9.3 Introduction

Do you buy the expensive, optional insurance when you rent a car? You only have two possible answers—yes or no. Let's consider what you may have been thinking when you made the decision whether or not to buy this extra coverage insurance.

• Yes, You Bought Insurance: Even though you already have auto insurance—and you are confident you won't get in an accident—you know that bad things can happen to anybody at any time. Besides, you're never exactly sure how your personal coverage translates to a rental car. Worse, accidents are bad enough, but if one happened while you were driving the rental, you really don't want to mess with the hassles of the rental car company. The uncertainty of it all makes you nervous. Simply put, you're risk averse. Buying insurance lets you sleep well at night.

• No, You Didn't Buy Insurance: Like we said above, you're covered—and a good driver. You haven't had an accident in years. Why would you want to waste money on expensive rental car insurance? Certainly, the money you save by not paying insurance premiums can be put to better use elsewhere. In other words, you are willing to live with the risks.

When you "ran the numbers" to make your decision, you evaluated two uncertainties:

1. Timing: If and when you might wreck the rental car and need the added insurance.

2. Magnitude: If an accident happened, how much would it cost—in both time and money?

You also considered—consciously or not—how well you personally deal with the risks caused by an uncertain future.

You won't be surprised that your decision-making process is an analogy for business. Companies must also deal with uncertainty—and the risk it brings. Managers must decide how willing they are to let their companies be exposed to the "bad things" that might happen. Inventory is the insurance you, as a logistics manager, buy to protect against the uncertainties of doing business. Let's dig a little deeper into why and how you use inventory as insurance.