No More Inventory??? Read this carefully, integration is the key.

Forward Thinking

The end of inventory?

By Mark Solomon | March 26, 2013

Fewer goods are being stored in warehouses and distribution centers, and that doesn’t seem likely to change. Are we in permanent lean mode?

Ever since the Great Recession ended in late 2009, it’s been the hope of executives and analysts alike that shell-shocked retailers would emerge from their foxholes to begin a cycle of inventory replenishment that would buoy shipping and economic activity.

Hope continues to spring eternal. Yet retail inventory levels, which hit their lows on an absolute basis during the recession as businesses froze ordering and sold from their existing stocks, are today as lean as ever. Thanks to improvements in inventory management processes and advances in forecasting and distribution management technology, what many initially thought to be a short-term trend influenced by macroeconomic forces has become a secular phenomenon unaffected by the economic conditions of the moment.

The Institute for Supply Management’s (ISM) influential monthly “Manufacturing Report on Business” said in its February edition that its Customers’ Inventories Index, which measures inventory at the retailer level, came in at 45. That marked the 45th consecutive month with a reading below 50, an indication that finished goods inventories are too low.

Bradley J. Holcomb, former head of procurement for Dallas-based food and beverage giant Dean Foods Co. and chair of the ISM committee that publishes the report, said the below-50 readings have persisted for so long that the decline in inventories may be irreversible. “I just don’t see anything changing here,” he said.

Holcomb added that order lead times have shortened to the point that no one wants to hold inventory for any prolonged period.

A quarterly survey by Morgan Stanley & Co. of 500 U.S. and Canadian shippers that forecasts inventory levels six months out found that about 46 percent of respondents surveyed in Q4/2012 planned to maintain their current inventory levels through mid-2013. About 37 percent of respondents said they would reduce inventories through the middle of this year, while only 17 percent said they planned to increase them.

“Shippers continue to manage inventories very tightly, with no evidence of any big restocking in the near future,” William Greene, the firm’s lead transportation analyst, said in a mid-February analysis accompanying the data.

For many years, the dollar values of retail inventories were higher than for inventories in the wholesale trade, according to Rosalyn Wilson, a supply chain analyst at Vienna, Va.-based Delcan Corp. and author of the Council of Supply Chain Management Professionals’ annual “State of Logistics Report.” That changed around the second quarter of 2008, and after a period when levels of both types of inventory moved in near-lockstep, wholesale stocks have grown at a faster clip than those for retail, she said.

At the end of 2012, U.S. wholesalers held $597.6 billion in inventory, while retailers held $522 billion, Wilson said. Wholesale inventories are at their highest levels since before the financial crisis and subsequent recession, suggesting that retailers are becoming more adept at pushing inventory back upstream through the supply chain, at least to the wholesale channel, she said.

According to the U.S. Census Bureau, the current inventory-to-sales ratio (a measure of a company’s on-hand inventory relative to its net sales) for retailers stands at about 1.28, which is at or near all-time lows. The ratio has been trending downward since 2000, but began to drop in earnest following the 2008-09 recession. It spiked during the worst of the downturn, mostly due to collapsing sales.

That the ratio has stayed so low since mid-2010 even with a modest pickup in retail sales activity indicates that either sales remain subpar or that retailers are doing a better job of calibrating supply and demand, or possibly both.

Better tools
The advent of high-tech forecasting tools has clearly been a boon to inventory management. Retailers and manufacturers alike have greater visibility into their demand patterns and can adjust supply flows quickly and precisely. This reduces the need for guesswork and the overstocking that comes with it.

This is particularly true with e-commerce orders, where an estimated 98 percent of sales data are generated at the point of transaction. By leveraging that data, retailers can do a superior job of gauging customer demand. They then share that information with manufacturers and their suppliers, enabling them to better plan their production schedules.

Further enhancing efficiency is the migration to Web-based “cloud” computing, which allows all partners in a supply chain to have instant access to the same data. This gives all parties visibility into orders and dissolves the intercompany silos that often thwart the success of such collaborative efforts.

All of this is leading to a best-of-both-worlds scenario for a growing number of retailers: lean inventories without the risk of stockouts. Ralph Cox, an inventory management expert and principal at Raleigh, N.C.-based Tompkins International, said the top retailers have mastered the art of keeping inventory low while recording a high “SKU (stock-keeping unit) in-stock” score. According to Cox, larger companies began working on these initiatives long before the downturn, while smaller rivals, either lacking resources or foresight, did not.

The result is a tale of two inventory scenarios. “The big retailers are lean because they’ve learned how to do it,” Cox said. Smaller companies may appear lean, but that’s due as much to cutting back on orders after the recession as to any proactive measures, he said.

Cox said the next big push in IT systems will not be in forecasting, but in tools that enable efficient distributed order management. Multichannel retailers today have access to software that allows them to determine the best location from which to fill an order, he said. For example, a retailer with overstock at a store location can leverage e-commerce orders for the same product and ship the item from the store, rather than redeploy it to the distribution center. Multichannel retailers need this level of flexibility to compete with an e-tailer like Amazon.com, whose efficient online model has forced all retailers to compress their fulfillment and delivery schedules, he said.

Like other inventory gurus, Cox believes the days of inventories driving macroeconomic activity are over. Even the less-efficient, more-reactive retailers are adopting the technologies and processes needed to be more productive, and their operations run better today than they did five years ago, he said. Given the inexorable global march toward e-commerce, he added, those companies “will be more efficient five years from now than they are today.”

Mark Solomon is a senior editor at DC Velocity, a sister publication of CSCMP’s Supply Chain Quarterly.

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This entry was posted in Forecasting, Inventory, Logistics, Manufacturing, Marketing, MRP, Supply Chain Strategy. Bookmark the permalink.

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