Inventory masking true GDP weakness

[Randy Littleson]

Today’s headlines are full of confusing statements about the true status of US gross domestic product (GDP) numbers. Take these examples:

• U.S. GDP: Less ugly than feared (Forbes)
• The worst is still ahead of us (MarketWatch)
• Economy: Sharpest decline in 26 years (CNNMoney)

But the interesting commentary is below the headlines:

• Though the GDP figure beat pessimistic expectations by a wide margin, excessive inventories levels may have distorted the reading. “Rising inventory levels are considered to be a business investment, so they add to GDP,” said Joe LaVorgna, chief U.S. economist at Deutsche Bank, on Thursday, in advance of the data. If consumption suddenly stalls, inventories pile up, and in such an environment, GDP will be pumped up deceptively.
• Inventory building, while it technically adds to growth, is the last thing we need right now. The more businesses overstock now, the more they’ll have to reduce the orders for new goods later, and the more manufacturers and others will have to cut production and employment. It’s extremely rare for the economy to contract as violently as it did in the fourth quarter without a large drawdown in inventories.
• Faucher and other economists noted that the biggest surprise in the report was the sharp growth in business inventories.

As I commented the other day in this post “Inventory cycle critical to economic recovery” inventory control is the thing to be watching right now. It’s exceptionally hard to balance supply and demand in the midst of so much volatility and uncertainty. As a manufacturer with likely outsourced operations (I say that because the majority of manufacturers outsource at least some manufacturing today), you need to start with supply chain visibility. If you don’t have an accurate accounting of where all your inventory resides (raw materials, work in process and that most expensive finished goods inventory) you’re most likely exacerbating the problem by making “blind” decisions that compound the problem.


The conventional wisdom right now is that cost cutting is the imperative. Of course this is important, but what’s happening to inventory can have broader implications (and, of course, contributes to cost).


Randy Littleson is a Vice President for Kinaxis, provider of the on-demand RapidResponse service that empowers multi-enterprise manufacturers with collaborative and integrated demand-supply planning, monitoring, and response capabilities.

[dreck]

Randy brings up an important point that inventory (supply chain) visibility is essential to managing inventories.

However, having the information and knowing what to do with it are two different things. Most companies are reacting to the downturn by slashing production/buying and although this seems sensible, it could impact customer service rates.

What is termed inventory management now is often across the board cuts and this is always a bad idea. A better alternative is to actually study your inventory and make the appropriate adjustments (this could include SKU rationalization).

Having a trained inventory management professional on staff will help you through this. If you lack experienced staff, an experienced consultant could take you through this at a reasonable cost.