Inventory control plays critical role in economic recovery

[Randy Littleson]

I’ve talked about the implications of inventory control on the economic recovery in the past (see “Squeezing more working capital from your supply chain” and “Inventory masking true GDP weakness“). This continues to be a central storyline in the economic news and will continue to play a role in any economic recovery efforts.
Here’s a sampling of current headlines:

• Bloomberg - Home Depot, Nordstrom, Macy’s Earnings Beat Analysts’ Estimates
  • “Macy’s reined in inventories and offered exclusive merchandise from Martha Stewart and Tommy Hilfiger in the period to keep sales from declining as much as at Kohl’s Corp. and J.C. Penney Co.”
  • “Nordstrom, based in Seattle, showed “disciplined inventory management,” said Liz Dunn, an analyst with Thomas Weisel Partners LLC in New York.”
  • “Inventories remain well-managed” at Macy’s, Dunn said in a research note today. She rates the shares “overweight.”
• EE Times - Inventory Glut Likely Beyond Q1, Analyst Says
  • “A hangover of excess inventory in the electronics supply chain is now expected to spill beyond the first quarter of 2009 as the supply chain continues to cut existing stock to adjust to the current demand outlook”
  • “Inventories would need to decline sequentially by 10 percent, or $7.4 billion, in order to maintain normal inventory on hand of 45 days”
  • “Longer-term, when orders do return, semiconductor and component manufacturers are poised to benefit from the resulting restocking in what should be an under-inventoried supply chain“
• CNNMoney - P&G: Inventory Impacts Should Lessen
  • “Procter & Gamble (PG) said Thursday that one of its large customers suspended shipments of the consumer product maker’s products toward the end of December as part of a broad pullback in retail inventories, but P&G now expects the pressures of inventory reductions to lessen.”
• About.com - Falling Inventory Levels Can Be Good For Stocks
  • “Lower inventory levels do mean that when the economy begins to rebound, companies that are prepared to ramp up production are in the best position to benefit.Which companies will come out of an economic downturn or recession in the best position to benefit by rebuilding inventories?Low debt and high cash are two key indicators. Stocks in these companies have good potential for major gains.”
• Seeking Alpha - Inventories Indicate Worsening Economy
  • “I’ve lowered my economic forecast for 2009 based on inventory data which I’ve recently studied. Below is the long-run picture.
  • “That trendline (in red) would head even lower if it were calculated without the latest data. It looks to me like we’ll have a $200+ billion inventory correction this year, as companies try to get their inventory-sales ratios back to normal. What would help? Getting the sales level up quickly, of course, but that’s unlikely to happen.”

As you can see, the implications that inventory have on the economy are enormous - and it’s across all industries. And, as any supply chain professional knows, there’s a direct correlation between inventory reduction and customer service. I think the key challenge for supply chain management professionals today is to retain that balance - despite all the focus and pressure to simply reduce supply chain costs (with inventory reductions being a major aspect of that effort).


What’s going on in your company? Are you talking about supply chain cost and inventory reductions in the same breathe as you talk about customer service? Or, is the focus just on cost reductions? Is your supply chain management team aggressively watching inventory?


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