Inventories decline as supply chains seek equilibrium

[Randy Littleson]

Two new reports highlight that inventory levels are on the decline. At Forbes there’s an article entitled “Blemish on business inventories” and at Manufacturing.net is a story entitled “January business inventory levels fall 1 percent.” According to the Manufacturing.net article:

• The Commerce Department said Thursday businesses reduced their stockpiles by 1 percent in January, essentially in line with the 1.1 percent drop that analysts had forecast.
• The five consecutive declines marked the longest stretch of reductions since inventories were cut for 15 straight months from February 2001 to April 2002, a period that covered the country’s last recession.
• The 1 percent reduction in inventories followed a revised 1.6 percent drop in December, which was a bigger decline than the 1.3 percent fall originally reported.
• The inventory declines are being translated into cutbacks in production and rising layoffs as businesses try to trim costs to survive the recession, which already is the longest in a quarter-century.
• For January, inventories were reduced at all levels of the supply chain. Manufacturers cut their stockpiles by 0.8 percent, wholesalers reduced inventories by 0.7 percent and retailers cut inventories by the largest amount of all, a drop of 1.7 percent.
• The ratio of inventories to sales remained at 1.43 in January, the same level as December. That means it would take 1.43 months to eliminate existing business stockpiles at the January sales pace. That is the highest level of inventories to sales since it stood at 1.44 in September 2001, the month before the last recession ended.

I think inventory reductions are ultimately a good thing. It’s extremely painful, but we need to find equilibrium again. We’ve clearly had more supply and capacity than demand. The economy can’t recover until we get back in balance and, if we continue to have too much inventory, it will slow any recovery.


As to the economists, they are also the one’s that count inventory into GDP growth, which distorts reality. This is just reflecting the painful realities as they exist.


Also see the following related posts:

• Inventory control plays critical role in economic recovery
• Inventory masking true GDP weakness

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.