Inventory’s New Dimensions

(Traffic World – William Hoffman)

Shippers and their service providers relied for years on low-cost transportation to help keep inventories lean. Now that higher energy prices have made pure shipping costs an item that can’t be taken for granted, more logistics planners are turning to advanced technology to manage inventories by matching the sophistication of supply chain strategies to the basics of day-to-day execution.

For shippers, the move to better inventory management tools has been the result of a shift over the last five years in the balance of costs throughout the supply chain to the point where, from a financial standpoint, it’s become more important than ever to keep inventory at a minimum. Industry studies such as the Council of Supply Chain Management Professional’s “State of Logistics” report show inventory carrying costs making a steady climb in recent years.

Inventory carrying rates last peaked in 1989, at 28.1%, hitting a low of 20.1% in 2003, before accelerating to 24.1% in 2007. Inventory as a percentage of GDP was 5.4% in 1985, the first year CSCMP started keeping track, hit its low of 2.8% in 2003, and rebounded to 3.5% in 2007.

“Inventory optimization is again a key issue,” said Rosalyn Wilson, the independent researcher and author of the CSCMP report. A bellwether of the new regime - the absolute volume of wholesale inventories exceeded that of retail inventories for the first time in December 2007, while inventory turnover rates that year began to fall.

“It seems like the more we evolve this (supply chain) industry, the more problems come back to the same key areas,” Wilson said in presenting her report in June. “Inventory optimization was paramount in the 1980s and 1990s, and we conquered it. Now it is at the forefront again, but the issues are much more complex and difficult to solve.”

The causes of the reversal in inventory management fortunes are not hard to find.

Fuel costs have more than tripled since the 1990s. Price and wage inflation in offshore production markets, especially but not exclusively in China, have eroded the competitive advantage shippers used to get by sourcing outside North America. A weak dollar and faltering U.S. economy mean unsold freight has accumulated across lengthy and increasingly brittle supply chains.

Obviously there is no alternative to reasserting control over supply chains to bring inventory costs back down, or at least to slow their advance. Yet technology vendors said the next steps in inventory management – already undertaken by savvy shippers and a small but growing cadre of logistics providers – will require participants to collaborate in an increasingly uncertain and even hostile macroeconomic environment. Read the complete article.