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Sunday, July 9, 2017

Inventories Are Heading in The Right Direction

Anyone who follows me knows I feel very strongly about the Total Inventory to Sales Ratio and how it forecasts the future for transportation (in the near term).  If inventories rise over a period of time then it only stands to reason companies will start cutting them back.  When they do that, freight slows to a crawl.

Recently, a lot has been made about the current measurement decreasing (ever so slightly).  As you can see below, they had been going down for most of 2016 and now have stayed steady in 2017:


Inventory to Sales Ratio through June 14, 2017
If you look at this in isolation - i.e., just the last year - you would say it is going in the right direction - which it is.  However, by looking at the full measure over a longer period of time you will see the "recovery" from 2012 to 2016 included a substantial inventory build.  We have just recently moved it down and it is a very slight move.   This tells me there is still substantial room for inventories to be depleted which also means transportation capacity still has a way to go before it becomes a "scarce" commodity.  Yes, there are blips but the longer term trend tells me the curve has room to decrease.

As a supply chain professional I also tend to cringe when I see the contents of this graph. To discuss this, let's ask ourselves why we have inventory in the first place.  Two key tenets of supply chain management:

  1. Inventory at rest is a bad thing:   Said a different way, bad things happen to inventory.  It can become obsolete, spoil (in the case of food), get lost, stolen or damaged. When inventory rests, you should see opportunity.
  2. Inventory exists as a buffer for lack of information:  In a world where you have perfect information (i.e, perfect forecast, perfect purchase signals, perfect transportation signals) you have little need for inventory. Given this, more inventory relative to your sales indicates your progress in S&OP (Sales and Operations Planning) information accuracy is stalling.  You are not improving this information flow, rather, you are making it worse which drives inventory levels. 
Put these two together and you have to ask yourselves if we, as supply chain professionals and as a supply chain industry, have made global supply chains worse or better since 2012?  With all the investment in software, data and analytics, you would think we would have at least stayed even.  But, we have not.  

What we have done as an industry is cut costs.  As reported in CSCMP's State of Logistics Report, we have decreased overall logistics' costs as a % of GDP for the first time since 2009.   But, to what end has this occurred?  The 5 year CAGR for storage costs for inventory is now at 3.6% - far higher than inflation.  While the financial cost of inventory has actually decreased, a lot of this is attributed to lower financing costs (i.e., interest rates) rather than great inventory management. 

The bottom line:  Inventory has been somewhat ignored during this time of incredibly favorable financing.  I do not expect this to continue and as this turns, it is going to turn quickly.  Expect a renewed focus on inventory and expect inventories to be managed a lot tighter in the future.  

And when that happens, expect any sign of a "transportation recovery" to stall (as it has in many years prior).  

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