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).  

The Value of S&OP in Logistics

I have been talking a lot at various events recently on the value of Sales and Operations Planning to the logistician and specifically to those managing transportation.  I have found many so called "great" S&OP processes stop at the end of the factory and just assume unlimited capacity and capability from the distribution arm of the supply chain.  Very few look holistically at the entire chain from raw materials to the consumer and most just look at their particular part of it with some input from upstream and downstream suppliers.

This should and must change. The S&OP process is critical to the proper execution of the logistics' plans of a company.  It is also vital to give your carriers a decent forecast on the capacity needed at a time in the future.  I will remark more on this later in a post soon however I do want to remark on Kevin O'Marah's comments relative to the core aspect of S&OP - Trust.

Even the core of Vested Outsourcing  is built on trust.  In S&OP Gotcha: Bad Collaboration, Kevin discusses how egos and the desire to "win" ultimately can kill a good S&OP process.  Before entering into a true S&OP collaborative process across the virtual enterprise (this includes all participants in the supply chain) you have to agree on core principles and on trust.  If one is trying to get "leverage" over another then I truly believe it is a waste of time to enter into a S&OP process.  Just understand the situation you are in and make the best of it.  The core ideas to S&OP are:

1. Each trusts each other's data.  If you feel data is manipulated or hidden, you are starting at a weak point right from the beginning. 
2. Each agrees the "solution" is what is right for the ultimate end user - the consumer. 
3. Each agrees the "solution" has to be profitable for all.  No one will stay entered in a relationship if it is not profitable.  There is nothing wrong with this.  Where it goes wrong is where one side withholds information or changes information to gain profits at the expense of the other. 
4. Each agrees to open book sharing.  If key data is withheld then it just will not be possible, long term, to maintain a solid S&OP process. 

For the logistician, the output of this has to then tie to capacity requirements, possibilities and constraints of the logistics network.  One cannot assume whatever the outcome of the core S&OP process can be executed without constraint.  That is a recipe for failure. 

Logisticians need to force their way into the S&OP process of a company and make their voice known.