Doctor's Note (July): Inventory Woes - It is Time to Act Now!

US manufacturing inventory as compared to sales has been steadily declining over the past 20 years. Since 1991, the sales to inventory ratio (months) has come down from about 1.6 to below 1.3 in 2008. The recent slowdown has raised the ratio to above 1.4, but this is still only to the level it was in the 2001-2002 timeframe.

The numbers don’t tell the whole story though. When a slowdown hits as abruptly as it did recently, it is not just the inventory level that goes up, but imbalances in the inventory profile become magnified because customers are not equally affected and they also react to the slowdown in very different ways. The net result is imbalances in product inventory.

These imbalances are less of an issue when sales are at a reduced level. However, all indications are that the economy is beginning to turn the corner. Again, different segments of the economy will recover at different time and different rates Canadian manufacturing activity in terms of constant 2006 dollars edged up by a couple of percent in February even though only 9 out of 21 industry segments reported an increase. In the US, although shipments, inventories, and unfilled orders continue to decline for durable goods, new orders have increased in 3 of the last 4 months.

Unless a manufacturer pays close attention to the inventories that it is using to service its market during the recovery, it is liable to run into shortages in this phase. Management is still focusing on cost reductions and cash conservation while operations are feeling the strain of meeting new orders. This is a serious problem because in the current climate, competition is intense and any shortfall in customer service provides an opportunity for a competitor to capture market share. Remember, it is much easier to retain a customer than to acquire a new one.

The supply chain organization at a manufacturing company ought to be proactive in managing both the inventory levels and the mix of stock. Many potential problems can be resolved if the manufacturer or distributor maintains constant vigilance with the tools available on the market today. Remember, high inventories at this stage of the recovery do not automatically translate to high service levels – the mix of inventory is critical.

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