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.
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Tags: Demand-supply balancing, Inventory
Posted in Supply chain management
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Intersting when you say that inventory reduciton is a good thing. As lean Expert, I would say that’s the key item that drive the improvment of performance. Sorry to speak like a book, bu you may saw thispicture of the company like a boat floating in lake where rocks (pb, non value adds) are hidden at the bottom. When you reduce inventory, rocks appear and you can start improvement by cuting off them one by one. It’s important to not decrease too fast the lvel of water, otherwise you will see rocks appearing all together and you loose the priority order to adress the problem. I might even exceed your own capacity to handle problem.
To be back on real life, inventory reduction will means a capacity under the demand that is collpsing, thus the reduce dramatically capacity until we are back to balance: huge shake in employement. To satisfy the demand without no inventory, it’s the purpose of lean, we’ll cut others job not linked to value add (storage, material handling..). Then to employe back every one we must boost the demand at the same time…How to make it happen? Next economical cycle with creation of new business/values (organic industry, environnemental care…)
Damien – thanks for the comments. I know the picture you reference. And, I completely agree with your views. Namely, you can’t just reduce inventories in isolation, you have to look at them in context to customer service requirements, at a minimum (I picked that out mainly because I think this economy requires that to be front and center while you seek to reduce inventories).
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