Have The Chickens (Of Inventory) Come Home To Roost?
In stark contrast to 12 months ago, a glut of inventory may be a dubious honor right now, especially if you’re looking out 12-18 months and starting to sense that demand for your goods is waning due to inflation, fears of recession, or simply ever-shifting consumer trends.
As of this writing, average turn days on containers and chassis in the US is up to 33 days – that’s up from 20 days in May of 2022 and from 10 days in 2019. The reason? Slower demand, more difficult labor conditions, and full-to-the-brim warehouses are slowing down a shipper’s ability to swiftly collect their containers and unload them at their warehouses. As a result, containers are sitting on-site at warehouses in order to avoid rail yard detention, which is also tying-up chassis for other shippers that may want to collect their containers.
The US is currently flooded with inventory of materials that consumers are currently less willing to buy, for whatever the reason. CNBC has a “State Of Freight” section that does a great job of explaining and illustrating international logistics trends and dynamics. The most recent article as of the writing of this blog can be found here.
Pay Attention to The SLOB
Do you have a good process to manage your Slow-Moving / OBsolete inventory, or is it managing you? It’s important to understand how many days of supply you have on-hand, which products are the slow-movers that require some action to increase the turns. It’s also important to ensure there’s a process to review obsolete inventory and move them out of your warehouses as quickly as possible.
Have you ever considered how much you spend on warehouse space or holding costs for inventory that isn’t generating sales?
Are you able to calculate what is a reasonable days of supply and then measure the actual DOS of each product so that you can identify the products that are dragging your balance sheet? Here’s a Pro Tip: Days of Supply is calculated by using either a Forecast (if you trust it) or Historical Shipments, converting it to days, and then dividing the inventory quantity by the value of a day. So if you ship 90 widgets per month, one day of supply is 3 widgets (on average). If you have 500 widgets on-hand, then you have approximately 167 Days of Supply of said widget. Is that good? It’s hard to say without knowing all the factors, such as Total Replenishment Leadtime. If your TRLT is 180 days, then you might actually be cutting your widget inventory a bit low. If your TRLT is 14 days, then you have a great opportunity to reduce the amount of inventory you’re carrying before it goes Obsolete.
Demand Sensing: Looking Forward Instead of Backward
Doing something to better understand your future-forward demand is better than looking backwards at historical data. Why? Because, as the last 2.5 years have taught us, history is not always a great predictor of the future. Consumer demand and supply chain constraints have repeatedly proven to throw their wrenches with frightening consequences to global supply chains. Keeping a pulse on your forecasts at a monthly cadence, if not weekly if your team’s bandwidth allows for it, will allow the purchasing teams to more proactively adjust orders and materials planners can adjust inventory needs.
While simple historical/statistical modeling can sometimes be helpful, it has become less-so in the last 30 months. Check out Lora Cecere’s article on saving supply chain leaders from groupthink, where she mentions the Forecast Value Add and how systems can sometimes work contrary to successful planning.
Demand sensing is more of a behavioral shift to teasing-out customer and consumer insights from the teams that are closest to them – such as Sales, Customer Service, or Marketing. It also leverages a data approach that attempts to correlate external influence factors as drivers of the underlying demand. Is that BOGO promotion still relevant? Is it going to snow much in the Rockies this year? Is the customer experiencing supply constraints of their own? Does your customer anticipate slowing demand from their customers? Are your operations limited by constraints such as material shortages/labor shortages/machine downtime?
Scroll to the bottom of this blog page for a quick refresher on the key drivers of inventory need.
Replenishment Leadtime Matters, Especially If It’s Changing
It’s good news that total replenishment leadtimes are dropping back to more normal levels in many industries. The bad news is that purchasing teams aren’t necessarily right-sizing their buying habits, either for fear of getting caught-short on inventory, or because they simply haven’t adjusted their purchasing yet.
Take advantage of a good-news story (reducing leadtimes) and make it better by showing how much less inventory you need to buy, and then make it happen.
Back to Basics: The 4 Key Drivers Of Inventory, Simply Stated
If the below looks familiar, it’s because we shamelessly stole it from our July 27, 2022 blog post, but it bears repeating:
Demand: The quantity you anticipate selling over a period of time. It’s a look into the future, frequently based on historical behaviors.
Replenishment Leadtime: The amount of time it takes to obtain new product once an order is placed.
Variability: The variability and predictability of demand and replenishment leadtime.
Service Level: How frequently you want to be able to have product in-stock to ship customer orders on-time and in-full.
The two most relevant drivers right now? Demand and Replenishment Leadtime.
Our supply chain and operations advisors are experienced in many manufacturing and distribution companies. We help find the best way to optimize your supply chain management and get the results you want.