Destocked Up

We’re not sure what the hot toy for the holiday season will be this year, but retailers have their favorite: the supply chain manager action figure, an iconic hero who slashes inventory and leaves no goods available for discount sales by the end of the year.

Batteries absolutely are not included.

The fact is, while economists and business executives alike are speaking of uncertainty and mixed signals in the U.S. economy, retailers are making a clear and certain choice: They are holding onto only the inventory they believe they absolutely must have to meet consumer demand this year.

What’s becoming clearer, however, is that the basics of managing that inventory are changing in a more fundamental way. Risk management is behind the strategy, and it’s one result of the lessons businesses learned during the 2008-09 recession.

The idea is that retailers are not simply maintaining low inventories, but also managing the movement and placement of goods in new ways.

As John Lanigan, executive vice president of BNSF Railway, told last week’s Progressive Railroading RailTrends conference in New York, retailers are having their suppliers hold stocks at their own expense at forward supply points. Shipments then can be shuttled relatively quickly to stores when demand signals warrant more goods on the shelves.

“That’s kind of a departure from what retailers have done in the past,” Lanigan said, as reported by Senior Editor Joseph Bonney on www.joc.com last week.

“When you have retailers, which are really kind of the bellwethers of the economy, behaving that way heading into the Christmas season, it’s got to give all of us reason to pause and wonder exactly where we are (in) the recovery.”

It’s something of a departure for retailers, but the tug-of-war over inventory and its carrying costs is an established feature of managing supply chains, and some companies even are built on the concept. The idea that Dell, for instance, builds its computers in less than a week, as the company’s stated days-of-inventory suggests, makes no sense unless you understand that some of its components suppliers produce and store the goods under the same roof as Dell.

That lean strategy is evident across the industrial sector: Manufacturers’ inventories fell 5.3 percentage points in October, according to the Institute of Supply Chain Management, and the 46.7 percent reading for factory inventory levels is the lowest reading of the year. Customers’ inventories fell even more, however, and at 43.5 percent were even leaner.

With credit rates low and the potential cost of deep-discount sales so high, the economics within the supply chain have shifted, and that’s a trend, as BNSF suggested in New York, that transportation operators need to account for in deploying their own high-cost assets.

UPS and FedEx both responded in similar ways in recent weeks, expressing cautious optimism in holiday sales but cutting air capacity back to the demand they see, not the demand they expect. It looks like that’s a lesson they picked up from their customers, the retailers.

The idea is to match the inventory to the sale. Surely, it’s only a matter of time before the same lesson spreads to other carriers.

Paul Page is executive director of The Journal of Commerce. He can be contacted at 202-355-1170, or at ppage@joc.com. Follow Paul Page on Twitter, www.twitter.com/paulpage.

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