Companies Seek the Inventory Sweet Spot

Companies Seek the Inventory Sweet Spot

Every month’s dose of inventory data produces a flood of analysis and opinions about what it means. Are stockpiles too high or too low? Do companies need to reorder? Are they optimistic or pessimistic about demand?

This reading of tea leaves is never easy, and lately it’s grown even harder. As the economy continues its slow growth, stockpiles remain tight. Economists say that’s partly due to uncertainty about demand, and partly because companies have grown more adept at matching inventories with demand.

The customers’ inventories index in the Institute of Supply Management’s manufacturing report registered 44.5 in April. It was the 49th consecutive monthly reading below 50, the break-even point between expansion and contraction.

Some analysts say this lengthy streak suggests traditional yardsticks of inventory don’t reflect changed attitudes and practices in inventory management. The Great Recession caught many companies with goods and materials they couldn’t sell, and reinforced a years-long trend toward keeping stockpiles as low as possible.

The seasonally adjusted business inventory-to-sales ratio has hovered at 1.28 to 1.29 for most of the last year. That’s a slight increase from the 1.26 level of the first four months of 2012 but well below the 1.49 recession peak of January 2009.

First quarter inventory levels increased 1.1 percent from the fourth quarter of 2012, when inventories were up 1.5 percent from the previous quarter. This year’s first quarter inventory buildup was the slowest increase since the end of 2011. First quarter inventory accumulation was affected by a drawdown of 0.5 percent in retail inventories during March.

What do those numbers mean for the economy and container shipping volumes? It’s a tricky read that defies pat answers. “Sometimes an increase in inventories is giving us classic mixed signals,” said Paul Bingham, economics practice leader at CDM Smith. “It could be a sign of optimism about an expected uptick in sales, or it could be an increase in inventory as a result of sales not growing faster than desired.”

The long-term trend, emphasized at almost every supply chain management conference, is to keep inventory levels as low as possible without jeopardizing sales. Striking that balance forces tough decisions on quantities of “cycle” stock for recurring demand and “safety” stock for surges.

Containerized imports and exports got an unexpected boost in 2010 when a recovering economy caught companies with depleted shelves and warehouses and forced emergency restocking. The opposite happened in 2011, when ample stockpiles allowed companies to supply modest demand growth with minimal restocking.

Volumes were skewed late last year when many shippers padded safety stocks to hedge against a threatened Maine-to-Texas longshore strike that didn’t happen. Bingham said there are no signs that current inventory levels are far enough out of whack to necessitate a surge in restocking this year.

Ralph Cox, principal at Tompkins International, said companies that once viewed inventory as an uncontrollable byproduct now see inventory management as a source of competitive advantage and are applying technology and expertise to manage supply. “If I can get my inventory turnover high enough and my payment terms long enough, I can get paid for stuff before I ever have to pay anybody else. If that’s not an eye-opener for a CFO, I don’t know what is,” Cox said.

“People have become more aware that this is another competitive arena, and they have to get better at it,” he said.” If inventories are lower, is that just because it’s left over from the recession? I don’t think so. Is it just a reflection of lower demand? I don’t think so. I think it’s a lot of things that are playing out. Companies have gotten smarter.”  

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