The red flag of rising inventories

By James Cooke

An overview study of logistic costs in the U.S. economy should serve as a red flag for electrical distributors—showing that more of them need to take action to better control their inventory. The report showed that while retailers have managed this past year to keep their inventories in check, wholesalers and manufacturers did not in 2011.

That interesting finding was contained in the Council of Supply Chain Management Professionals (CSCMP) 23rd Annual State of Logistics Report presented by Penske Logistics. This long-running study quantifies the impact of logistics on the U.S. economy. Last year money spent on logistics totaled $1.28 trillion, a 6.6% percent increase over 2010, which resulted in large part from higher truck and rail rates this past year to move freight. The study determines the number for logistics by adding up costs for transportation, carrying inventory, and logistics administration. In 2011 business logistics costs accounted for 8.5 percent of a $15 trillion U.S. economy.

Because last year was such a lackluster one for the U.S economy, it would seem reasonable that businesses would NOT add to their stockpiles. Yet the report, citing Commerce Department Bureau of Census data, noted that wholesale trade inventories climbed from $500 billion in 2010 to almost $600 billion in 2012 while manufacturing inventories rose slightly to surpass $700 billion. In contrast stockpiles for retailers stayed roughly the same at $400 billion.

Although the report does not expressly provide an answer as to why the retailers did a better job at inventory management than wholesalers or manufacturers, my belief is that many merchants are taking advantage of the latest sophisticated software to manage their stock on hand. The use of software has given retailers the necessary tool to manage inventory successfully.

Today’s inventory optimization software uses sophisticated algorithms to calculate   the minimal amount stock necessary to support sales. This type of software can determine the amount of safety stock and reorder points for store replenishment. Most solutions from vendors will keep tabs on inventory in real-time and therefore when stock levels fall below pre-established thresholds, the software can notify the retailer of the need to order replenishment items. Given the number of stock-keeping-units that businesses must carry to meet customer demand, the software automates what would otherwise be a daunting task for a human being.

Retailers are also embracing so-called demand software applications that use point-of-sale data to drive stock replenishment. By updating their replenishment forecasts frequently with actual sales data, rather than using historical sales, the retailers can make sure that they have the right items on hand and don’t have excess stock on their shelves, which ties up working capital and often results in a price markdown to clear the item.

The point here is that electrical distributors have the same opportunity as traditional retailers to optimize inventory by deploying the latest software solutions. If they’re not already doing so, distributors should consider using cutting- edge software to align inventory levels with sales, thus allowing them to minimize the stock on hand in their warehouses.

James Cooke is the editor of CSCMP’s Supply Chain Quarterly magazine, the premiere journal of global thought leadership for supply chain professionals. He has been writing and reporting on the best practices in supply chains for more than 30 years.

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