This commentary represents the fourth of our ongoing Supply Chain Matters- Llamasoft market education series directed at clarifying needs and requirements addressing supply chain wide visibility.
Business media has of-late pointed out that that overall inventory levels among retailers and manufacturers has been unusually high, which is impacting both current procurement activity as well as logistics and transportation trends. In a prior blog posting earlier this month, our research suggested there was indeed an inventory overhang with two potential causes. Of the three potential causes, one was that with more and more products being offered online, and with consumers expecting immediate availability and delivery, it would seem that inventory levels have risen to the challenges in the transition to support the explosion of online.
Last week, the U.S. Commerce Department released adjusted data regarding U.S. economic growth levels that occurred in Q2. US GDP growth was adjusted downward to a 1.1 percent annualized growth level in Q2. There was other data relative to inventory levels in the economy.
Overall, the messages delivered were that consumer related spending jumped to an annualized 4.4 percentage rate in the April to June period, the strongest gain since Q4 for 2014. However, business spending on equipment and other items declined at a 0.9 percentage pace following drops in the prior two quarters. In essence, consumers drove spending levels in Q2 rather than B2B activity. That was reflected in remarks from U.S. Federal Reserve Chairwoman Janet Yellen who also contrasted solid growth in household spending with soft ongoing business investment. The result is that overall corporate profitability rates which are reported by Commerce are now trending down 2.2 percent compared with the year-ago period.
Regarding inventories, The Wall Street Journal quotes PNC Financial Services’ Chief Economist as indicating: “Inventories were a major drag on growth in the second quarter, but now that businesses have better aligned inventories with demand, that should lift and inventories will add to growth in the near term.” Another chief economist is quoted as indicating that profit margins are past their cyclical peak and are set to decline further over the coming quarters. Thus, the usual contrasts and challenges regarding the ongoing management of supply chain wide inventory visibility.
For supply chain executives and strategists overseeing product demand and fulfillment activities focused on U.S. market segments, the message is that inventory hangover and management is very much associated to either a B2C or B2B market segment.
The numbers would indicate that optimistic consumer spending will continue in the current quarter, and perhaps into the final B2C holiday focused fourth quarter, bar the results of the U.S. Presidential Election in early November. Inventory management in B2C and Omni-channel retail would thus be a reflection of the hottest consumer products and quick responses and calibration to weekly market trends. However, as we all know, B2C product margins are very thin and the overall costs for online fulfillment are rising.
However, in the B2B sector, more cautionary inventory management remains prudent, since many businesses remain in a period of uncertainty with reluctance to spend. The current depressed state of the oil and gas industry coupled with election year and interest rate uncertainties obviously remain as pressures on businesses to reduce further costs and maintain expected profitability.
Thus supply chain inventory levels will remain in the crosshairs of the CFO both for the remainder of the year as well as into the future. Suppliers should anticipate continued pressures to absorb inventory costs.
In all cases, advanced inventory management pegged to item-level actual product demand levels, and broader visibility to supply chain wide inventory exposure applies for all supply chain planners for the foreseeable future.
As noted in our prior commentary related to this market education series, from the user lens, significant challenges in creating a unified view of all supply chain inventory data and information remain as unfulfilled. However, new Cloud or on premise in-memory, data visualization and data cleansing information technology tools now coming to market continue to improve and will better assist in this effort. In particular, the combination of advanced in-memory coupled with data visualization and analytics will add augmented computing power and a more enhanced user-interface.
A further ever important capability has become multi-echelon inventory optimization practices. Such inventory optimization techniques allow the flexibility in the use of what is termed “service classes” which are equated to customer fulfillment service needs. Inventory optimization techniques in essence, calculate “stock-to- service” curves, optimizing individual service and safety stock levels to an inventory location. Such capability is especially pertinent to producers of consumer focused goods which are increasingly being planned n Omni-channel fulfillment. Trying to plan such landscapes with traditional ABC inventory management techniques is sub-optimal and inefficient in terms of overall inventory management.
When inventory optimization is supported by higher and deeper levels of supply chain wide inventory visibility, more informed planning and supply chain wide decision making can be enabled as to various impacts on financial business outcomes such as margins and profitability. An overall inventory dashboard capability provides the means of alerting to average daily inventory levels by distribution segment, product demand that is consuming the bulk of available inventory or important trending in inventory vs, days of supply for key products.
Muted economic growth and high levels of business uncertainty indeed point to needs for end-to-end supply chain visibility augmented by more sophisticated, analytics-enabled inventory management
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Disclosure: This educational series related to supply chain wide visibility is sponsored by LLamasoft.