Higher Inventories, but why?

From Modern Material Handeling:

Overseas sourcing pushes inventories higher

If you’re sourcing from overseas, inventory increases are inevitable, but they can be kept in check.

By Corinne Kator, Associate Editor -- Modern Materials Handling, 5/21/2008

While order fill rates and picking productivity have steadily improved over the last three years, inventory levels have skyrocketed. That’s one of the highlights of “DC Measures 2008,” a benchmarking report released at the Warehousing Education and Research Council’s annual conference last month.

Three years ago, the report says, companies reported holding an average of 20 days of raw materials in inventory. Now they’re reporting 62 days worth.

Kate Vitasek, managing partner at Supply Chain Visions and co-author of the report, says stagnation in the U.S. economy is part of the reason inventories are so high right now. But that’s certainly not the whole story.

Inventory levels have been on the rise for the past decade, she says, because U.S. companies have changed the way they do business. They offer more choice and faster service, and their supply chains are more complicated.

The biggest factor complicating supply chains, she says, is increased sourcing from overseas. (According to the American Assoc. of Port Authorities, container traffic at U.S. ports has increased 72% over the last decade.)

Importing materials, Vitasek says, automatically adds at least 30 days of inventory because of product being held in inventory as it crosses the ocean. In addition, companies sourcing from overseas usually hold more safety stock in response to their longer lead times.
Supply chain consultant Rosalyn Wilson agrees overseas sourcing has added extra time and uncertainty to companies’ supply chains, and that has pushed inventories up. “But that doesn’t mean we’re doing something wrong,” she says. “It just means we’re doing it differently.”
“What’s happening is making sense,” she adds, “and I don’t see any way of getting around it as long as we continue to globalize.”

But there is, of course, room for improvement.

Experts agree one way to improve inventories is to shorten the supply chain by selectively moving some production closer to home.

“In the rush for off-shoring, it’s possible that some products went out that shouldn’t have been off-shored to begin with,” says Mike Peters, first vice president at ProLogis. “And it’s possible that they’ll come back—maybe not to the U.S., but perhaps to Mexico.”

Another way to improve inventories is to leverage today’s sophisticated inventory planning tools. A recent report from Marsh, a consulting firm specializing in risk management, says companies using multi-echelon planning software to manage inventory on a global level commonly see inventory reductions between 10 and 20%.

“The new tools out there are really good,” says Vitasek. In fact, she says, the tools are so sophisticated that many planners don’t understand them. This lack of understanding leads them to mistrust the tools and override their calculations. “The tools are out there,” she says. “We just need to trust the tools.”

There is a lot of talk out there about companies redesigning the supply chain.

Rising transportation costs have hit home, people are starting to wonder if there are better ways to do things. A lot of what I have seen is from supply chain modeling software companies offering ways to compute more efficient methods of getting things from the point of production to the point of consumption (and back).

Most of what I have seen are disguised advertisements for these software companies, but they do bring up some valid points:

1. Rising fuel costs eat at the bottom line, you cannot simply have existing centers carry more capacity anymore.

2. Mergers and acquisitions are common when the economy is in a recession. This results in overlapping or excess warehouses, redundant supply chains.

3. Customer demands are changing (again) and what worked in the past may not be relevant as people are more concerned with costs than in the past.

4. Cost of relocation, employment, financing all need to be detailed when making these complex and weighty decisions.

I am not sure if you need to pay some professional $30 - $50 thousand to tell you that things need to change, and what they are. People have a pretty good gut feeling.

And while an exact optimal location decision is worth paying for, these models are only as good as the assumptions that go into them, so you can have a fancy multi-regression, Gauss optimization algorithm with all the bells and whistles, but at the end of the day, it is still a guess.