The COVID-19 pandemic has driven global economic and societal changes at the fastest rate in recent history, creating challenges for the most basic elements of commerce. Global businesses experienced major disruptions, with many forced to restrict their activities, sending the economy into a brief, but damaging, decline. Inaccurate demand forecasting has resulted in both a shortage of consumer products and logistics services, as well as increasing costs globally. And in the United States, costs including rising prices on consumer goods, capital equipment, electronics components, and many raw materials, contributed to inflation of close to 9%

Many of the world’s current supply chain challenges stem from the ‘just-in-time’ (JIT) Japanese manufacturing methodology of the 1970s and 1980s. This school of thought encourages manufacturing plants to keep on hand  only what they need and rely on the global supply chain to keep inventory levels low. Nevertheless, in the current environment, the exact opposite is occurring as organizations are stockpiling to mitigate extended lead times. This is happening right now. As supply chain reliability wavers across manufacturing and retail, many businesses have stockpiled their inventories, leading to companies ordering less. This is contributing to a sense of economic contraction, so there is less consumer demand and less commercial demand. If inventory is not properly managed, this shift in economic conditions and economic uncertainty can be highly detrimental to manufacturing and retails businesses alike.

How do I find the sweet spot between maintaining low inventory levels and stockpiling to ensure business continuity?

According to the World Bank, business revenue fell approximately 27% on average over the course of the pandemic, which created panic as to whether supply would meet demand, resulting in excessive stockpiling. Companies that are still completing inventory checks on paper and inputting inventory levels into their enterprise resource planning tool (ERP) by hand are in trouble. To exacerbate challenges in procurement, this method of inventory management incurs painstaking labor costs, risks inaccuracies, and is plagued by human error. Forward-thinking companies are taking a more strategic approach to inventory management to mitigate supply chain risk and safeguard their long-term success. 

However, as optimizing inventory management practices often do not result in an immediate return on investment (ROI), organizational leadership often opts against it.  This is misguided. These types of improvements can contribute to an immediate boost in profitability by enabling increased service levels, reducing the risk of stockouts, and increasing net cash flow.  In particular, the freeing up of cash on hand with a more precise level of inventory accuracy is one of most significant ways to mitigate risk in uncertain economic conditions like downtown or full-blown recession. Often during times of supply chain uncertainty, companies begin to build inventory levels to help mitigate risk of stockouts.  Manufacturers and wholesalers inventory levels have increased from 9% to 15.9%, from November 2020 to November 2021 according to the most recent US Census Bureau’s Manufacturing and Trade Inventories and Sales Report. This sort of increase without proper inventory management and control strategies can tie up unnecessary cash flow, potentially straining a business’ health in trying economic conditions. Proper inventory management strategies can increase your net cash flow, enabling your business to operate without significant debt required for continuity and expansion of operations, avoiding the often-higher cost of capital (interest rates) during economic troughs.

Avoiding investing in how your inventory is managed is a detrimentally short-term view that directly affects operating expenses and net income, not to mention customer satisfaction and the future ability to fulfill customer orders.

So, what is inventory management and why does it matter?

Ultimately, improving inventory processes leads to a more satisfied end-consumer, driving higher customer lifetime value (CLV), allowing a business to grow more efficiently and organically. Establishing inventory management processes and policies are foundational for a business and naturally enable the opportunity to implement automation. Bringing new tools and technologies into a business can further increase overall inventory turns and create resilience against global supply chain disruptions.

Inventory management provides the ‘infrastructure’ necessary to implement other types of supply chain optimizations, from the implementation of procurement efficiencies to the optimization of your network.

How we can help with rapidly evolving supply chain conditions

In response to changing economic and manufacturing conditions around the world, companies are taking a more measured approach to inventory management. Before the pandemic, many companies relied on JIT procurement and inventory methodologies, keeping lean inventories. According to Bloomberg, the average lead time for raw production materials is 97 days, while capital equipment is up to 173 days. With growing lead times, companies are stockpiling to prepare for shortages. Moving from extremely lean management to excessively stockpiling has the potential to create further shortages and tie up a business’ free cash in inventory. We work with our clients to navigate this changing landscape with bespoke inventory management strategies. 

Our work in this space

Take our work with a global leader in mobile site solutions, which led us to deliver a 15% improvement in inventory accuracy in just four months.  This streamlined approach revolutionized the way they manage inventory. Our client initially asked us to help them create more efficient processes to keep track of what inventory they have on hand at any given time – at the time they had no ability to see what they actually had in stock. Working side-by-side with their executive leadership team, we developed and implemented a strategy to solve for inventory discrepancies as well as implementation of appropriate technologies to automate processes and save labor time and cost. 

Resist the temptation to drastically alter your inventory strategy based on the challenging macroeconomic situation. Instead, here are a few steps you can proactively take to begin considering how your organization should cope with the changing landscape:

  1. Complete an internal audit to identify places where inefficiencies are contributing to money being left on the table. This could be across all areas of inventory management (automation, receiving, managing, transporting, and usage)
  2. Determine where manual effort and inaccurate data limits your product throughput and visibility into inventory levels
  3. Examine areas that have traditionally been referred to as, “this is the way we’ve always done it” – these are likely inefficient or introducing unnecessary risk
  4. Engage experts to incorporate outside-in thinking and industry best practice. Our industry leading innovation network of startups, organizations, and venture funds can provide advice and assistance across verticals and business areas 
  5. Consider whether an internal center of excellence could drive continued optimizations and innovation around inventory and supply chain efficiencies

Our team of experts have deep experience in the manufacturing space, from supply chain optimization to industry 4.0. Connect with us today and we’ll help you solve your toughest business problems.