By Dan Gilmore, Editor-in-Chief
Through a special arrangement, presented here for discussion is a summary of a current article from Supply Chain Digest.
Just as we are in an economy where businesses and consumers are "deleveraging," most businesses are deleveraging inventory levels as well. Wonder why it took so long?
Indeed, despite many stories of individual companies greatly reducing inventories over the past years, a chart we pulled together last year from the annual CFO Magazine working capital study indicates not a whole lot of progress (the lower the number, the less inventory a company holds).
Why such little progress? The iconic Bud La Londe from Ohio State University wrote a few years ago that the data showed steep drops in work-in-process inventories, but little or no progress in finished goods inventories over some number of years.
SKU proliferation certainly played a role in that. I enjoyed the presentation John Bermudez used to make when he was at AMR Research. He had had the bright idea to begin collecting various flavors, formulas and packaging for Crest toothpaste over the years. He'd come with a large grocery bag filled with dozens of different SKUs collected over not that long a time frame. It certainly drove home the point about SKU complexity, micro-segmentation and more.
But the recession will turn out to be the real catalyst. First, inventory levels were dramatically cut in most companies to drive cash flow. Worried about the impact on sales, many manufacturers and retailers looked around and said, "Maybe the easiest way to do this is to cut back on SKUs rather than starve our best sellers with across the board cuts," or something along those lines.
Target is testing stores that carry 50 percent fewer SKUs to see what the reaction is. That is an astounding, game changing concept. Frito-Lay cut SKU counts by some 29 percent last year. Estee Lauder SKU counts were down 10 percent at the end of last year versus 2008. Kroger is said to be testing stores with 30 percent fewer SKUs, etc.
What else is happening to drive this?
- Continued consolidation in most markets frankly means smaller brands can be squeezed out.
- Consumers and B2B customers may in some cases find less is more.
- The "new normal" relentless focus on price by customers of all types means more will choose low cost over having exactly what they want.
- Technology (e.g., inventory optimization, new store-level DRP solutions) is really providing some answers now.
- There is the growth of Sales, Inventory & Operations Planning (SIOP).
- New fulfillment models (DC Bypass, drop shipping) are merging that will
lower inventories.
So, I may not be the first to say it, but you can bet by 2015 there will be a substantial shift downward in the inventory levels across virtually every industry sector. That will largely represent true supply chain progress, and it will be real and permanent, at least to some new plateau well below where we have been the last decade or so. As always, there will be ramifications pro and con for companies and individuals.
Discussion Questions: Do you think we will see real drops in inventory levels starting now and for the next few years? Why, despite the seeming progress over the past decade, did overall inventory levels seem not to improve? Do you think this current focus on inventory reduction will last, or again creep back?