Originally published on Adhesives & Sealants Industry on September 23, 2022
Logistics costs have been staggering. According to the 33rd Annual State of Logistics report produced by the Council of Supply Chain Management Professionals by the global consulting firm Kearney and presented by Penske Logistics, U.S. business logistics costs rose by 22.4% last year. The bottom line is that the global supply chain is out of alignment, and it remains out of alignment. Unfortunately, it isn’t a simple or quick fix to re-balance and right-size the supply chain and curtail inflationary pressures.
Look no further than recent occurrences in the global logistics landscape. Shanghai was under lockdown for two months, and wait times reached a peak of 69 hours before reopening. During that lockdown, factories had to wait on raw materials, creating potential future disruptions in the supply chain. As Shanghai started shipping again, there are concerns of a new wave of container ships arriving at the U.S. ports, creating new congestion and delays. On the other hand, labor negotiations are creating concerns at the West Coast ports, and so some shippers are diverting containers to other U.S. ports, causing congestion, delays, and increased costs throughout the system.
From a shipping point-of-view, costs will remain high with rising interest rates, historically high fuel prices, increasing wages, and inventory carrying cost pressures. Fuel prices are likely to remain high with the Russia-Ukraine war, energy policies, and the inability to change the situation quickly. Inventories are up by double-digit percentages in the second quarter and warehouse vacancies are at historic lows, and so inventory management is taking on greater importance. Unfortunately, the right inventory is not in the right place at the right time.
Successful Inventory Management
Those that manage inventory well will have the opportunity to grow and thrive, and the rest will lose customers, and/or be saddled with debt and have limited cashflow. Strategic decisions will have a direct impact on inventory levels. For example, a lawn and garden tools manufacturer had to keep a minimum of 16-20 months of inventory on hand to satisfy customer requirements and to offset the 13-week supplier lead time from Asia. Although most of the inventory was built into lead time, the manufacturer was able to minimize inventory levels vs. its competition with effective inventory management disciplines.
Successful inventory management processes require exemplary planning disciplines. Thus, the tools manufacturer implemented best-practice demand planning processes to forecast future sales and product mix. The resulting demand plan was provided to manufacturing and purchasing so that the production schedule and purchase plan would make sure that the right items are available at the right time to best support customer requirements at the lowest cost. The distribution (replenishment) and logistics plans took it from there and made sure that the right product was distributed to the right location (its internal warehouses or its customers’ distribution centers) at the right time by the optimal modes of transportation to support its customers’ frequently changing needs in the most efficient and effective manner possible.
Advanced Planning and Adapting
Although the tools manufacturer could reduce inventory to three months with effective inventory management, it decided the built-in lead time was no longer acceptable. Thus, for this reason among others, it also decided to move the bulk of its manufacturing from Asia to North America, thereby decreasing the inventory required to support the built-in lead time. These inventory strategies created a competitive advantage so that it could be more resilient with changing conditions.
By implementing advanced planning principles across your organization, you will most effectively manage your assets and best support your customers. Since there are widespread supply chain disruptions, those companies that have the “right” inventory available for key customers and potential ideal customers will have the opportunity to grow and thrive while their competition struggles to navigate the supply chain chaos and inflationary pressures. The strong will continue to get stronger, creating more opportunities in the next few years than at any time in history except for during the Great Depression, while the weak get weaker. Reevaluate your strategic decisions as inventory gains in importance and focus on proactive inventory planning processes to take control and thrive during these turbulent yet opportunistic times.