With all the Just-In-Time talk and knowledge regarding better management and understanding of inventory, you'd think that average levels would be decreasing. Well, I still think that at a well-managed company, they should be, but Susan K. Lacefield, accociate editor of Logistics Management, wrote a pretty interesting article that found otherwise.
In a poll of her magazine's internet readers, she found that over 60% of companies expect to see inventory levels rising over the next year. The specifics regarding why are some pretty interesting reasons.
Most notably, Wal-Mart's JIT efforts are leaving their suppliers with more inventory. If you think about this, it makes a lot of sense. Wal-Mart does not want to hold inventory. At the same time, they do not want backorders. The only way to do this is to be able to replenish their stock at a moment's notice. So what does this do to their suppliers? According to Logistics Management, it shoots supplier's inventories straight up.
The demands that Wal-Mart places on its suppliers are incredible because of the power Wal-Mart places on its suppliers. Personally, I'm waiting for the day when Wal-Mart's suppliers form a massive supplier's union (sounds like collusion to me), but until then, good for Wal-Mart for leveraging what it can out of its suppliers. Also in the mean time, suppliers are forced to hold incredible safety stocks to make sure they can satisfy Wal- Mart's demands.
Basically, the suppliers don't have a choice in the matter. Wal-Mart's business, even with the demands on service, is too good to pass up. But, Wal-Mart is not about to have a stockout due to some supplier's inability to provide a 99% service level. Wal-Mart, like many huge companies, will not wait. Many companies are:
requiring shorter lead times even as more companies implement 'zero tolerance' policies for late shipments.
Zero tolerance is a hell of a statement from a company that knows service level. To provide even a 97% service level compared to a 95% service can result in a huge increase in inventory. Zero-tolerance is wild. In fact it is actually impossible. No matter what a company holds in inventory, there is always the possibility that Wal-Mart could order one more than that. Couple this with a shorter lead time to Wal-Mart and inventories are stagerring.
Not only does Wal-Mart demand what they want when they want it, but also, as one Logtistics Management survey respondant said regarding why he has to hold more inventory:
Wal-Mart is ordering fewer cases more frequently
For a company, this means that they can either produce smaller batches, or hold onto more inventory. Because if a company cannot produce less and faster, than they have to produce a large amount and then, instead of producing a large amount and getting rid of it all at once, they have to get rid of it slowly over time, which increases average inventory.
While Wal-Mart may be getting the good end of the deal, one thing is for sure, there's a reason suppiers put up with these demands, and it's not because the business with Wal-Mart is bad.
If you would like more informatin regarding this article, Shippers are seeing inventory rising, it can found in the October 2005 Logistics Management Vol. 44, No. 10 issue. Additionally, feel free to leave comments with a question and your email address.
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Well written article. I do believe that that one point was missed. As the suppliers strive to meet the increased service level demands of Walmart they will incur higher costs. These higher costs will impact the supplier margins in the short term, but ultimately affect the margins of Walmart through higher average costs for each product through a bullwhip effect. The other component to note is the importance of forecasting for supplier's new product introductions. Imagine if P&G releases a new product that significantly exceeds forecasts, there will be a severe impact on service levels. To reiterate your point, the manufacturing lines of the supplier's must be extremely flexible or supplier's will incur higher inventory costs for running larger batches.
Posted by: Ryan | Apr 25, 2006 6:00:28 PM
Ryan’s comment touched upon the core issue here. Accurate demand forecasting is the only way that suppliers stand a fighting chance to get in front of the bullwhip effect. By having accurate demand forecasts, suppliers are able to meet the strict demand of a customer like Wal-Mart while still being able to produce in smaller batches. The problem is that forecasting for non-staple, seasonal, and new products is extremely difficult due to the lack of historical data points. Several companies (Profit Logic, i2, Retek) have attempted to provide companies with forecasting solutions for these types of products. However, the results have been mixed, at best. Therefore, as Ryan and Charles mentioned, the only option for suppliers who cannot accurately forecast demand is to increase the amount of inventory that they are carrying or create extremely efficient production lines.
Posted by: Felipe | Apr 25, 2006 6:24:41 PM
Actually, Wal-Mart is (or should be) providing their suppliers with excellent information about the movement of their products through distribution centers and into the stores. Why can't a smart supplier use that to drive DOWN inventories that he holds? Imagine, knowing to the minute what your products are doing at your customer's locations! Knowing that, you could produce exactly what is used and get it to the right locations quicky. Yes, you need inventory to protect against hiccups and changes in demand within your replenishment cycle. But the smart supplier keeps that inventory in the right places.
Posted by: Jack Vinson | May 3, 2006 12:29:51 AM
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