Inventory levels trend down amid supply chain efficiencies
- The inventory to sales ratio, a measure that compares the value of monthly sales against the value of unsold inventory, has been trending down for the last couple of decades, according to numbers tracked by the U.S. Census Bureau.
- "It’s been a measure we've tracked for years to give an indication of how much inventory [retailers] have on hand," said Scott Scheleur, the assistant division chief for retail and wholesales indicators programs at the Census Bureau. For example, a ratio of 1.5 indicates retail stores have enough merchandise on hand to cover 1.5 months of sales. The ratio is generated through monthly surveys with retailers.
- The downward trend shows increased efficiency in supply chains. "Technology has enabled the retailers and suppliers to shorten the supply chains to enable retailers to hold less inventory at any moment in time," Mark Cohen, the director of retail studies at Columbia Business School, told Supply Chain Dive in an interview.
There are exceptions to the overall downward trend. The recession, for one, stands out — "when business slowed down dramatically and inventory backed up accordingly," Cohen said.
But as the ratio decreases, it highlights how supply chains have become quicker and more reactive to the needs of retailers and consumers, avoiding the incremental costs of holding unsold inventory. Carrying inventory that's not fresh or current, Cohen said, increases its risk.
"Inventory is frangible," he said. "It’s obviously perishable if you’re a grocer, but it’s also perishable if you’re a fashion retailer."
Economics have driven the need for retailers to make up for declining sales per square foot numbers, and one way to make up this loss is to buy less inventory.
Technology has made it much easier for retailers to communicate with manufacturers. Algorithmically-driven software can keep track of sales and ensure manufacturers know the needs of retailers in near-real time, Cohen said.
When a customer orders anything other than a base-level Apple product, for example, it triggers a production commitment at the Foxconn facility in Shenzhen, China. The company has effectively eliminated the middle repository between the manufacturer and the customer, Cohen said.
"Apple and others have created enormously fast, efficient and productive supply chain lines which result in them holding relatively little finished inventory on a shelf," he said.
Buying inventory on a more regular basis also helps ensure retailers are stocking what customers want. If they buy in bulk for the season then they're making the best guess on the colors and sizes customers will want, but with more flexible manufacturers they can instead buy more of what is actually purchased, Cohen said.
Retailers could turn to emergent technology like 3D printing to shrink this ratio even more, but that could be a ways in the future.
"Theoretically there are limits to how far this can go because merchandise has to be physically manufactured somewhere in the world, componentry has to be assembled prior to manufacture and even though the world has shrunk we’re not looking at the teleportation of inventory in our lifetime," Cohen said. "The Pacific and Atlantic Oceans are still substantial bodies of water and air cargo will always be expensive."
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- Federal Reserve Bank of St. Louis Retailers: Inventories to Sales Ratio
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