Prior to the onset of the Covid-19 Pandemic, the trend in managing business inventories throughout most sectors of the economy had gravitated towards what’s known as “just in time,” meaning that smaller levels of stock were maintained that provided just enough product to meet demand. The goal was to receive merchandise just as it was needed to be consumed in manufacturing or placed on the shelf for retailing. Part of the stabilization of GDP growth over most of the last thirty years was owed to globalization of trade and wiser monetary policy, but a much greater part was owed to a shortening of the inventory cycle.
The Classic Inventory Cycle: The classic or traditional inventory cycle would bolster GDP growth during an up cycle as businesses would over-ordering inventory, and inhibit GDP growth during a down cycle as business would conduct stock clearances. This provided a certain amount of whip-sawing of inventory levels that reverberated up and down the supply chain.
The Rise of the Shortened Inventory Cycle: In more recent times, store chains have been able to leverage computer systems that track inventory more readily and provide automatic ordering to maintain certain predetermined inventory levels without requiring extensive human input. This approach began in the 1980’s to help firms reduce the cost of carrying large inventories that was exasperated by ultra-high interest rates of the times. This smoothing and streamlining of the inventory cycle not only helped retailers, but it became very useful for manufacturers who likewise did not want to maintain ultra large materials inventories for the same reasons.
Trade Wars, Lockdowns, Geopolitical Issues: The trade wars between China and the U.S. began to rattle the inventory cycle with delays, tariffs, and stockouts of certain merchandise that caused retailers to reconsider whether they should stockpile more goods in face of more potential upheaval. The pandemic broke up supply chains altogether as did the war in Ukraine. Lockdowns turned demand around as consumers were unable to enjoy traveling, dining out, and attending theater and concerts. Instead, the demand shifted towards what could be obtained by shopping online and delivered directly. The war and the ensuing sanctions have impacted the supply of fuels for transport, further adding to supply chain issues.
Supply Outages: Owing to certain inventory products being in short supply (notably computer chips), other manufacturing processes would halt causing great delays in the delivery of such products as automobiles. Many businesses lost a lot of sales owing to stockouts and delayed deliveries. The remedy used to correct this situation was to over purchase most inventory items to prevent loss of sales and customers. However, this reversion back to the basic inventory cycle has caused retailers to wind up with large inventories of unsold goods, bringing back stock clearances at reduced prices and smaller profit margins.
Shifting Away from the Classical Model: As the retail sector sorts these issues out, the idea of shifting from “just in case” back to “just in time” will be difficult to administer in the short run as large retailers are faced again with rising interest rates and higher carrying costs of goods. The results could be smaller purchases from suppliers to go along with smaller profit margins. As suppliers may be having similar problems as their retail customers, the entire supply chain could take another large hit. Bringing back the smooth, orderly flow of goods to consumers may involve periods of whiplashing of inventory levels, as buyers and managers at the retail level discontinue relying on their computerized automatic reordering systems and deal with their problems manually via trial and error.
Just in Time Versus Just in Case: The shift to “just in case” has become a form of insurance for retailers who want to maintain their customer base. This comes with the sacrifice of efficiency that “just in time” has brought to the retail sector. The “just in time” strategy also requires such support as open borders, steady transportation costs, timely delivering at all levels, and steady and predictable demand. Geopolitical events of the past few years have greatly inhibited these requirements.
Sources: The Economist, The Inventory Cycle Returns, by Buttonwood, June 4th 2022.