Shippers see inventory rising (page 4)

-- Logistics Management, 10/1/2005

Page 4 of 4
Reassessing Strategy

Simply responding tactically, however, may not be enough to address inventory pressures. Chainalytics' Kilgore says that shippers also need to take strategically analyze their individual situations to determine the best balance of transportation and inventory-carrying costs. "I think companies are still focused more strategically on reducing inventory," he says. "I don't think they have really taken a step back in general and said, 'should we rethink our strategy around how much inventory to hold and what our general philosophy should be?' "

In that vein, shippers may need to reconsider policies such as a strict devotion to lean principles or a drive to consolidate distribution centers and inventory. Consolidation may have been beneficial in the past but may not make as much sense in an environment where transportation costs are outpacing other costs, Kilgore says.

That's not to suggest that companies should pull back completely from lean and just-in-time inventory management, says IBM's Butner. Instead, leading companies are already looking at new models for supply chain network design. "We have to put more inventory in the pipeline in the right places, maybe even open up facilities to store some of this stuff temporarily," she says. "However, we're not going to go back and use old models and just put distribution centers everywhere. We're going to look at new ways to be able to accommodate that. It could be outsourcing ... it could be some kind of shared facilities."

Scherck foresees some companies adopting what he calls a "continental strategy," locating manufacturing capacity or inventory on every continent to ensure that they'll be able to work around supply chain disruptions. For cost reasons, this strategy isn't appropriate for all products, he adds. High-value, low-weight items will benefit from a global supply chain model, under which goods move directly from the point of production to the point of consumption. Low-value, high-weight items, by contrast, will continue to move by ship and then by truck to warehouses. Commodities that fall in the middle will move in a continental or regional distribution model, Scherck predicts.

Sullivan of UPS Consulting believes that shippers will adopt a similar, stratified approach to determining how much inventory to hold. "I think a lot of companies are reluctant to adopt a policy where they build a safety stock across the board," he says. Instead, they will implement inventory segmentation, with different policies for different kinds of inventory. This "inventory stratification" will be guided by a combination of factors, including profit margins and the various products' life cycles, he says.

In short, profitability may have the greatest impact on shippers' inventory strategies in the future. Says Butner: "Companies are not just looking at cutting costs or at where inventory needs to be to meet customers' requirements, but also at how to do that profitably."

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