When we think of supply chain disruptions, we usually only consider the shortages that became familiar during the pandemic—back-ordered or unavailable parts, empty store shelves, long delays in shipping and fulfillment. But it seems that many companies are now experiencing the opposite, in the form of significant excess inventory.
This problem is having an impact in a variety of industries, with overall manufacturer and trade inventories in June being up 18.5% compared to the previous year, according to the U.S. Census Bureau.
Every company is different, but many appear to be experiencing inventory imbalances driven by abrupt changes in either supply or demand, or both. Managing inventory is always challenging, but the volatility of the past two years has made it especially difficult. As supplies ran short during the pandemic, many companies boosted orders to build buffer stocks. Now, with demand subsiding somewhat—or shifting to different products—some of those companies are left with too much inventory. This can lead to excessive amounts of capital being tied up in goods, along with other carrying costs for things such as storage space and insurance. And for companies focused on innovation, excess inventory increases the potential for product obsolescence, as components sit on shelves waiting to be used.
Taming Supply Imbalance
What can companies do to reduce inventory imbalances in the future? There is no simple answer, but they can take steps such as tightening their inventory-accounting practices to gain a more timely, detailed view of the materials they and their suppliers have on hand. This can help them understand how well inventory is aligned with demand. Additionally, they can change their ordering patterns to focus on smaller, more frequent purchases; making it easier to respond quickly to changes in demand. They can also conduct assessments that proactively identify potential risks in the upstream supply chain.
More broadly, companies can re-examine just-in-time practices and look for ways to use targeted, carefully managed buffer inventory to reduce their vulnerability to shortages. Or they can consider structural changes to the supply network, including reshoring to reduce reliance on long global supply chains and bringing more suppliers into the mix to expand sourcing options.
Looking forward, effectively managing inventory imbalances in an era of “disruption as normal” will require increased visibility across larger portions of the supply chain. Here, companies can consider technologies ranging from EDI to supplier portals and cloud-based supply-chain platforms that let partners work together to understand supply and demand to optimize inventory levels.
In the end, however, the best tool for avoiding inventory imbalances will be relationships that allow partners up and down the supply chain to communicate and collaborate to identify imbalances early on. For many, this will call for new ways of working with partners to share information about risks and disruptions in production and logistics; about the design of new products; about products reaching the end of their lifecycle; and about changes in end-customer demand.
To a great extent, inventory imbalances are the result of uncertainty. Strong relationships that foster greater information-sharing will be key to cutting through that uncertainty to keep inventories at levels that will meet the needs of companies and customers alike.