The Destabilizing Effect Of Inventory Swings

An excellent Wall Street Journal article, “Clarity is Missing Link in Supply Chain,” accentuates a point made in my favorite economics book, that inventory swings are tremendously destabilizing.  Here’s a stunning macroeconomic impact:

In March, Best Buy Co. said it could have sold more electronics equipment in the three months ended Feb. 28, but its suppliers’ deep cuts made it tough to keep shelves stocked. Suppliers “all decided to build a lot less,” says Best Buy merchandizing chief Michael Vitelli.

The reason for this problem is explained:

Companies all along the supply chain live in mortal fear of piling up inventory. Profit margins are razor thin, and unsold inventory only loses value as newer technologies hit the market.

The article highlights how difficult it has become for companies to always know where their products are going.  In Businomics, I emphasized the need of an upstream supplier to understand the ultimate users of the product.  So the company making computer chips needs to understand how those chips are being used.  One company thought their chips were going into computers, only to learn later that they were destined for electronic picture frames.

OK; it is hard to know how your product is being used.  That does NOT mean it’s less important to know how it’s being used.  You still have to understand ultimate users, at least if you want your company to survive this business cycle.

If you have a copy of Businomics on your desk, re-read pages 54-58 for a basic explanation of how de-stabilizing inventory swings are, then all of Chapter 7, “Managing Through the Business Cycle” for how to manage your own inventories.

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