Making it in the "new normal" economy

The Council of Supply Chain Management Professionals' 23rd annual "State of Logistics Report" presented by Penske Logistics offers proof that at least some supply chain chiefs are mastering the "new normal" economy. Despite a rise last year in U.S. business inventories, the inventory-to-sales ratio remained stable.

As the report's author, economist Rosalyn Wilson of Delcan Corp., writes in the report, "The ratio was very stable during 2011, indicating that retailers have adjusted to the new level of spending and unpredictable changes in demand. The flat retail inventory-to-sales ratio masks the growth in the wholesale and manufacturing inventories that back up retailers."

Astute inventory management has proved critical to keeping supply chain costs low and freeing up working capital for retailers in the "new normal" economy. (Executives of the global investment firm PIMCO coined that term in 2009 to describe the lackluster economy founder William Gross predicted would drag on for a decade, with high unemployment, stagnant corporate profits, and a reduced standard of living for people around the globe. If his predictions are correct, then any real relief is still years in the future.)

Fortunately for supply chain executives, technology that can help them with inventory management is widely available. Thanks in part to the development of more sophisticated algorithms, advances in demand and inventory management software give executives tools to better match supply with customer demand. The latest applications in demand management software, for example, are using point-of-sale (POS) data to drive both replenishment and production. Retailers and manufacturers are using POS data to frequently update their forecasts to ensure that they make and distribute the right amount of the right product to meet market needs.

These tools are making a quantifiable difference in how companies manage inventory. A study conducted last year by the software vendor Terra Technology found that the demand-sensing approach adopted by nine leading U.S. consumer packaged goods (CPG) manufacturers reduced their average weekly forecast errors by 40 percent for the period 2009-2010. If CPG manufacturers are indeed getting better at forecasting, that could help to explain why the inventory-to-sales ratio has remained stable.

As the "State of Logistics Report" observes, despite retailers' success in controlling inventory, manufacturers' and wholesalers' stocks continue to accumulate. Clearly, supply chain managers in those business sectors need to follow the lead of their peers in retail to get their inventories in line with the demands of the "new normal."