Hot Potato!

Hot Potato!

When inventory is eliminated, it doesn't necessarily disappear - it may simply show up in someone else's warehouse. Eventually, that costs someone time and money. But new strategies and products are coming online that replace inventory with information, and do so quickly and cheaply.

Reader ROI

  • How to know when an enterprisewide solution to inventory reduction is not necessary
  • New products that can help you reduce inventory
  • Case studies of inventory reduction success

    The West Coast port slowdown and eventual longshoreman lockout last October in the US focused attention on the delicate condition of America's supply chain. An estimated $US300 billion worth of goods flow through West Coast ports every year, and as the giant container ships that carry it all sat bobbing, anchored at sea and unable to off-load for 10 days, companies across the US started to run out of inventory and assembly lines began to grind to a halt.

    Mitsubishi, out of engines and transmissions (which it imports from Japan), suspended production of Eclipse convertibles and Galant sedans at its plant in Illinios. GM and Toyota ceased operations at a shared assembly facility in California, for one week until parts could be flown in. Boeing's production of 767 and 777 airliners was disrupted because Asian-built cargo doors and fuselage panels were delayed at sea.

    Those and other interruptions were the product of a 20-year-old, 180-degree about-face in the business world's approach to inventory management. Companies used to measure their muscle by the size of their inventory. Bigger was better. Vast warehouses filled to capacity ensured efficient assembly lines and guaranteed that, come hell or high water, production would never stop. Who cared about carrying costs? They would be erased by sales.

    But now that equation has changed. Today, most inventory is considered excess, and overstuffed warehouses represent missed opportunities and, worst of all, wasted capital. Inventory has become such an anathema that companies regularly risk shutting down their assembly lines in order to hold less of it. Which is why the relatively brief port shutdown had such a profound impact.

    In the big picture, American business has succeeded in its quest to run lean. US Department of Commerce figures show that from 1981 to 2000, inventory as a percentage of gross domestic product (GDP) fell 46 per cent, from 8.3 per cent to 3.8 per cent. During that same period, the total GDP more than tripled (from $US3.1 trillion to $US9.9 trillion) while the total amount tied up in inventory didn't even double, rising from $US747 billion to $US1.48 trillion.

    But almost all these gains in inventory reduction happened from 1981 to 1991, and the past 10 years have not seen much improvement. The inventory carrying rate (a way of expressing the money spent to store inventory as a percentage of its value), which was 34.7 per cent in 1981, fell to 22.7 per cent in 1992 but rose to 25.3 per cent in 2000. And inventory as a percentage of GDP held steady at 3.8 per cent from 1992 to 2000.

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