“Inventory carrying costs continue to rise, driven by inflationary pressures and late shipments,” said Mark Baxa, chief executive officer of the Council of Supply Chain Management Professionals, in a recent conversation with CNBC. “This means that with every day that passes, three things are happening: growing sales risk, margin pressure, and D&O [deteriorated and/or obsolete].”
Baxa isn’t alone in his view. A CNBC survey of 90 logistics managers representing the American Apparel and Footwear Association, ITS Logistics, WarehouseQuote and CSCMP found that these were common themes. Among the key findings:
- Only about a third of supply chain managers think warehouse inventories will return to normal before 2024.
- Twenty-seven percent say companies are selling excess inventory on the secondary market because high storage prices are hitting the bottom line, with impacts to materialize in upcoming quarterly results.
- Almost half said their biggest inflationary pressure is warehouse costs, followed by rent and labor, and many are continuing to pass those costs on to consumers.
The list of pressures goes on. In one week alone, I talked to three different manufacturers about escalating on-time, in full (OTIF) fines reaching into thousands of dollars every week, as major retailers return to pe-pandemic service-level expectations. What’s more, margin pressure has, in many cases, meant layoffs, together with the double-whammy of a pull-back in strategic technology investments.
Against this background of challenges, manufacturers can’t afford to abandon modernization through digital transformation. There’s an increasing “digital divide” between those that are driving forward with such efforts, and those that seem to be capitulating to short-term decision-making driven by finance.
Almost exactly a year ago, I wrote about the growing trend toward regional supply chains and their many benefits: fewer chokepoints, more sourcing options, faster and more efficient production and shipping, quicker time to recovery after disruptions, and the ability to tap a much bigger pool of potential talent. Manufacturers that made meaningful strides toward regionalization are faring better than many of their peers in today’s environment.
I see a disturbing trend toward purely cost-saving and cost-cutting measures. It’s not unusual for financial officers to take the reins during tough times, but senior supply chain leaders — many of whom were elevated in the executive ranks during the pandemic — need to use their greater clout to push back against the heavy hand of near-term, financially driven thinking.
They have the ammunition. An oft-cited 2010 article in the Harvard Business Review, “Roaring Out of Recession,” detailed how 4,700 public companies fared during the recessions of 1980, 1990 and 2000. Seventeen percent went bankrupt, went private, or were acquired. But 9% of the companies didn’t just recover in the three years after a recession — they thrived, outperforming competitors by at least 10% in sales and profits growth. Diligent scenario planning and tech investments were linchpins of their success.
More recent supply chain-specific research from PwC expounds upon the many benefits of investments in advanced supply chain technologies, such as “lower costs, increased revenues, improved sustainability, higher asset utilization, better risk management and greater rates of on-time, in-full delivery to B2B and B2C customers.”
This is not the time for manufacturers to pull back on modernization efforts such as scenario planning, SKU rationalization, regionalization. new supplier relationships and process automation. By becoming a data-driven organization — one where, as the PwC study puts it, free-flowing data is available across all departments — manufacturers can generate the insights they need to “identify shocks before they happen, streamline operations and improve the customer experience.”
If most manufacturers’ gut instincts are correct — that higher inventory levels and inflation will continue into next year — they would do well to remind themselves, and their leadership teams, that modernization is the way to come out stronger on the other side.
Todd Simms is vice president, industry strategy, manufacturing with FourKites.