Just How Much Inventory Is Out There, Anyway?

Hamish Brewer, chief executive officer of JDA Software, was giving a speech at the Economic Club of Phoenix last year, when the topic of global inventory levels came up. The question he posed: How much stuff is currently in transit or socked away in warehouses the world over? The answer: Nobody really knows.

Which comes as something of a surprise. Aren't we always talking about inventory trends in one country or another? The Council of Supply Chain Management Professionals' annual State of Logistics Report, sponsored by Penske Logistics, does a fine job of tracking inventory numbers in the U.S. There's also raw data from the U.S. Census Bureau, the Commerce Department's Bureau of Economic Analysis and the World Bank, the last of which reports on inventory changes in nearly every major country of the world.

What, then, is missing? A reliable method of putting those numbers together on a global basis, for one thing. So, at least, said JDA's Brewer. It was his query that prompted Kelly Thomas, the company's group vice president of global accounts, to tackle the question in a methodical fashion.

Thomas's initial research into gross domestic product and inventory levels discovered a shortage of good information for other countries, notwithstanding the World Bank numbers. "They do have similar bodies that collect information," he says, "but it's quite opaque compared to the U.S." So he decided to use the American figure as a starting point, then calculate foreign inventories based on their various levels of efficiency.

Adding up the GDP of all countries gave Thomas a total of $70tr of output worldwide. (TheCIA World Factbook puts the number for 2012 at $71.8tr.) He then applied American efficiency levels to the sum, to come up with a global inventory figure of $10tr.

That number was clearly too low, given the fact that many other nations don't approach the U.S. in efficiency. The U.S., for example, spends between 8 and 9 percent of GDP on logistics, versus China's 16 to 18 percent, Thomas says.

"Logistics costs as a percentage of GDP in the U.S. compares quite favorably to that of trading partners," CSCMP says in the newest State of Logistics Report. "The supply chain sector has made great strides in productivity, asset utilization and inventory management in the last three years."



Europe and Japan are likely to be comparable to the U.S. in terms of logistics efficiency, Thomas adds, but emerging nations such as the BRICs - Brazil, Russia, India and China - are significantly less so. So he tacked on another $2tr in inventory to his initial number, to come up with a total of $12tr for the world. In other words, on the basis of economic output, there's about two months of global inventory sitting around at any given moment.

It was no mere exercise, in Thomas's view. One number for the world gives logistics professionals a clearer sense of what needs to be done to increase their efficiency. The $12tr figure suggests inventory turns of between five and six, although that estimate is probably overstated, given that a big part of the economy is driven by services instead of manufacturing.

Still, "even five to six turns is certainly not stellar," says Thomas. "We're trying to make a provocative point. We should be aspiring to be better."

The latest State of Logistics Report bears him out. It finds that inventory levels at the end of 2012 were 6.2 percent higher than the previous record, reached during the worst months of the Great Recession. Average investment in business inventories across all industries was up 3.9 percent over 2011, to nearly $2.3tr. And the cost of warehousing rose 7.6 percent.

Granted, the inventory-to-sales ratio is declining gradually in mature economies. But Thomas urges businesses to look beyond basic inventory levels, to include the types of products being sold. He says analysts haven't adequately accounted for the trend of rampant SKU proliferation, which results in a far greater variety of merchandise for the same amount of inventory dollars.

Part of the answer, he believes, lies in a greater investment in information technology, to help companies boost the level of visibility and communication within their supply chains. The ultimate goal, he says, is to "take inventory and turn it into information."

Inventories might also begin to drop as companies re-shore their manufacturing from China to the West. The rush to embrace cheap production in Asia over the past two decades has led to the creation of buffer stocks close to end-markets, as a hedge against interruptions in lengthier supply chains. As plants draw closer to the ultimate consumer, there should be less of a need to keep excess merchandise on hand.

Despite its so-so outlook for the U.S. economy in the coming year, the State of Logistics Report offers some comfort. "Inventory management techniques are improving," CSCMP says. "These practices are likely to be some of the major learnings coming out of the very trying period we have endured for almost five years."

Maybe the next time we run the numbers, we'll have some better news.

 

Hamish Brewer, chief executive officer of JDA Software, was giving a speech at the Economic Club of Phoenix last year, when the topic of global inventory levels came up. The question he posed: How much stuff is currently in transit or socked away in warehouses the world over? The answer: Nobody really knows.

Which comes as something of a surprise. Aren't we always talking about inventory trends in one country or another? The Council of Supply Chain Management Professionals' annual State of Logistics Report, sponsored by Penske Logistics, does a fine job of tracking inventory numbers in the U.S. There's also raw data from the U.S. Census Bureau, the Commerce Department's Bureau of Economic Analysis and the World Bank, the last of which reports on inventory changes in nearly every major country of the world.

What, then, is missing? A reliable method of putting those numbers together on a global basis, for one thing. So, at least, said JDA's Brewer. It was his query that prompted Kelly Thomas, the company's group vice president of global accounts, to tackle the question in a methodical fashion.

Thomas's initial research into gross domestic product and inventory levels discovered a shortage of good information for other countries, notwithstanding the World Bank numbers. "They do have similar bodies that collect information," he says, "but it's quite opaque compared to the U.S." So he decided to use the American figure as a starting point, then calculate foreign inventories based on their various levels of efficiency.

Adding up the GDP of all countries gave Thomas a total of $70tr of output worldwide. (TheCIA World Factbook puts the number for 2012 at $71.8tr.) He then applied American efficiency levels to the sum, to come up with a global inventory figure of $10tr.

That number was clearly too low, given the fact that many other nations don't approach the U.S. in efficiency. The U.S., for example, spends between 8 and 9 percent of GDP on logistics, versus China's 16 to 18 percent, Thomas says.

"Logistics costs as a percentage of GDP in the U.S. compares quite favorably to that of trading partners," CSCMP says in the newest State of Logistics Report. "The supply chain sector has made great strides in productivity, asset utilization and inventory management in the last three years."



Europe and Japan are likely to be comparable to the U.S. in terms of logistics efficiency, Thomas adds, but emerging nations such as the BRICs - Brazil, Russia, India and China - are significantly less so. So he tacked on another $2tr in inventory to his initial number, to come up with a total of $12tr for the world. In other words, on the basis of economic output, there's about two months of global inventory sitting around at any given moment.

It was no mere exercise, in Thomas's view. One number for the world gives logistics professionals a clearer sense of what needs to be done to increase their efficiency. The $12tr figure suggests inventory turns of between five and six, although that estimate is probably overstated, given that a big part of the economy is driven by services instead of manufacturing.

Still, "even five to six turns is certainly not stellar," says Thomas. "We're trying to make a provocative point. We should be aspiring to be better."

The latest State of Logistics Report bears him out. It finds that inventory levels at the end of 2012 were 6.2 percent higher than the previous record, reached during the worst months of the Great Recession. Average investment in business inventories across all industries was up 3.9 percent over 2011, to nearly $2.3tr. And the cost of warehousing rose 7.6 percent.

Granted, the inventory-to-sales ratio is declining gradually in mature economies. But Thomas urges businesses to look beyond basic inventory levels, to include the types of products being sold. He says analysts haven't adequately accounted for the trend of rampant SKU proliferation, which results in a far greater variety of merchandise for the same amount of inventory dollars.

Part of the answer, he believes, lies in a greater investment in information technology, to help companies boost the level of visibility and communication within their supply chains. The ultimate goal, he says, is to "take inventory and turn it into information."

Inventories might also begin to drop as companies re-shore their manufacturing from China to the West. The rush to embrace cheap production in Asia over the past two decades has led to the creation of buffer stocks close to end-markets, as a hedge against interruptions in lengthier supply chains. As plants draw closer to the ultimate consumer, there should be less of a need to keep excess merchandise on hand.

Despite its so-so outlook for the U.S. economy in the coming year, the State of Logistics Report offers some comfort. "Inventory management techniques are improving," CSCMP says. "These practices are likely to be some of the major learnings coming out of the very trying period we have endured for almost five years."

Maybe the next time we run the numbers, we'll have some better news.

Sumber : http://www.supplychainbrain.com/content/blogs/think-tank/blog/article/just-how-much-inventory-is-out-there-anyway/