subscribe: Posts | Comments | Email

Muted U.S. Economic Growth Levels Point to Needs for More Advanced Inventory Management Capabilities


This commentary represents the fourth of our ongoing Supply Chain Matters- Llamasoft market education series directed at clarifying needs and requirements addressing supply chain wide visibility.

Business media has of-late pointed out that that overall inventory levels among retailers and manufacturers has been unusually high, which is impacting both current procurement activity as well as logistics and transportation trends. In a prior blog posting earlier this month, our research suggested there was indeed an inventory overhang with two potential causes.  Of the three potential causes, one was that with more and more products being offered online, and with consumers expecting immediate availability and delivery, it would seem that inventory levels have risen to the challenges in the transition to support the explosion of online.

Last week, the U.S. Commerce Department released adjusted data regarding U.S. economic growth levels that occurred in Q2.  US GDP growth was adjusted downward to a 1.1 percent annualized growth level in Q2. There was other data relative to inventory levels in the economy.

Overall, the messages delivered were that consumer related spending jumped to an annualized 4.4 percentage rate in the April to June period, the strongest gain since Q4 for 2014. However, business spending on equipment and other items declined at a 0.9 percentage pace following drops in the prior two quarters.  In essence, consumers drove spending levels in Q2 rather than B2B activity. That was reflected in remarks from U.S. Federal Reserve Chairwoman Janet Yellen who also contrasted solid growth in household spending with soft ongoing business investment. The result is that overall corporate profitability rates which are reported by Commerce are now trending down 2.2 percent compared with the year-ago period.

Regarding inventories, The Wall Street Journal quotes PNC Financial Services’ Chief Economist as indicating: “Inventories were a major drag on growth in the second quarter, but now that businesses have better aligned inventories with demand, that should lift and inventories will add to growth in the near term.” Another chief economist is quoted as indicating that profit margins are past their cyclical peak and are set to decline further over the coming quarters. Thus, the usual contrasts and challenges regarding the ongoing management of supply chain wide inventory visibility.

For supply chain executives and strategists overseeing product demand and fulfillment activities focused on U.S. market segments, the message is that inventory hangover and management is very much associated to either a B2C or B2B market segment.

The numbers would indicate that optimistic consumer spending will continue in the current quarter, and perhaps into the final B2C holiday focused fourth quarter, bar the results of the U.S. Presidential Election in early November.  Inventory management in B2C and Omni-channel retail would thus be a reflection of the hottest consumer products and quick responses and calibration to weekly market trends. However, as we all know, B2C product margins are very thin and the overall costs for online fulfillment are rising.

However, in the B2B sector, more cautionary inventory management remains prudent, since many businesses remain in a period of uncertainty with reluctance to spend. The current depressed state of the oil and gas industry coupled with election year and interest rate uncertainties obviously remain as pressures on businesses to reduce further costs and maintain expected profitability.

Thus supply chain inventory levels will remain in the crosshairs of the CFO both for the remainder of the year as well as into the future. Suppliers should anticipate continued pressures to absorb inventory costs.

In all cases, advanced inventory management pegged to item-level actual product demand levels, and broader visibility to supply chain wide inventory exposure applies for all supply chain planners for the foreseeable future.

As noted in our prior commentary related to this market education series, from the user lens, significant challenges in creating a unified view of all supply chain inventory data and information remain as unfulfilled. However, new Cloud or on premise in-memory, data visualization and data cleansing information technology tools now coming to market continue to improve and will better assist in this effort. In particular, the combination of advanced in-memory coupled with data visualization and analytics will add augmented computing power and a more enhanced user-interface.

A further ever important capability has become multi-echelon inventory optimization practices. Such inventory optimization techniques allow the flexibility in the use of what is termed “service classes” which are equated to customer fulfillment service needs. Inventory optimization techniques in essence, calculate “stock-to- service” curves, optimizing individual service and safety stock levels to an inventory location. Such capability is especially pertinent to producers of consumer focused goods which are increasingly being planned n Omni-channel fulfillment. Trying to plan such landscapes with traditional ABC inventory management techniques is sub-optimal and inefficient in terms of overall inventory management.

When inventory optimization is supported by higher and deeper levels of supply chain wide inventory visibility, more informed planning and supply chain wide decision making can be enabled as to various impacts on financial business outcomes such as margins and profitability. An overall inventory dashboard capability provides the means of alerting to average daily inventory levels by distribution segment, product demand that is consuming the bulk of available inventory or important trending in inventory vs, days of supply for key products.

Muted economic growth and high levels of business uncertainty indeed point to needs for end-to-end supply chain visibility augmented by more sophisticated, analytics-enabled inventory management

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

Disclosure: This educational series related to supply chain wide visibility is sponsored by LLamasoft.

Statistical Evidence Suggests There is Indeed an Inventory Overhang with Two Potential Causes


Business media has of-late pointed out that that overall inventory levels among retailers and manufacturers has been unusually high, which is impacting both current procurement activity as well as logistics and transportation trends.

We at Supply Chain Matters decided to have a detailed look at the data to extract some insights

The most accepted and readily available measure of any inventory overhang is the inventory-to-sales ratio. The generally accepted definition of this ratio equates to the amount of total amount of inventory that businesses report has compared with the amount of goods that they have sold in a particular period of time. In essence it represents total business inventories divided by total business sales.  A ratio value in excess of one would indicate how much more inventory is available to support existing sales levels. During times of severe recession, such as which occurred during the years 2008-2009, the ratio is high. During good economic times when sales are robust, the ratio should be lower.

For U.S. related activity, the U.S. Census Bureau calculates and reports this ratio.  We downloaded adjusted historic data with a start year of 2008, just prior to the prior severe global recession, with values up to and including May of this year. (The last reporting value).

There are three different variants available from the U.S. Census:

Total Business (Adjusted)

Total Manufacturing (Adjusted)

Total Retail Trade (Adjusted)

For purposes of our analysis, we elected to analyze and share Total Business and Total Retail Trade.  However, we elected to sort and present this trending data by month, which we believe would be far more of interest to our supply chain, manufacturing and product management reading audience.  This is because inventory is managed continuously in daily, weekly or monthly dimensions.

Indeed, the data does present some insightful trends.

Our first figure is Inventory to Sales Ratio-Total Business Activity (Adjusted), 2008 to Date.



First, notice the distinctive spikes in the ratio for the early and late months of 2009, when the global recession took a severe toll on businesses. The average ratio across all of 2009 monthly values was 1.34, with the highest values ranging from 1.48 to 1.43 during the first-half of that year. What we further noticed was the ratio began a steady creep upwards beginning in November 2013 (1.33) thru May 2016. The average ratio value for the five months of 2016 was 1.41, rather close to the spikes in early 2009. Notice further that the spike in the ratio extends across all months

So what happened?

Again, we do not portend to be trained economists but it would seem by our knowledge of supply chain events that there were two rather significant events that occurred in the designated latter period. One was the U.S. West Coast port disruptions that extended from the latter-half of 2014 well into the first-half of 2015. The other was the ongoing boom of online commerce that has impacted retail channels, resulting in a boom in the construction of new online fulfillment distribution centers.

We further analyzed the ratios for Total Retail Trade (Adjusted) for the same period of 2015 and the first five months of 2016.


Notice that the 2009 spike was far larger and that a somewhat similar pattern of current creep is manifest in the 2015-2016 data. The average ratio for Retail Trade was 1.46 for 2015, and 1.52 for the five months in 2016. While not to the 1.6 levels of 2009, the trend is indeed worrisome.

We therefore suggest that with more and more products being offered online, and with consumers expecting immediate availability and delivery, it would seem that inventory levels have risen to the challenges in the explosion of online.

We conclude with the following takeaways:

  1. There is indeed strong evidence of a building overhang in inventory levels. Supply chain, procurement and sales and operations teams need to take a hard look at inventory trending in relation to supporting expected sales volumes.
  2. The U.S. West Coast port disruption appears to have provided its own impacts in ongoing inventory management. Whether that resulted in increased safety stocks, changed global transportation patterns or continued concerns, the ratio creep correlates in timing.
  3. The ongoing explosion of online commerce, online consumer demands for immediate availability, and the added build-out of new fulfillment centers seems to have a direct correlation to ratio creep timing, however there may be other factors at-play. Bottom-line, inventory levels are indeed creeping up to concerning levels, despite all the current advanced planning and technology tools currently available. It may further explain why global PMI indices have trended more toward contraction levels.

We encourage our readers, particularly those of economic and/or academic backgrounds to weigh-in on the above. What do conclude from the current high levels of inventory overhang?

Bob Ferrari

© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.


Apple’s Fiscal Third Quarter Performance Provides Added Concerns and Heightened Expectations

Comments Off on Apple’s Fiscal Third Quarter Performance Provides Added Concerns and Heightened Expectations

Yesterday, Apple reported its fiscal third quarter financial performance for the period that ended in June and the results were somewhat concerning from both a financial and supply chain strategy perspective.  Apple Logo

On the financial side, the business media headlines reflected the first prolonged slump in iPhone sales since that product was introduced in 2007. That is especially concerning since the iPhone is the prime revenue and profit generator for this prominent consumer electronics producer. Total revenues declined 14.6 percent while net income decreased nearly 27 percent or $2.9 billion from the year-earlier quarter. Gross margin for the recent came in lower at 38 percent, primarily attributed to the introduction of the lower-priced Apple iPhone SE model. The average selling price for the company’s iPhone lineup dropped to $595 from $662 in the year earlier quarter.

From a supply chain volume perspective, the company indicated it sold 40.4 million iPhones and close to 10 million iPads in the quarter.  Regarding the former, CEO Tim Cooke indicated that sales interest in iPhones was higher but was constrained by a decision to reduce four million units of overall iPhone inventory in its various retail channels. Regarding the latter, iPad volume has now dropped for 10 consecutive quarters with the latest 9 percent volume decline. From a global perspective, more concerning was a 33 percent drop in sales within Greater China that includes Hong Kong and Taiwan in addition to the mainland. Smartphone sales in this region continue to increase and have benefitted other domestic and foreign producers.

In its reporting, The Wall Street Journal opined that the company’s main hardware products remain in decline and that new products are not successful enough to pick-up the slack. Further indicated is a concern that Apple may have lost its innovative touch.

Thus, Apple’s current new product development and product release phase looms even larger to convince investors and the market as a whole that Apple will retain its innovative edge.  Once again, the Apple supply chain must deliver on both higher expectations and now, new pressures to reduce costs along with smarter management of overall inventories. With a continued decline of the company’s traditional hardware products added to what is likely to be highly optimistic forecasts and expectations for pending new products, Longer-term, expectations remain high for Apple’s entry into other markets such as electric powered vehicles.

Apple’s sales and operations team members have yet another challenging 6 months in planning for the all-important year-end holiday period where sales and profitability needs are so important. Compounding this problem is yet another shift in supplier strategies and constant information leaks across the supply chain.

Indeed, Apple has reached an interesting crossroads. The again, there could well be other interesting developments in the weeks to come given Apple’s massive cash balance and propensity to generate considerable profits. We should all not be surprised by other strategic moves.

Bob Ferrari

© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.

Upscale Retailer Invests in Cloud Based B2B Platform Technology Provider

Comments Off on Upscale Retailer Invests in Cloud Based B2B Platform Technology Provider

It is very seldom that one reads of a luxury goods retailer, for that fact, other retailers acquiring a majority stake in a supply chain technology firm, but in these challenging times of Omni-channel retail, we suppose anything is possible.

Thus The Wall Street Journal reports (Paid subscription required) today that Nordstrom has made a direct investment in DS Co., a Utah based Cloud B2B platform services provider that supports the ability of retailers to support direct ship capabilities from individual suppliers. Detailed terms of the investment were not immediately disclosed.

As the WSJ points out, the drop shipping process reduces the costs for the retailer in having to hold larger amounts of inventory, instead, stocking just a few sizes or colors of goods.  For an upscale retailer offering lots of choices for the consumer, the savings can be substantial.

A visit to the DS web site describes the stated value-proposition of its software, namely providing an integration platform that simplifies and standardizes the way retailers and suppliers connect and exchange inventory, order, and catalog data.  One of the stated differentiation aspects of the technology relates to retailers who utilize standard EDI value-added-networks (VANS) that incur data and transactional fees upon movement of data.

The Dsco platform allows suppliers to populate up to date information without incurring such additional EDI transactional fees.  It further supports the ability of retailers to route purchase orders directly to drop ship suppliers, allowing that supplier to ship directly to the end-customer and avoiding the need for the retailer to carry the added inventory. In addition to Nordstrom, lighthouse customers are noted as Sharper Image, Woolworths and Modell’s Sporting Goods.

The DS relationship with Nordstrom began two years ago in an effort to enhance this retailer’s drop-ship processes as well as make it more profitable and easier to manage supplier management.

According to the report, the new investment will be utilized to hire additional staff and develop more data analysis and inventory management capabilities. Judging from our scanning of DS’s web site, it would appear the firm is running lean and mean and could benefit from more marketing and other needed resources.  Within a two hour span, we literally witnessed the updating of the Nordstrom announcement from data that was rather dated in nature.  Perhaps the new investment included a long overdue refresh of the web site.

Obviously there is more than meets the eye related to this news development. Nordstrom has current relationships with a very well known enterprise technology company as well as noted systems integrators. Supply Chain Matters will attempt to reach-out and gather any additional information.

The universe of B2B business networks is indeed changing and that includes traditional VANS adding more managed transactional and analytical services for customers. Today’s Omni-channel world demands higher and more sophisticated levels of services but at the same time, retailers and producers remained concerned regarding the added costs and expenses related to online fulfillment.

Bob Ferrari

Pay Close Attention to the Rising Costs of Online Customer Fulfillment

Comments Off on Pay Close Attention to the Rising Costs of Online Customer Fulfillment


 The added costs for fulfilling online orders are likely to increase over the coming months because of the current boom in overall demand for large-scale distribution and warehouse space across the United States as well as other regions.

Reuters reports that real estate investment trusts (REITs) that weight their portfolios towards warehouse and distribution real estate holdings have now become the favorite of Wall Street interests because of the current pent-up demand for additional space from retailers. The report specifically mentions logistics real estate services provider Prologis, which counts Amazon as its largest customer, as raising rents a record 20 percent in the first three months of this year. The report cites Morningstar data as indicating that fund ownership in real estate investment firms such as Prologis and Duke Realty Corp. has increased 30 percent or more in the last quarter.

The trend was further reinforced by a recent announcement from the world’s largest commercial real estate services and investment firm, CBRE Group that indicated that- “Voracious global demand for e-commerce fulfillment centers fueled a 2.8 percent year-over-year increase in prime logistics rents globally, led by double-digit percentage gains in U.S. coastal markets.”

According to a recent CBRE report, six of the top 10 markets with the fastest growing prime logistics rents globally were within the United States. Among what CBRE ranks as the Top 10 Global Logistics Hubs by Prime Rent Growth:

  1. Oakland
  2. New Jersey
  3. Inland Empire
  4. Midlands, United Kingdom
  5. Santiago Chile
  6. Ciudad Juarez Mexico
  7. Los Angeles- Orange County
  8. Dallas- Fort Worth
  9. Seoul South Korea

The Wall Street Journal recently published an infographic indicating current areas of warehouse space under construction across the U.S… That mapping indicates the largest double-digit increases in construction of warehouse space focused in the Dallas-Fort Worth and Houston areas, Los Angeles and Inland Empire, Chicago, Atlanta and Greenville/Spartanburg SC areas.  From our lens, that data would indicate broad geography coverage for online fulfillment needs.

And, cost increases are not just confined to warehouse and distribution space.

We have brought reader attention to increasing rate increases by the major parcel transportation and delivery firms, including added surcharges and handling fees. As consumers continue to purchase online items that are larger, more bulky and heavier, there has been increasing demand for logistics delivery services. That is providing opportunities for traditional less-than-truckload (LTL) carriers who are increasingly being called on to provide additional delivery services to support online purchases of hard line goods. This will likely require some LTL providers to invest in augmented technology and logistics assets, which will add to rates charged.

As we have further highlighted, the largest high profile retailers such as Amazon and Wal-Mart continue to aggressively invest in more internal and owned resources in augmenting their own parcel transportation, logistics and last-mile delivery networks under the banner of premium, free shipping services. That is obviously part of the reason for the current building and investment boom underway. A continued competitive battle fueled by multi-billion investments adds to the supply-demand imbalances and speculators to drive up costs further.

However, other retailers with limited financial resources are now faced with the realities of even more increasing cost challenges associated with online customer fulfillment. No doubt, something will have to give.  Either retailers will become more creative in prime, no-cost free- shipping membership programs that can offset the effect of added fulfillment costs or the largest retailers with financial scale will become more dominant retail fulfillment platforms.

Our takeaway for retail and B2C focused supply chain organizations and procurement services teams is to up your game in supply chain network modeling and strategy implications.  Insure that you factor the real possibilities of more added costs in distribution, logistics, transportation and inventory carrying costs. The coming months may well be very challenging, including the upcoming 2016 holiday online fulfillment surge which will more than likely test limited capacity in certain key areas, forcing teams into more costly alternatives.  Be wise, be pro-warned, and conduct rigorous scenario based planning.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


« Previous Entries