The Ramp-Up Cometh…Maybe

In October 2008, the US economy melted down and dragged the world with it into the biggest recession since the great depression. As sales abruptly fell 10, 20, and even 30%, companies were stuck with inventory in their stores, distribution centers, and en route from Asia. There were orders for even more inventory in the pipeline. It was clear to everyone that they had too much inventory. Supply Chain executives led the immediate charge to:

• Cancel existing orders, even if goods were in production


• Put in more rigorous review processes to order any more goods


• Recalculate the re-order points and quantities

Basically, inventory was bled down, mix changes due to the economic conditions were evaluated, and orders for goods were placed more sparingly. Let’s consider two government statistics for Manufacturing and Trade Inventories. At the end of Q3 2008, inventories were $1,396.5 B and the Inventory to Sales Ratio was 1.39. In July of 2009, inventories had dropped to $1,313.9 B and the Inventory to Sales Ratio was 1.42. So, we had an $82.6 B drop in inventory and sales fell $1,004.7B to $925.3 B or $79.4 B.

So we tightened the belt. We let sales bring down the inventories. We were certainly doing this until July, here are the numbers reported in this October 2009 report (http://www.bea.gov/scb/pdf/2009/10%20October/1009_isr.pdf).

Now, we are starting to see something else happening.

We are seeing cases of demand ramping up faster than lead times can react. We are seeing out-of-stock situations in a few cases. This raises a few questions and concerns.

1. As mentioned above, the ramp down of inventories was simply a matter of reducing orders and letting sales bleed down the inventory to the new norm. It took longer than management probably wanted but it worked. It was steady and customer service did not suffer unless the sales mix shifted drastically to lower priced goods. The long lead times from Asia made the ramp down slow.


2. The meltdown happened very fast it was impossible to predict simply using demand planning. As a result most companies had to react quickly and they did just that.


3. What if the few examples we are seeing is an early indicator that things might heat up quickly? Will demand ramp up faster than the long lead times will allow us to react? If so, we might want to decide to start bringing up inventories now. If we do this and sales are flat we will look inept. If we do not and demand shoots up, we will be air freighting and expediting like… well there is no shortage of metaphors here.


4. My guess is most of us will err on the side of caution.

Certainly, the recession has been a tough trek for shareholders, employees, and consumers. But from an inventory standpoint, it was relatively smooth for the companies that were on top of it, changed their policies, and let the market bleed down inventories. The ramp up could be a much bumpier ride than the ramp down.

Let’s consider a real life example. Here is a screen shot from our DemandCaster software tool that illustrates what we are seeing. It is for a product imported from Asia. The green line is actual demand. The red is the historic forecast and the blue is the forward forecast.



Note that in Q4 of both 2007 and 2008, demand decreased. Not surprisingly, in 2008, demand decreased even more to what appeared then to be a lower norm of sales. There was every reason to believe that sales would decrease again in Q4 of 2009. That is not what happened in October and November. Sales dramatically increased, causing stress in the planning process. The product is still in stock but there is not much safety in the inventory level at this time. The question no one can answer is whether this is a random spike or if sales are returning, as the forecast now indicates, to pre-recession levels. What would you do? What would you order? We are recommending to raise inventory on this item since ramping down, if needed, is less easier and less painful than going out-of-stock.

No one ever said this was easy.