The world faces economic headwinds. According to the Economist, Europe’s economy only grew at 4% this decade as compared with 8% of the United States and is struggling with a triple shock of the energy crisis, surging Chinese imports, and the threat of tariffs from the United States. On the other hand, the United States’ Federal Reserve raised its benchmark rate the fastest in four decades from March 2022 to June 2023 and has remained steady at higher rates since then. Thus, proactive companies are managing cost and inventory to improve margins and cash flow to navigate economic turbulence.
Energy has a profound impact on any economy. It not only is required for day-to-day fundamentals such as food, shelter, and public services, but it also powers the future. For example, according to Scientific American and Joule, artificial intelligence (AI) has a hefty energy requirement. A continuation in the current trends in AI capacity and adoption will lead to NVIDIA shipping 1.5 million AI server units by 2027, and these units will consume more than 85 terawatt hours of electricity annually which is more than many small countries use in a year. If the production of electricity is stifled due to regulations and wars, prices will continue to increase.
Inflation is also having a significant impact on the economy. In essence, prices continue to rise at a fast pace. For example, since 2020, inflation has increased almost 20% in the United States, and so even though it is trending closer to the target level, it remains high. Thus, businesses are paying higher prices for materials, components, labor, equipment, and interest rates. Since carrying high debt levels increases the cost burden, companies are concerned about reducing inventory levels to reduce carrying costs and increase cash flow.
Smart companies are proactively managing costs and inventory. There are several strategies to successfully reduce cost and inventory levels while keeping service levels intact. One of the best strategies is to utilize a SIOP (Sales Inventory Operations Planning) process to align demand and supply while optimizing customer service, operational efficiencies, and inventory levels. In essence, by better forecasting future demand, Operations can proactively allocate production to maximize service and operational efficiencies and Supply Chain can work with suppliers to plan ahead, reduce costs and roll out collaborative inventory programs, thereby achieving the win-win-win of service, profitability, and cash flow.
Implementing best practices for planning and inventory management will also deliver bottom line results. These programs include providing the forward view with master planning, optimally sequencing production lines with production scheduling and saving logistics costs with replenishment / distribution planning. For example, in an industrial manufacturer, the team brought inventory levels down by over 20% by focusing on translating demand into product types or models with SIOP, projecting key raw materials and commodities, partnering with suppliers on collaborative programs, adjusting inventory policies, and better utilizing their ERP system to optimize the process. In addition, they analyzed capacity aninfld determined what to offload vs bring in house to maximize margins while meeting customer growth plans.
Successful companies will proactively manage inventory levels, plan production, collaborate with suppliers, adjust sourcing, upgrade their ERP systems and supply chain technologies. Improved margins and working capital will not happen by default; instead, only those companies willing to invest in talent, technologies, and process upgrades will achieve these benefits. In the next few years, the winners will separate from the pack as they right-size inventory yet are prepared to scale up rapidly as competitors struggle to fulfill demand. These winners will dominate their industries for decades to come.
Originally published in Brushware Magazine – July / August 2024