The Last Mile: Inventory's China Syndrome

The theory was that a nuclear core meltdown would generate enough heat that the core would melt through the Earth's crust and, eventually, emerge in China. The fact is, China may be starting a supply chain reaction that is driving an inventory meltdown. For more than a year, numerous speakers at logistics conferences have suggested U.S. companies have shifted from a just-in-time to a just-in-case stocking strategy. We're well past the West Coast port shutdown that interrupted imports during the build up to the peak retail season in 2002. Nevertheless, the behavior was retained as retailers continue to bring goods in earlier and are stocking some "just in case" inventory.

There's a more persistent problem. Forecast accuracy — or, rather, inaccuracy — has long been the bane of the logistics manager's existence. There was comfort in having suppliers nearby to respond quickly to any shortfall in the sales or production forecast. Overages were even easier when you had very little product in the pipeline. Turn off the flow and the inventory dries up pretty quickly.

With consumption close to production, other gains were possible in direct shipping, bypassing the additional handling step in your own distribution center. In some cases, suppliers could be instructed to sequence orders for multi-stop deliveries — even aisle-by-aisle restocking within a retail shop. Inventory flew through the pipeline, barely stopping long enough to register on the accounts payable ledger before turning into a sale.

We were all going to be like Dell Inc., and get paid by customers before receiving an invoice from our suppliers.

Then we shifted from next door to next month. Instead of sourcing 30 minutes away, transit times were back to 30 days. Adjusting to forecast variations got complicated. Gross forecasts drove shipments of container loads of product that couldn't be configured for final delivery for four to six weeks. Deconsolidation or transload stations near ports now received those goods, reconfigured the loads and sent them on to a domestic distribution center or customer. Companies with good visibility can determine what those loads will look like while the ship is still a week or more offshore.

Our concern over stock outs and their impact on sales has only increased during this time. We don't know what will happen if we are out of stock on item X for any amount of time, but we're sure it isn't good. How do you protect against a stock out? Have plenty of stock. How much stock? Enough to cover demand until you can restock. How long is that? Forty-five days.

Low sourcing costs in China, reasonable transportation costs and transit times, and unprecedented low cost of capital have all conspired to mask much of the cost of increased inventories. That's not likely to continue in 2006 and beyond.

China is under pressure to revalue its currency. Interest rates have been climbing steadily. Fuel costs have settled at a higher level. Capacity is tight. It appears nearly all of the underlying cost factors are moving up.

If we don't get a handle on inventory levels — perhaps allowing selective stock outs — the weight of the goods stored in U.S. warehouses could start a geological breakdown, resulting in our own version of a China syndrome.

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