The $13 Trillion Question

Updated: Dec 22, 2019

$13 Trillion is the amount of inventory currently sitting in various stages around the world. As we used to say, "that’s a lot of bread, Fred." It’s more than the GDP of Japan, Germany, and the United Kingdom, combined. On a global GDP, or output basis, this amount of inventory represents about six turns per year (turns would be considerably lower for just the goods-producing and goods-selling part of GDP; see the world-as-a-supply chain infographic). Reducing global inventory by 10% could free up $1.3T in cash that could be used for investment in new plants, equipment, technologies, and infrastructure. This amount of investment could help with the global productivity problem (a topic for another day). These are dial-moving numbers for humanity and one of the reasons supply chain management has moved from the backwaters of business to front-and-center over the course of the past fifty years.

The question is: is this too much inventory? Lean doctrine says that inventory is evil, but the real answer is more nuanced. It’s more as Larry Lapide used to describe it: inventory is like cholesterol – there is good inventory and bad inventory. Good inventory is at the right place, right time, and right quantity to satisfy demand; bad inventory languishes, taking up space, and is ultimately marked down or written off. Enterprises want to reduce bad inventory, increase good inventory, and lower overall inventory. Nowhere is this problem more prevalent today than in the retail sector, where there is a lot of inventory in bad locations (retail stores), where consumers are spending less and less time.

Companies have invested heavily over the course of the past thirty years to lower inventories. Has this investment significantly lowered overall inventories? The short answer is no. The longer answer is more complex. One of the characteristics of mature economies that has a significant impact on the management of supply chains is choice – consumers have a dizzying array of products available to them for just about every conceivable need. A negative search on Amazon reveals 572M products available for sale (in a testament to the power of postponement, a typical Walmart store carries between 100K and 150K SKUs). This power of choice figures prominently in all matters associated with supply chain management and drives the need for sophisticated decision making in order to maintain and grow profitability. We will further explore these concepts in future articles.

#supplychain #inventory #Amazon #postponement #consumerchoice