As demand shifts, some businesses are weighed down with too much inventory
As demand shifts, some businesses are weighed down with too much inventory
We’ve covered inventories quite a bit at “Marketplace” in the past few years — supply chain issues leaving some businesses without enough inventory and changing consumer demand leaving others with too much.
As demand has weakened, some businesses have found themselves stuck with inventory, and they’re trying to get rid of it.
Their efforts seem to be working: The most recent logistics managers index found that a lot of businesses have been able to clear out extra inventory — so much so that they’re back to building it up again.
But that’s not universal. In some industries, there’s still a lot of inventory sitting around doing nothing — and that’s bad for business. A lot of the inventory bloat we’re talking about is happening at the wholesale level.
“So firms that are buying large quantities of product and then reselling them to other businesses,” said Jason Miller, a professor of supply chain management at Michigan State University.
Many of those other businesses — think retailers connected to the housing sector — aren’t buying much from wholesalers right now.
“For example, furniture wholesalers, appliance wholesalers, heating, plumbing, air conditioning and hardware equipment wholesalers,” Miller added.
In other words, this all comes down to where consumers are spending their money. Home sales have been falling over the last year, so people aren’t buying as many building supplies or furnishings.
The same thing’s happening in electronics, where consumer demand spiked early in the pandemic, according to Zac Rogers, a professor of supply chain management at Colorado State University.
“And some of those companies misread that as, ‘Well, this is the new normal. So let’s ramp up inventories in anticipation of a different growth trajectory than we’re really on,'” he said. “And then you’re left just with way too much stock on hand.”
All of that stock — whether electronics or building supplies — has something in common: It’s expensive.
Companies have a lot of money tied up in that inventory, and while that may not be a big deal to larger retailers and wholesalers, “if you’re one of those smaller firms, and not some giant Fortune 100 retailer, you may not be able to absorb it as well — especially if you don’t have the large reserves of cash that all of those big companies built up during the pandemic,” Rogers said.
Cash tied up in inventory isn’t being used productively, said Nicole DeHoratius, a professor of operations management at the University of Chicago.
“It is capital that’s not being used to invest in new parts of the business — to introduce a new product, to pay your employees more,” she said.
Getting rid of that extra inventory with discounts, promotions and advertising is costly too, DeHoratius added.
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