A recent Harvard Business Review article [1] examined the transition from critical supply shortages during the early COVID-19 pandemic in March 2020 to a current state of inventory excess, particularly in the technology sector.
Initially, companies over-ordered products like tech devices and essentials to meet the surge in demand from consumers adjusting to work-from-home and quarantine lifestyles. As demand weakened, the forecasting algorithms were not responsive enough to the demand signals, leading to overestimated demand and resulting in an accumulation of outdated inventory, such as semiconductors.
The article highlights the significant financial and environmental costs associated with these ‘inventory gluts’, citing a Kearney study that values the excess inventory issue at over $250 billion in the U.S. alone, with global repercussions extending into the trillions. It further suggests that such inventory challenges are cyclical, with potential future demand spikes in many other areas like electric vehicle batteries indicating that similar patterns of surplus may recur.
To understand the complexity of the problem, imagine that managing inventory in a supply chain is like managing your body weight and, specifically, trying to avoid accumulating too much belly fat.
1. Causes of Inventory Glut as Overeating: Just as overeating can lead to an accumulation of belly fat, overestimating consumer demand can lead to an accumulation of excess inventory (inventory glut). In an attempt to ensure there’s enough supply following shortages, companies might “overeat” by ordering more stock than necessary, thinking they’re avoiding the risk of running out. However, just as eating too much, even good food, can lead to unwanted weight gain, ordering too much product can lead to storage issues and financial strain.
2. Implications for Businesses as Health Risks: Holding too much inventory is akin to carrying extra belly fat. Just as excess weight can lead to health issues and reduce mobility, excess inventory can tie up capital that could be otherwise used for growth, increase storage costs, and risk product obsolescence, affecting the company’s financial health and operational flexibility.
3. Obsolescence and scrappage as a drain on financial margins: Obsolescence is like expired food that presents a difficult choice. Consuming expired foods can be harmful to your health and throwing them results in wastage of financial resources. Similarly, holding onto obsolete inventory can harm a company’s financial health. It represents money tied up in products that can no longer be sold at all or at their intended price leading to potential losses. Additionally, scrapping obsolete inventory that has become obsolete or unsellable, results in a direct financial loss
Strategies to Manage Inventory Glut as Weight Management:
To mitigate the effects of inventory glut, companies need a balanced “diet” and “exercise” plan for their supply chain. This involves:
- Improved Forecasting (Balanced Diet): Just as a balanced diet requires understanding the right amount of calories and nutrients, improved demand forecasting helps understand market needs to avoid overordering. Results from the M5 Forcast Accuracy competition show that advanced ML models like LightGBM can beat traditional statistical models by up to 24%. [2]
- Flexible Supply Chain Model (Exercise Routine): Flexibility in the supply chain is like having an adaptable exercise routine that can be adjusted based on current needs and conditions, helping to quickly adapt to changes in demand. Flexible capacity, dynamic planning, and routing based on advanced Graph Neural Networks (GNNs) can drastically improve supply chain performance.
- Inventory Visibility (Health Monitoring): Just as monitoring health metrics can guide diet and exercise adjustments, enhanced inventory visibility allows for better decision-making to prevent surplus. We have done extensive work on Business-focused Data Products and how they can create a 360-degree view of inventory across lifecycle stages and operational systems. Such a setup helps organizations make near real-time global optimization decisions instead of dealing with local trade-offs. Additionally, recent developments in LLMs and ChatGPT-like solutions offer commercial decision-makers an easier way to get personalized reports and results on natural language queries.
Just like individuals maintain a healthy lifestyle by finding the right balance of diet and exercise, companies can also effectively manage their inventory levels through tactical decisioning, adaptable operating models, and continuous monitoring.
Preparing for and adapting to fluctuating supply chain dynamics requires agility, resilience, and continuous improvement. Just as there’s no one-size-fits-all approach to diet and exercise, companies must tailor their strategies to their specific scenarios and market conditions, focusing on maintaining a “healthy weight” for their inventory levels to stay agile and competitive.
Just as managing belly fat requires awareness, moderation, and adaptability in diet and exercise, managing inventory levels demands strategic planning, accurate forecasting, and flexibility in supply chain operations and the efficient redistribution of excess components to prevent the equivalent of “corporate obesity” in the form of an inventory glut.
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Source:
[1] The Next Supply-Chain Challenge Isn’t a Shortage — It’s Inventory Glut
by PS Subramaniam, HBR, Sept 29, 2023
[2] Makridakis et al, M5 accuracy competition: Results, findings, and conclusions, International Journal of Forecasting, Volume 38, Issue 4, 2022, ISSN 0169-2070