The double inventory whammy

Last week I had the privilege to present at a Pharma Industry event in Madrid. One of the things we talked about was the sudden increase in inventory per sales around the time that Lehman Brothers left the scene in Sep 2008, the drop of inventory per sales through 2009 and what effect this has on the Supply Chain.

We all seem to have been caught out up to certain degree by the sudden drop in demand in the second part of 2008 and especially the supply chain which are operating on relatively long lead-time with long chains (multiple partners), seem to have been hit hardest. Organisations operating within these supply chains have had to commit to procuring and manufacturing goods many months before the final consumption of these goods. These organizations were left with large stock piles when faced with the sudden drop in end consumer demand.

Some industries had the unfortunate addition that shortly before the drop in demand, demand outstripped supply which would have driven up the price and therefore the value of inventory, just before demand dropped, leaving manufacturing and distributors with a not only high but also very costly stockpile.
The result of all this is that all inventory keeping players are trying to reduce their inventory drastically even if this means selling at a loss. The worrying thing (as if there has not been enough to worry about yet) is that the same supply chains that were caught out with lots of inventory in 2008 are going to be so under stocked that they potentially will miss out when demand recovers again and thereby incurring a double inventory whammy.

This phenomenon is of course not new. The effects described are caused by the infamous Bullwhip Effect (Prof How lee Stanford University). In short the Bullwhip effect is the increased distortion of the end customers demand signal the further up the Supply Chain you go.
Organisations have been trying to minimize the effect of the Bullwhip effect through better forecasting, Supply chain collaboration and visibility, reduction in lead-time and by removing demand signal distorting effect as price promotions and period based sales quota. But the current scenario which is playing out in many supply chains makes you wonder how effective these efforts have been and bags the question if we should not do more.

This double inventory whammy seemed to really strike a chord with the Pharma companies in Madrid. I would really like to know how relevant this is to you and what actions if any you have taken to tackle this issue.

Looking forward to your comments

All the best
Richard van der Meulen