Best way to manage inventory when demand drops

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The best way to manage inventory when demand drops. Credit: Fusion Worldwide

Inventory cycles swing from "just-in-case" to "just-in-time," but recent trends are pushing manufacturers to amass unnecessarily large inventories. Stockpiling can seem like a beneficial safeguarding measure, but experience has shown that it can backfire and create instability while furthering inflation.

There is a viable substitute for both the just-in-case and just-in-time methods. Instead of hoarding to safeguard resources, manufacturers should leverage vendor and supplier relationships to find stability when the scales of supply and demand invert.

Buffers Become Barricades

As demand outpaces supply within the semiconductor industry, the disparity has driven up prices and lead times - a costly consequence for those who cannot afford to wait for product.

Buying buffer stock is a key part of the just-in-case management model. It entails carrying larger inventories in case supply chains fail. However, over-ordering further depletes market supply, which subsequently increases prices and extends lead times.

In such scenarios, carrying costs are high and buyers may utilize 3rd-party warehouses for storage. This turns buffer stock from a benefit into a liability, as it constricts cashflow and causes logistical complications.

Restored Supply Means Trouble for Stockpilers

When supply chain disruptions start to dissipate, companies realize the downfalls of the stockpiling strategy. In today's market, demand is softening. Inflation and events like the Russia-Ukraine conflict have driven commodity prices higher and consequently reduced consumer spending. Consumer electronics are likely to suffer the most, as these purchases tend to trend downward first. This shift is hurting manufacturers, particularly after they experienced heightened demand during the peak of the pandemic.

The impact is reflected in reduced business outlooks. Micron, which produces DRAM chips for technology like personal computers and smart phones, announced a drastic cut in production after projections showed a 3-8% price drop for DRAM chips.

Although Micron will need to hold the already produced chips, this production slowdown preserves Micron's control over supply, mitigating excess and ensuring better prices.

How to Build a Healthy Inventory

Preemptively planning a holistic inventory strategy builds a foundation for success. Work closely with strategic suppliers to strengthen the supply chain and make securing allocation easier. Engage strategic supplier relationships during periods of inflation to ensure proper budget investment, as a dependable supplier relationship reduces costs by committing to orders in advance.

Plus, providing transparency on component lists helps suppliers better understand your needs and proactively offer supply. Buyers should limit excess supply to a 1-2-month period to avoid disruptions and additional carrying costs.

Price changes and shortages are unpredictable, but it is important to pay attention to consumer behavior and market movements. Independent distributors with market intelligence teams are especially valuable, as they can be your eyes and ears on the market and give recommendations.

Maintain Balance Strategically

Navigating between supply and demand is a balancing act; be sure to use every tool available to you to stabilize inventories. A company's best resource is its supply source, so work closely with strategic partners to control your inventory, instead of having it control you.