Market Intelligence
August 12, 2022

The Best Way to Manage Inventory When Demand Drops

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Inventory cycles often swing from "just-in-case" to “just-in-time,” but recent supply chain trends are pushing manufacturers to amass unnecessarily large inventories. Stockpiling as a safeguarding measure may seem level-headed on one hand, but experience has taught us that it can backfire, creating instability and fostering inflation. 

Assuming you can resist the temptation to over-order, there is a viable substitute for both the just-in-time and just-in-case methods. Instead of hoarding to safeguard resources, manufacturers should count on vendor and supplier relationships to help strike a balance when the scales of supply and demand invert.    

Buffers Become Barricades 

Since demand has far outpaced supply within the semiconductor industry recently, 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 are disrupted. However, over-ordering is counterproductive, as it further depletes supply, which subsequently increases prices and extends lead times. 

Despite prices on the rise, companies planning future projects try to load up on buffer stock for projected demand. In such scenarios, carrying costs are high and buyers may need to make use of 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 disruptions to the supply chain start to dissipate, companies realize that the just-in-case strategy has its downfalls. Eventually, after a disruption, we see manufacturing return to normal levels and regular production schedules resume.    

In today’s market, demand is softening as inflation and current events like the Russia- Ukraine conflict drive commodity prices higher and consequently reduce consumer spending. Consumer electronics are likely to suffer the most, as these are the purchases consumers tend to cut back on first. This drastic shift is hitting manufacturers hard, particularly after they experienced such heightened demand during the peak of the pandemic. 

This changing landscape can be seen in reduced business outlooks like the one recently announced by Micron, a company that produces DRAM chips for technology like personal computers and smart phones. Predicted price drops for DRAM chips ranged from 3-8%, which led Micron to cut chip production. 

While a portion of the chips already produced will need to be held in Micron facilities, the slowdown in production will preserve Micron’s control over supply, thereby mitigating excess and ensuring better pricing.  

Building a Healthy Inventory 

There is no one-size-fits-all approach to inventory management. Leveraging both the just-in-time and just-in-case approaches lets you occupy the middle ground between supply and demand. Additionally, working closely with strategic suppliers strengthens the supply chain and makes securing allocation easier.  

Make good use of strategic supplier relationships during periods of inflation to ensure your budget is invested efficiently. A dependable supplier relationship can help your budget by committing to orders ahead of time. Furthermore, providing transparency on component lists helps suppliers better understand your needs and proactively provide supply.  

Furthermore, carrying minimal excess doesn’t always result in realized risk. Limit excess supply to about a 1-2-month period to avoid supply disruption or additional carrying costs. 

Despite price changes and shortages being unpredictable, it is important to pay attention to consumer behavior and market movements. Independent distributors with market intelligence teams are especially helpful, as they can be your eyes and ears on the market and offer recommendations.   

Anticipating market patterns and preemptively planning a holistic inventory strategy builds a foundation for profitable success instead of excess. 

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. 

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