Research: Businesses Challenged To Reduce Finished-Goods Inventory

New research indicates that while businesses have shown good success in lowering their levels of raw and work-in-process inventories over the years, many struggle to improve their performances when it comes to finished goods. The study, conducted by the Supply Chain Management Research Group at the Ohio State University, Columbus, Ohio, analyzed data from publicly traded U.S. companies for the years 1979 through 2001, and focused on the ratio of inventory to the cost of goods sold. The companies involved in the study were grouped into 14 industries based on the North American Industrial Classification System. The study, titled "Inventory Turnover -- Reaching for the Stars or Spinning Its Wheels?" showed that while nine of the 14 industries showed improvement in their number of total inventory turns, just four showed improvement in their numbers of finished-goods turns. More specifically, nine of the 14 industries improved their raw materials turns; 11 improved their work-in-process turns; and four improved their finished-goods turns over the 13-year period analyzed. Why the lack of progress in improving finished-goods turns? The study outlines several possible explanations, including the suggestion that suppliers "are meeting their heightened service level requirements by holding higher levels of finished-goods inventory." Other explanations include:

  • Product proliferation -- Firms may hold higher inventory levels as they increase their numbers of stock-keeping units.
  • Stringent performance requirements by downstream customers -- Suppliers are carrying more inventory to meet those requirements.
  • Outsourcing -- Adding this additional layer to the production process could lead to lags in adjusting to demand, prompting companies to increase their buffer inventory.
The study was funded by ProLogis Research Group. With headquarters in Aurora, Colo., ProLogis provides distribution facilities and services in North America, Asia and Europe. A copy of the research report is available at www.prologis.com.
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