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Somewhere in your life journey, you’ve heard the cautionary tale from a 16th-century proverb, later woven into Shakespeare’s writings that suggest, in effect, “too much of a good thing is no longer a good thing.” Where once upon a time you may have read that caution, or heard that caution, today, you are living that caution. Post pandemic, we have inventory shortages from ketchup packets to semi-conductors, and practically everything in between. Semi-conductors alone have resulted in shortages not only in cars to purchase but even rent. How about lumber, steel, housing, appliances, toilet paper, clothes...seems just about everything is in short supply. Now add to this our over-reliance on imports from China as chronicled in my last column. In addition, the shortage of labor is artificially created by the policymakers intent on “progressing the agenda” to an extent where employers can’t compete with the inflated unemployment benefits, which ironically are funded by our very own tax dollars. At a time when employers have nine million jobs open, our government is monetarily incentivizing people…get this…to not work! Essential to supply chain success is the underlying reliance on the logistics infrastructure, a $1.6 trillion industry. Talk about challenges, at present for every 85 containers of goods already at our ports, there is only one truck…yikes.
With supply shortages and demand far exceeding supply, inflation is coming. In addition, to hyper-inflate, just leverage the pandemic to print $5 trillion in new money (debt), and the die is cast for a deficit disaster. While it was appropriate to help those in need throughout Covid, too many pork barreled special interests’ projects went along for the ride. A camp is emerging, with a progressive agenda, that lays the economic foundation that “deficits do not matter.” I vehemently disagree, for eventually, the piper must be paid. Yet those responsible for such get reelected. Why you ask?...the answer lies in the ole adage: “a government that robs Peter to pay Paul; can always rely on the support of Paul.” Translation: business owners your taxes are going up.
Now to the non-government free market. In our quest to find the cheapest, the fastest, the leanest, in our search for optimization did we overplay our card? Of course, with inventory being the single largest asset for PVF distributors, inventory optimization is a worthy pursuit. JIT leads to lower inventory investment thus higher turns, and hopefully increased profits for all in the pipeline (Pun). It also tends to mitigate inventory obsolescence. However, while it works perfectly on paper and typically works fine in real life, it does not always! It is a brittle system that can leave us vulnerable.
For example, it does not provide for unexpected changes in demand or black swan events. Hurricane Katrina eliminated one million vehicles that needed to be immediately replaced yet, supply lead times couldn’t ramp up. Early in JIT days, a plant manufacturing brake pads went on wild cat strike, and just days later, automotive manufacturing lines were idle.
Just a few years ago, we experienced what appeared to be a limitless race for microtechnology. It was a race to make things smaller, and smaller, and smaller. Then to the surprise of manufacturers, consumers didn’t necessarily want phones they could hold between two fingers…too much…too small.
We wake up one day, and a global pandemic basically shuts down the world, and with it, consumer demand. It became protracted, resulting in shutting down manufacturing the world over. The scientific community, those true heroes, pursued and found a successful vaccination. Subsequently, the country and world for that matter did not simply come back but, came back roaring with pent-up demand. Thus, this time the phoenix that arose was on steroids. My intuition tells me we didn’t really lose a year in economic activity and consumption, but rather it was simply delayed. For proof simply look at your solid first half. Yet your concerns for the second half grow as you strategize not to surrender your well-deserved gains.
You see those unexpected black swan events are occurring more frequently. You no longer see a century between 100-year rains or volcanic eruptions. As is said, “hope is not a strategy” therefore while inventory control is critical to success you must couple with strategy and strategy demands one to expect the unexpected. It seems in the pursuit of the lowest price in the Galactica we failed to consider the total cost side of the equation. Often, beyond a certain floor, further price decreases result in escalating total cost. Somebody in the channel needs to have inventory and even a bit of a buffer. We are the distributors in the value chain and therefore we are the inventory “keeper of the gate.” Pricing of steel and metals and so much more are actually at historic highs…as in highest in the history of mankind! Is anyone among us not experiencing upward pressure on your own total cost? With each disruptive, unexpected event it is critical to harvest the lessons learned. Our supply chain became so efficient, so good, so great, and we are now seeing a downside that was never anticipated. Should this year’s experience be an opportunity to reflect if in fact that indeed “too much of a good thing is no longer a good thing.”
“I went to a restaurant. It said ‘Breakfast anytime.’ So I ordered French toast during the Renaissance.” — Steven Wright