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The convergence of declining demand and rapidly deflating commodity prices has left many distributors holding onto significantly devalued inventory, no matter how good their inventory management systems were.
Why? Because distributors began stockpiling last year as prices climbed. When the prices plummeted, that stockpile didn't look quite as good. Inventory levels jumped $6.2 billion in the fourth quarter, according to the U.S. Commerce Department.
(The Wall Street Journal recently ran an article, Firms Race to Regain Control Over Inventories, looking at how manufacturers are approaching the growing inventory problem.)
There are ways to mitigate this situation. I recently spoke with an electrical distributor in Southern California for an article on commodity deflation (read Mitigating Commodity Deflation in our most recent issue).
Some of the advice he offered:
- Know what's available to you locally. You don't have to keep high levels of low-demand inventory for items that you can restock on short notice. But beware of "fly-by-nights" that may also take advantage of this and reduce the value of your inventory even further.
- At the same time, be very careful about maintaining a healthy cash cycle so that you can respond effectively.
- Be aware of how price indexes function. Distributors may see a lag time when prices start rising, so understanding that will help you maintain appropriate prices to keep at least some of your inventory moving.
- And, take the lessons of the downturn with you into the better times. Improving your inventory management now can only help you later