Pharaoh's Dream
AHEAD OF THE TAPE
By JUSTIN LAHART
February 9, 2005; Page C1
Back in the old days, signs of impending famine would be seen as a
cause to lay in enough grain to fill the storehouses up to their
rafters. But in modern days, good times are what prompt companies to
load up their cupboards.
Inventory building is a normal part of any recovery. As companies
see the economy picking up, they begin to stock up. By doing this,
they avoid not having enough on hand to meet demand.
The current economic expansion hasn't been all that different from
ones past. As with hiring, companies were slow to raise their
inventory levels coming out of the recession -- but they raised them
nonetheless. Total business inventories are 12% above their 2002 low
point, according to the Commerce Department.
What's different is the way the ratio of inventories to sales
dropped even as inventories rose. The implication: Companies have
never been so focused on running leanly.
The general direction of inventory-to-sales ratios since the 1980s
has been downward. New technologies and just-in-time business
practices allowed companies to better manage inventory, letting them
respond more easily to changing conditions. At the same time, the
decline in inflation took away what was once a powerful incentive to
keep a lot of inventory on hand: The sooner companies bought goods,
the less they'd have to pay.
Still, inventory-to-sales ratios usually bounce higher in an upturn.
But the total business inventory-to-sales ratio, at 1.31, stands
just a hair above its record low. For wholesalers, the ratio is
lower, at 1.15 in November, up from a low of 1.12 last April. Given
the strength of demand, the December wholesale ratio, which gets
reported this morning, probably fell.
Jose Rasco, an economist at Merrill Lynch, believes that inventory-
to-sales ratios will continue to decline in the coming year as
companies, in an effort to maintain profit margins, continue to look
for ways to streamline operations. The advent of radio frequency
identification, or RFID, tags -- which allow companies to more
easily track their inventory -- could help kick inventory-to-sales
ratios down another notch.
While there has been plenty of buzz about RFID, Bob Cornick, who
heads up the RFID program at Zebra Technologies (the company makes
devices for encoding RFID chips), thinks the tags haven't begun to
push down inventory-to-sales ratios yet. But with Wal-Mart's
implementation of its RFID program last month, that could change
soon. |
