The Global Sourcing Inventory Conundrum

Modern Materials Handling recently ran a story citing new benchmark data from the Warehousing, Education and Research Council that provides concrete proof that global sourcing programs are driving up inventory levels in the US. Granted, with the cost of capital down -- when it is available, mind you -- thanks to falling interest rates over the past 12 months, the cost of holding inventory ain't what it used to be. Still, adding cushion is never good for the bottom line. According to the study, three years ago, "companies reported holding an average of 20 days of raw materials in inventory. Now they're reporting 62 days worth ... The biggest factor complicating supply chain is increased sourcing from overseas ... container traffic at U.S. ports has increased 72% over the last decade."

According to one expert quoted in the study, importing materials automatically adds at least 30 days of inventory because of product being held in inventory as it crosses the ocean. In addition, companies sourcing from overseas usually hold more safety stock in response to their longer lead times. Now, companies that have created detailed total cost models know this already. And most important, they quantify it. But far too few organizations engaged in global sourcing understand before their first container hits the water the true total cost impact their global sourcing decision will have.

These are the types of companies who end up paying the most for global sourcing inventory challenges. But there is hope. Besides creating a total cost model from the start, procurement organizations should consider partnering more closely with their suppliers once a relationship is established. Perhaps, for example, it might be worth paying extra to have a supplier hold inventory and warehouse on-shore -- maybe in a JV type venture or structure. In other cases, a dual-source strategy might balance inventory carrying costs with on-shore options that reduce risk while only minimally driving up cost (especially given high commodity pricing and availability concerns of late in many developing markets). Perhaps the most important suggestion, though, is to find qualified partners -- such as 3PLs -- who can provide actionable supply chain advice for each and every unique situation. Incidentally, this is where most consultancies tend to come up short from a tactical advice perspective. Know when to call in the logistics experts!

- Jason Busch

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