by Ron Ross
The T-shirt inventory for this year's Redwood Coast Dixieland Jazz Festival illustrates a widespread and significant change in how businesses operate in today's economy.
To save the festival organizers the frustration and expense of unloading hundreds of surplus shirts, the T-shirt vendors -- Gypsy Moon Graphics and Provolt Design -- try to predict closely how many shirts will be sold. They keep detailed records from past years' events. They monitor the pace of sales and are even prepared to print additional shirts as needed during the weekend of the event.
Jeff Provolt of Provolt Design can get blank shirts from his suppliers in two days, so he keeps little inventory on hand. And most of his customers place orders several days before they need delivery, so he waits until he has an order before he calls his suppliers.
This style of inventory management, which has evolved in recent years, is having profound effects on economic efficiency and the stability of the entire economy.
Most of the business cycles we've had in this country since World War II have been largely the result of inventory dynamics. The existence of large inventories has turned minor fluctuations in business activity into full scale recessions. How so?
Consider the case of retailers who sell, among other things, printed T-shirts. They need adequate stocks of merchandise available for customers, but they must avoid tying up cash in a product that doesn't move.
If the retailers' sales decline, their inventories will grow. It's often the case that if sales decline by 10 percent, they'll reduce purchases by 50 percent or more to bring their inventories back to the desired levels. Since wholesalers and producers also have inventories which they attempt to adjust, the existence of inventories can create a whiplash effect in the economy. Anything that streamlines and minimizes inventories reduces the magnitude and damage of that whiplash effect.
In the past decade or so, business cycles have become less frequent and less severe. Improved management of inventories is thought to be a major contributor to this improved economic stability. The greater stability translates to fewer layoffs, less unemployment and fewer episodes of inflation.
Changes in technology make it possible to control and minimize inventories. For example, the electronic scanners at the supermarket provide continuous, detailed feedback about stock levels.
The ever-improving rapid delivery services such as United Parcel Service and Federal Express make it easier for many businesses to keep inventories at a minimum. These and other developments have created a new way of thinking about inventory management known as "just-in-time." It's what allows Provolt to maintain virtually no inventory.
Effective inventory management has important practical implications for businesses and their customers. When a retailer doesn't have the item the customer is looking for, it's a frustration for both of them. The lack of a certain part or item can create serious disruptions and delays for consumers, and cause retailers to lose customers.
One way the retailer can minimize that particular problem is to have an enormous inventory, but that option is prohibitively expensive. How do you finance and physically store a large inventory? What do you do with the unsold merchandise that spoils, goes out of style or becomes obsolete?
The reduced costs resulting from better inventory management result in a combination of lower prices for consumers and higher profits for business owners and stockholders.
Advancements in inventory management are but one of the quiet revolutions occuring continuously in our economy. No one plans them, no one coordinates them. They occur spontaneously as combinations of changes interact and feed on one another. Better inventory management is one of the main objectives of a rapidly growing service in the economy -- logistics. In the business context, logistics essentially means getting materials and products to the right place at the right time. Logistics has become a highly specialized service and is an example of another interesting trend in the economy -- "out-sourcing." But that story will have to wait for another time.
A former professor of economics, Ron Ross is a financial planner with Premier Financial Group, Eureka.