Shippers are keeping a hawk's eye on their inventory levels as soaring fuel prices and a faltering U.S. economy challenge established distribution networks and supply chain management practices.

Click to Enlarge

By just about every measure, inventory costs for shippers have grown sharply from historic lows earlier this decade, according to the closely watched Council of Supply Chain Management Professionals' 19th annual "State of Logistics" report.

To many industry observers, the growing cost of inventory is the result both of a broader downturn that has left more goods on the shelf as well as changes in shipping strategies that seem to reverse long-term trends toward lean supply chains.

"While much of the recent increase in inventories is attributable to changes in the way we are handling stocks in the global environment, in 2007 we began to see inventory buildups attributable to unsold inventories as the economy slowed," said Rosalyn A. Wilson, the independent researcher who authored the report.

Perhaps most troubling, if not yet fully understood, is Wilson's finding that in 2007 total wholesale inventories exceeded those held at the retail level, possibly for the first time in history.

With rising fuel prices placing unprecedented strains on shippers and service providers to find the most efficient routes through restructured distribution networks, shippers are challenged to "replace inventory with information," said CSCMP President and CEO Rick Blasgen.

Shippers say the process has been going on for a long time. Still, although fine-tuning inventory levels is a common goal, shippers say how they do it is tied closely to the products involved.

Kevin F. Smith, senior vice president of supply chain and logistics for CVS/ pharmacy, said more than 60 percent of what his company buys and sells now goes through a collaborative forecasting and replenishment process in which inventory needs are communicated to upstream suppliers.

"We've taken our variability down so low that I do not believe we are forcing our suppliers to hold more inventory," Smith said. "They may choose to manufacture more for their efficiencies in their factories. I don't have any control over that.

"But in terms of what we tell them we're going to need, I think we're getting pretty darn good at that precise number," Smith said. "I know we're getting excellent at putting the right number of pieces on the shelf in the store, and that's really where that whole inventory process starts for us."

For more shippers, managing inventory increasingly appears to mean paying close attention to the inventory levels of both vendors and suppliers.

Whirlpool has been reconfiguring its distribution network to bring products closer to the end consumer, and relying more on rail and regional and "super-regional" carriers than on traditional long-haul trucking.

"One of the important things for us is, because we sell such large cartons, our boxes are so big, we have to look at the inventory throughout the process, all the way from retailer, wholesaler, back to the manufacturer," said Brian Hancock, vice president of supply chain at Whirlpool.

"And what we found is, it's critical for us to be able to understand how much capacity retailers are able to tie up in the inventory," Hancock said. "And what I'd tell you is that retailers are more reluctant now to carry as much inventory as they have in the past.

"And so that creates an environment we can utilize our size and scale to benefit not only our customers but the end consumer in getting that product closer to them," he said. "So we've seen inventories be pushed back to us, but because of our size and scale we're able to put into place more inventory management techniques, utilizing much more sophisticated systems, and we're actually taking inventory out of North America" since Whirlpool acquired Maytag in 2006.

Rick Jackson, executive vice president of Limited Logistics Services for Limited Brands, said the apparel and personal care products retailer is "very closely aligned with what we want (suppliers) to provide."

Limited Brands' inventory strategy is complicated by low-cost, remote sourcing in a fast-changing fashion field.

"We are clearly playing defense right now," he said. "We are very conservative in our buys. We look at inventory very diligently. Since we're a seasonal business … it's so critical for us to make sure that we're in a healthy inventory position and not in a mark-down strategy, because our (profit and loss ratio) just goes upside down very, very quickly."