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Inventory carrying costs continue to rise, driven by inflationary pressures and late shipments. This means that with every day that passes, three things are happening … growing sales risk, margin pressure, and D&O [deteriorated and/or obsolete].

That’s Mark Baxa, CEO of the Council of Supply Chain Management Professionals (CSCMP), in a recent conversation with CNBC about how ongoing inventory gluts are impacting manufacturers and their partners and customers.

Baxa is not alone. A CNBC survey of 90 logistics managers representing the American Apparel and Footwear Association, ITS Logistics, WarehouseQuote, and the CSCMP, found these were common themes. Among the key findings:

  • Only about one-third of supply chain managers think warehouse inventories will return to normal before 2024.
  • 27% say companies are selling excess inventory on the secondary market because high storage prices are hitting the bottom line, with impacts to materialize in upcoming quarterly results.
  • Almost half of those surveyed said the biggest inflationary pressures they are paying are warehouse costs, followed by rent and labor, and many are continuing to pass those costs on to consumers.

The list of pressures goes on. In one week alone, I talked to three different manufacturers about escalating OTIF (on-time in-full) fines reaching into thousands of dollars every week as the major retailers return to pre-pandemic service level expectations. What’s more, margin pressure has, in many cases, meant layoffs, together with a double-whammy in the form of a pull-back in strategic technology investments.

Manufacturers can’t afford to abandon modernization, digital transformation

I see an increasing “digital divide” between the manufacturers who are driving forward with modernization and those who seem to be capitulating to short-term decision-making driven by finance.

For example, almost a year ago exactly, I wrote about the growing trend toward regional supply chains and their many benefits — fewer chokepoints; more sourcing options; faster and more efficient production and shipping; quicker time-to-recovery after disruptions; tapping a much bigger pool of potential talent. Manufacturers who made meaningful strides towards regionalization are faring better than many of their peers in today’s environment.

Anecdotally, I also see a disturbing trend toward purely cost-saving and cost-cutting measures. Of course, it’s not unusual for financial officers to take the reins during tough times. But I would encourage senior supply chain leaders — many of whom were elevated in the executive ranks during the pandemic — to use their greater clout to push back against the heavy hand of near-term, financially-driven thinking.

They have the ammunition. An oft-cited 2010 HBR article, “Roaring Out of Recession,” detailed how 4,700 public companies fared during the recessions of 1980, 1990, and 2000. 17% went bankrupt, went private, or were acquired. But 9% of the companies didn’t simply recover in the three years after a recession — they thrived, outperforming competitors by at least 10% in sales and profits growth. Diligent scenario planning and tech investments were linchpins to their success.

And there’s quite recent supply chain-specific research from PwC that expounds upon the many benefits of investments in advanced supply chain technologies, such as “lower costs, increased revenues, improved sustainability, higher asset utilization, better risk management, and greater rates of on-time, in-full delivery to B2B and B2C customers.”

What manufacturer going forward doesn’t need more of everything on that list?

Now is expressly not the time for manufacturers to pull back on modernization efforts. Scenario planning. SKU rationalization. Regionalization. New supplier relationships. Investing in technology that automates processes. And being a data-driven organization — one where, as the PwC study puts it, free-flowing data is available across all departments — is critical to generating the insights manufacturers need to “identify shocks before they happen, streamline operations and improve the customer experience.”

If most manufacturers’ gut instincts are correct — that inventory levels and inflation will continue into next year — they’d do well to remind themselves, and their leadership teams, that modernization is the way to come out stronger on the other side.

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