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Recent research from Morgan Stanley suggests that inventory restocking may face sustained headwinds as companies respond to persistently high interest rates. The report indicates shippers are increasingly reluctant to rebuild inventory, preferring instead to run leaner operations even at the expense of being late on orders. This shift could signify a permanent reduction in safety stock levels across supply chains.

We are starting to hear of potential scenarios where inventory levels may never return to prior decade levels as long as interest rates remain elevated with Shippers preferring to limit SKUs and running shorter, faster, tighter supply chains with higher turnover instead.

— Ravi Shanker, Morgan Stanley

To examine the implications of leaner, slower-moving inventories, we spoke with FourKites’ Seth Frederickson.

How will shippers need to adapt inbound processing and prioritization with leaner inventories?

This approach places greater importance on inbound prioritization for shippers. They will need to closely manage carrier delivery appointments to ensure timely receipt of critical SKUs that are at risk of going out-of-stock or reaching undesirably low inventory levels. Shippers may need to expedite the processing of these priority SKUs as they arrive at distribution centers and warehouses. This extends to the yard for drop-and-hook operations, where trailers are waiting to be unloaded for receiving in the warehouse.

Whereas shippers previously may have had some buffer room to balance operational resources over the course of a day, tighter control over inbound flows is now essential to mitigate the risks of receiving inventory later than usual against stock-outs. This requires optimization of processes around the receiving dock and yard to rapidly intake and put away inventory as it comes in. Adaptability will be key as shippers deal with more variability in lead times.

How can logistics operations achieve more flexibility and resilience to minimize disruptions with faster inventory velocity?

With less inventory in the pipeline, there is a lower tolerance for transportation disruptions. Shippers will need enhanced visibility into incoming orders and seamless coordination around carrier appointments for time-sensitive deliveries. Loads may require expedited handling as they arrive at distribution centers to maintain inventory availability.

For companies that have moved operations closer to end customers utilizing distributed fulfillment networks, priority ingress processing and cross-docking will be critical to support timely inventory positioning across sites. However, the risk of stock-outs may still increase if safety stocks are lowered, necessitating more frequent warehouse-to-warehouse transfers to satisfy customer orders. This could drive up the number of inventory touches.

Alternatively, order lead times could lengthen if products are out of stock at the most efficient fulfillment location. This underscores the need for inventory planning teams to closely align with warehouse operations — setting appropriate site-level stock targets and coordinating replenishment to balance service-level tradeoffs.

As facilities handle faster inventory turns of fewer products, operations must gear towards flexibility — adapting to faster cadences of receiving, put-away, picking and shipping to keep precision in inventory positioning.

What customer satisfaction challenges could emerge as inventories become leaner, and how can shippers mitigate the impact?

For e-commerce companies, operating with leaner inventories could lead to:

  • Lengthened delivery lead times beyond two days as closer-positioned stock is unavailable to promise and order fulfillment relies on inventory further upstream.
  • Additional packaging and transport inefficiencies when order lines are fulfilled from multiple warehouses, leading to split shipments.
  • Higher occurrence of out-of-stock backorders. As safety stocks tighten, websites may not reflect real-time availability. Customers able to place orders against shown stock could then face significant delays waiting for re-supply and fulfillment.

These outcomes all run counter to standard delivery and service guarantees, which could face greater uncertainty due to efforts to streamline inventory flows.

To mitigate impacts on customer satisfaction, shippers will need to closely coordinate inventory planning, order promising logic, and warehouse order orchestration to preserve consistency. Enhanced visibility into purchase order status and inbound logistics will help ordering systems better align to real-time stock levels across the network. Omnichannel options like ship-from-store or curbside pickup can also help ease stock-out frustrations.

The challenges require cross-functional collaboration — from supply chain to marketing and sales — to balance service level tradeoffs and effectively communicate expectations with customers amidst the variability.

As the Morgan Stanley analysis suggests, shippers face new challenges when it comes to operating with lower inventory levels. While lean operations can increase efficiency and profitability in a high interest rate environment, they also introduce risks around transportation disruptions, stock-outs and customer service challenges. Navigating these hurdles will require enhanced visibility, coordination across functions and adaptive solutions that provide flexibility.

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