Too often the news focuses on events instead of on the forces driving those events. Chattering about whether this company or that company is up or down does little to increase an understanding of the bigger picture. Though this piece is short, it touches on a basic situation affecting global and smaller organizations.
The world has not seen interest rates and inflation like this for years. Just as low interest rates and low inflation allowed for unlimited growth and expansion, the current climate is pushing enterprises towards different decisions regarding investment and investors, cash flow management, balance sheet elements (assets and debt), and especially expectations. EkaLore has written about ROI decisions before (https://www.ekalore.com/post/how-to-keep-bad-projects-going ). The changed attitude towards inventory is one of the most glaring examples of the changes brought on by higher interest rates and inflation.
Debt-funded inventories were a fine idea until recently. Costs were low (<5%), inventories didn’t materially lose value if held for too long, inflation/deflation rates were stable, and buyer demand was stable as well.
Now debt-funded inventories are a bad idea. Short debt inventory carrying costs have skyrocketed with interest rates. Long shipping times allow inventory values to materially change (see examples below of 25% or more per quarter demand changes with global shipping taking up to 12-16 weeks in bad periods). Consumer and business buyer demand patterns have seen rapid changes across USD$2T+ just in the US economy. The financially driven decisions to address these situations are easily stated: slow down production, build into inflation versus pursue only ‘pull’ models. Reassess what rate of return will satisfy each type of stakeholder.
This is a continuation of our earlier post, https://bit.ly/3XVJ8wF.
If you’d like to read more of our pieces on strategy you can find them at www.ekalore.com/ars
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