This post considers how inflation is changing the attitude towards stocking and building to order
Tesla is famous for now having billions of dollars in a backlog of orders. Ford and GM have ceased taking advance orders for electric vehicles not yet widely available. Manufacturers in past years viewed “build after order” as a counter to high interest rates and carrying costs. The convenience at retail of “on the floor” inventory was seen to be a key selling point. Internet orders and shared inventories have eroded these advantages even in sectors like consumer autos. “Pull system” models for retail inventories are now being tested with sharply disrupted consumer demand.
Some industries (automotive) have long production times and also have long transit/logistics time due to the need for specialized cargo carriers, handling, and the like. 45 days has been an oft-cited inventory forward stocking level to reduce shortages at retail. Inventory and costs build as consumer demand slows (like housing) and supply “catches up.” Retail may be a leading indicator of these trends.
As interest rates climb more “built after order” (as Lenovo does now for some business model laptop orders) will become more common to reduce carrying and interest rate costs. Amazon uses multiple business models to earn revenue from renting warehouse space and for stocking their own products (such as Kindle, Alexa, or other electronics). Amazon captures additional revenue on offers such as Fulfilled by Amazon and allowing sellers to distribute/stock Amazon warehouses with product (enabling Prime shipping). Higher individual order shipping costs are not a problem for an expensive piece of electronics. For bulk consumer goods, retailers and manufacturers see overhead costs (cited by more than one big box retailer in earnings calls) climb quickly. Inflation directly drives interest rate overhead expense for retailers.
Read our previous (and next posts) in the Ripple series at www.ekalore.com/the-ripple-effect
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