Richard Cabrera, executive vice president and head of middle-market banking with Umpqua Bank, details the permanent changes that businesses will be making in their inventory strategies as a result of COVID-19 and the subsequent supply chain meltdown.
A “sea change” has taken place with regard to inventory policies in the wake of the pandemic, Cabrera says. Companies relied for years on just-in-time supply strategies, predicated on a deep supply chain with multiple vendors and quick access to raw materials and finished product. That world came to an abrupt halt with COVID-19, which caused a near-immediate disruption of product flow.
Now, as companies struggle to recover from the effects of the pandemic, their attitude toward inventory is due for a major revision. They’re moving toward stockpiling more raw materials and finished product, Cabrera says. That could mean holding three to four times as much inventory than before, just to protect against similar disruptions in the future.
In the event of a supply interruption, “they have to know they can stay in business,” Cabrera says. “It’s like a security blanket for a lot of companies.”
Such a policy change will have a major impact on working capital requirements. Companies will need to spend more on warehouse space and equipment, whether by acquiring their own real estate or leasing facilities from third parties. Suppliers, too, will feel the heat, in the form of greater demand for product. “Nobody lives in a vacuum,” Cabrera says. “It’s going to go through the entire ecosystem.”
When the pandemic finally subsides, will companies forget their hard-earned lesson about the need for buffer stock, and begin shedding inventory? For the next two to three years, Cabrera doesn’t think so. After that, he expects market forces to determine optimal stocking levels.
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