There was a bit of good economic news last week, with the announcement that U.S. retail sales rose 0.8 percent in July. That was the biggest gain since February, and well above the 0.3 percent that economists had predicted. So is the economy finally recovering?

Not so fast. Unemployment, while staying safely below the October 2009 peak of 10 percent, rose 0.1 percentage points to 8.3 percent, despite the addition of 163,000 jobs. Business spending is still weak, and bank lending is lower than it was during the Great Depression of the 1930s. In fact, one survey from last year found 61 percent of respondents believing that the U.S. economy wouldn't return to pre-recession levels until 2014 - if at all.

These conflicting reports come as the summer winds down and we approach the holiday shopping season. Naturally, retailers are wondering how it's all going to play out. Supply-chain managers are doing their usual painstaking calculations, consisting of hard economic numbers, gut feelings and the finest available tea leaves, to determine how much inventory to have on hand.

It's an age-old exercise, but one that has changed somewhat in recent years. For one thing, production cycle times have shrunk drastically. I can remember when retailers would begin bringing in Christmas merchandise from Asia in June and July, then stick it in warehouses for five months or so. By fall, the shipping season would essentially be over, with the exception of some last-minute air freight to cover unanticipated needs.

Over the years, in a bid to slash inventory expense while more closely matching supply with actual demand, buyers have moved the import date later and later. By working with manufacturers - or, in some cases, simply mandating the change - they have squeezed time out of the supply chain. In the event, they have become better able to react to any number of events that can raise or lower demand.

Only one problem: that goal has become increasingly difficult to meet with the stretching of global supply lines. A heightened reliance on offshore manufacturing has saddled merchandisers with longer response times. They might not be shipping physical product earlier, but they have to commit to orders sooner than they're comfortable doing. Either that or they spend huge amounts on expedited shipping to fill in the gaps in their forecasts.

This year, the quandary is more vexing than ever. Questions abound: Where is the U.S. economy going? What's the real level of consumer confidence? When will businesses start hiring again? What is the potential impact of economic problems in China and, even more critically, Europe? Will the Greek debt crisis have a ripple effect that will be felt in American consumers' pocketbooks?

Lorcan Sheehan, senior vice president of marketing and strategy with ModusLink, recalls the shock that retailers experienced when Lehman Brothers filed for Chapter 11 bankruptcy protection - one of the events that triggered the recession - in September 2008. Most had made bullish commitments for the holiday retail season, he says, and were stuck with large amounts of excess merchandise in the ensuing plunge. Their only recourse was to engage in wide-scale, profit-killing discounting.

Now they fear that another event could similarly choke off consumer demand in an already fragile economy. Even unrest in Syria threatens to destabilize the Middle East and have an impact on world oil prices. In addition, there's the constant possibility of another crippling natural disaster, like the 2001 floods in Thailand, and earthquake and tsunami in Japan.

Fortunately, says Sheehan, buyers and suppliers have learned some lessons about how better to cope with the unexpected. Merchandisers are working closely with a limited number of original equipment manufacturers, building a degree of flexibility into their supply chains. Instead of committing to a fixed amount of orders at the outset, they are operating within a demand range, then adjusting actual purchases as the time for shipping draws near.

One valuable technique in the face of uncertainty is the postponement of final assembly and packaging until a relatively late stage of the game. Sheehan sees signs of companies placing such activities closer to end markets, either in the U.S., Mexico or Latin America. The strategy is, of course, far from new - Hewlett-Packard was practicing "mass customization" of its DeskJet printers in the mid-1990s. It would make a standard version of the product at the factory, adding such features as power cords and instruction manuals at a postponement site closer to the ultimate customer.

Retailers and OEMs in other industries have since followed suit. In the apparel sector, basic garments can be configured in one location, then cut and sewn further down the line. Mobile phones, too, can be finished for regional markets. The order lead time for those late-stage processes is, of course, much shorter than for production of the generic item.

Sheehan believes many more companies are going to jump on the postponement bandwagon as they reconsider sourcing strategies. The question is, how come more haven't done so already? The technique adds complexity to the manufacturing function up front, he acknowledges. "Now it becomes a two-stage process." And there are certain low-value items for which postponement doesn't make sense. "There probably is a price point on the product beneath which it may not warrant a second touch," he says.

Still, postponement holds substantial promise as a means of dealing with the unknown. In addition, Sheehan says, retailers should be taking a close look at the phenomenon of SKU proliferation, determining exactly which items are worth continuing and which might be pruned in the interest of simplification. Finally, it helps to get a better handle on excess inventory, with an eye toward re-directing it to other markets instead of dumping it at a discount.

A last-minute slump won't hurt retailers this year the way it did in 2008; current forecasts of demand are nowhere near as optimistic as they were then. But there's still a price to be paid by companies that aren't prepared for surprises - which, of course, tend to happen with unsurprising frequency. "There's always going to be something unpredictable," says Sheehan. "That's what makes it interesting."

- Robert J. Bowman SupplyChainBrain

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