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Question of balance in inventory cycle

Richard Milne
Financial Times
4 May 2009

The turn in the inventory cycle could prove to be a help or a hindrance to companies worldwide.

The phenomenon known as destocking – or the cutting of companies’ inventory – has hurt companies globally and throughout the supply chain in the past six months. Groups including Cadbury, Procter & Gamble, PetroChina and BASF have blamed destocking for falling sales and output.

But with some executives keen to call the end of the inventory cycle, a phase of restocking is about to take place. The big question though is whether that provides just a temporary fillip to companies or something longer-lasting.

“We are starting to see destocking bottoming out now,” says Tim Lawrence, a supply chain expert at PA Consulting. “But it is unclear where the underlying demand is. It is very difficult for companies to read.”

That is leading to vastly different reactions with companies split between optimism and pessimism. For some, the end of destocking is one of the necessary conditions for sales to start rising again. Customers in many cases may have overreacted and so have to buy just to return to normal stocking levels.

Most of the optimistic companies are centred in the consumer goods industry where retailers have made dramatic cuts. P&G officials expect one more quarter of destocking while Pernod Ricard, the French spirits company, saw the cuts in inventory – which were worse than it expected – ease in March, according to analysts.

Mr Lawrence contines; “You can’t predict where the demand is going to come from. For instance, which products, which customers. You can end up getting an over-recovery. There will be a further round of companies that can’t survive with the underlying level of demand and so we will see the next wave of restructuring.”

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