Inventory Management in Focus
Inventory management is critical for the majority of sectors covered by our analysis and is often a key contributor to strong working capital performance when prioritised and done well. Whilst Australian companies decreased average inventory holdings by 12% in FY23, inventory cycles in Australia remain 1.5x and 1.2x longer than in the US and Asia, respectively. In the Agriculture, Building Products and Retail sectors, operators continue to hold more than three months of inventory.
So, what are the factors most influencing inventory levels and DIO metrics, and what is on the horizon for Australian businesses?
International shipping is more reliable and cost effective (for now)
Whilst still not back at pre-COVID levels, global schedule reliability has improved to 64% (c.80% pre-COVID) and costs have come down with the Drewry World Container Index now 2% below 2019 average rates. Whether this is sustainable in the long term is difficult to assess, with inflation and the unpredictability in customer demand forcing shipping lines to continue to manage capacity closely.
Warehousing capacity is the next big challenge
Port congestion has significantly eased across the major container ports, however bulk ports still continue to experience some congestion due to the increased export volumes from the Agriculture sector. Whilst the easing of congestion is good news, the problem has now shifted to storing the product that has been shipped, with the national industrial and logistics vacancy rate of 0.6% in the first half of 2023 (January to June), indicating a material undersupply of space. This is the lowest rate globally, with all major markets recording relatively low, although improving, vacancy levels.
ESG initiatives remain a focus, despite higher costs of capital
Climate change and investor demands have forced logistics providers to focus on supply chain ESG, including reducing carbon emissions, with initiatives often financed through increased debt. The increased focus is here to stay, so providers need to factor ESG initiatives into their cost considerations over the next 12 months.
Agile inventory management will become essential in 2024
The ongoing shortage of warehousing capacity will limit businesses’ ability to stockpile inventory. Coupled with the increased reliability and lower cost of international shipping, there will be a temptation to return to the “just in time” inventory management practices seen prior to the pandemic. However, with volatile consumer demand across a number of sectors and international instability increasing (particularly in the Middle East, which could materially impact fuel prices), businesses will need to consider agile inventory management strategies. A disciplined approach to demand forecasting and inventory monitoring will also be required, with an ability to quickly change course should it be required.