Companies tighten up on an old form of waste
One of the most closely watched signs of business activity is the level of company inventories. As sales slump during a recession and stockpiles of unsold goods swell, businessmen begin dumping their inventories and cutting back on orders from suppliers. In the process, layoffs surge throughout industry, and inventories grow skimpy. Then, when sales-hungry businessmen detect the first signs of an improving economy, they begin to rehire workers and restock warehouses. The level of inventories, thus, is usually a telltale signal of a recession or recovery.
Inventory liquidation has been driving the economy steadily lower since last December. Week after week, in wave after wave, companies have been emptying warehouses, trimming stockpiles and cutting back on orders from suppliers. This was the major cause of the 3.9% drop in the gross national product during the first quarter. Says Otto Eckstein, chairman of the Data Resources Inc. economic forecasting firm: "The most significant factor behind the economic decline during the past three months has overwhelmingly been business's huge liquidation of inventories."
With interest rates high and sales projections dismal throughout virtually all of American industry, few businessmen seem eager to start hastily rebuilding their stocks to former levels. Instead, more and more firms are studying ways to hold down costs and operate with leaner inventories.
Tighter control of stocks is being made possible by the spreading use of computers throughout business. With computers, managers from supermarkets to steel mills are able to know, from one minute to the next, exactly what is in their warehouses and storage bins. This helps save hundreds of thousands and even millions of dollars a year by holding stocks to the absolute minimum levels needed to keep production lines humming.
At Stew Leonard's Farms, a large retail food outlet in Norwalk, Conn., computerized check-out scanners keep watch over the shelf and warehouse stocks of more than 650 different consumer items. Says J. Michael Peters, the firm's financial controller: "These scanners have helped tremendously to keep inventories in line with sales. Before we got them, it would take days, sometimes even weeks, to check out our inventory-to-sales position. Now the scanners provide the data instantaneously."
Computerized inventory control has proved especially helpful to heavy industries like steelmaking. More than simply keeping track of large stockpiles of raw materials, such as iron ore and coking coal, steel firms also have to make sure that stocks of finished goods, ranging from rolled steel to ingots, sheet metal, cable and wire, are neither too large nor too small for projected demand. Says Albert E. Martz, a general manager for Jones & Laughlin Steel Corp. of Pittsburgh (1981 sales: $4.7 billion): "As a result of higher interest rates, we are trying to run leaner and operate closer to the bone. Now we maintain less inventory in order to accomplish the same thing."