JDA’s CEO, Hamish Brewer, gave a presentation last year at the Economic Club of Phoenix in which he talked about the intersection of supply chain management and economics. In preparing for that presentation, he asked us a simple question: “how much inventory is in the world?” The short answer is that no-one knows for sure, and no-one keeps track of it at a global level. However, with some simple data points and deductions, one can probably arrive at a reasonable approximation of how much inventory is out there. This is an interesting question, because it gives us an understanding of how efficient the world is in turning inventory into economic output.
I gave a short presentation earlier this year in which I asserted that there was approximately $12 trillion of inventory sitting and moving around the globe at any one time last year. I’ll explain how I arrived at that number and also discuss why this question might be important.
First, inventory levels are tracked by some government agencies at a country level. There are various levels of transparency and reporting by these agencies. The U.S. Bureau of Economic Analysis (BEA) is particularly strong in its reporting with detailed and robust data on various aspects of sales, inventory, and pricing. The transparency and availability of this data are impressive. Analyzing this data does require work since much of it is chained to specific years in order to normalize the impact of inflation.
In addition, the Council of Supply Chain Management Professionals (CSCMP) has published for the past 23 years an excellent report titled “CSCMP Annual State of Logistics Report.” This report leverages data from the BEA and other sources and provides great detail on logistics, distribution and inventory costs in the U.S. According to this report, there was approximately $2.2 trillion in business inventory in the U.S. in 2012 (this understates overall inventory since the government, including the military, also carries inventories in its operations). I use this data point and the size of the U.S. economy as a percentage of all global economic activity to calculate an approximate number for the world.
Last year, there was approximately $70 trillion worth of economic output globally. The U.S. represented approximately 22 percent of overall output. Assuming the rest of the world is as efficient as the U.S., a simple pro-rata calculation based on economic output produces the following global inventory level:
Global inventory = $2.2T/22% = $10T
This calculation does not account for the relative efficiency of economic activity across countries (and does not account for government-owned inventories). China, for example, has twice the logistics costs of the U.S. as a percentage of economic activity or GDP. Given that the combined GDP of the BRIC countries is almost the size of the U.S. economy, and if you assume all of the BRIC countries have logistics costs similar to that of China, this would add almost another $2 trillion to the overall inventory number. That’s basically how I arrived at the rough approximation of $12 trillion in global inventory. This likely understates the actual number since it also does not account for relative inefficiencies in other emerging markets (and does not include government-owned inventories).
If this approximation is in the ballpark, it gives us an understanding of the efficiency of economic output relative to inventory. Based on this information, economic output turns against inventory are about six (this would be roughly the same as sales turns). This means there is approximately two months of global inventory sitting around at any one time (on an economic output basis).
My view is that we can do better than six turns. And if we were able to reduce inventories by just 10 percent, that would free up $1.2 trillion in capital that could be deployed to growth activities that would benefit companies, countries, and ultimately people.
Do you agree or disagree with my assessment? What processes and technologies have your organization put in place to ensure inventory turns are positively impacting cash flow?
Stay tuned for subsequent blog posts where I will discuss in further detail how companies can most effectively optimize their inventory strategies, and what the potential impact might be to global economies.