Rebalancing Act 2015: This Year’s Battle For Your Supply Chain’s Life

This is an excerpt of the original article. It was written for the December 2014 edition of Supply Chain Management Review. The full article is available to current subscribers.

December 2014

By the time you receive your copy of the December issue of SCMR, the holiday rush should be ready to peak and taper off as we all look forward to the year ahead. This issue can help readers prepare in several important ways. This issue also brings you our annual Executive Guide to Supply Chain Resources. This is a comprehensive guide to services, products, and educational opportunities targeted to supply chain professionals. The editors at SCMR wish all of our readers a successful year to come. We hope that the information and insights in this issue will play a part in that success.

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The most significant tradeoff companies make in short term supply chain decisions is the tradeoff between transportation cost and inventory. As nearly every reader of this article will know, the speed and reliability of transportation affects the amount of inventory in the supply chain; shifts in these costs tend to create a lag until a new equilibrium is established.

Direct transportation costs can be influenced internally through activities like regularly scheduled negotiations and forming core carrier relationships. However, overall market conditions exert a strong invisible hand on transportation rates to determine a cost range, which negotiations cannot change. Similarly, the cost of keeping inventory is largely driven by interest rates set by the Federal Reserve.

The largest economic component of holding inventory is the cost of capital. When the cost of debt shifts significantly up or down, there tends to be a lag of at least two quarters before equilibrium is reached.

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