Ever since the Great Recession blew out to sea in late 2009 after nearly leveling the U.S. economy, it's been the hope of executives and analysts alike that shell-shocked retailers would eventually emerge from their foxholes to begin a cycle of inventory replenishment that would buoy shipping and economic activity.

Hope continues to spring eternal. However, retailer inventory levels, which hit their lows on an absolute basis during the recession as businesses froze ordering and sold from their existing stocks, are today as lean as ever. Given improvements in inventory management processes, and advances in forecasting and distribution management technology, what many initially thought to be a short-term trend influenced by macro-economic forces has become a secular phenomenon unaffected by the economic conditions of the moment.

The Institute for Supply Management's (ISM) influential monthly Manufacturing Report on Business said in its February edition that its Customers Inventories Index, which measures inventory levels at the retailer level, came in at 45. That marks the 45th consecutive month of a reading below 50, an indication inventory levels of finished goods are too low.

Bradley J. Holcomb, who chairs the ISM committee that publishes the report and who recently retired as head of procurement for Dallas-based food and beverage giant Dean Foods Co., said the below-50 readings have persisted for so long that this may be irreversible. "I just don't see anything changing here," he said.

Holcomb added that order leadtimes have shortened to the point that no one wants to hold inventory for any prolonged period.

A quarterly survey by Morgan Stanley & Co. of 500 U.S. and Canadian shippers that forecasts inventory levels six months out found that about 46 percent of respondents planned to maintain their current inventory levels through mid-2013. That percentage has remained fairly constant for nearly two years though it represented a sharp upward spike from levels seen early in 2012. By contrast, only 17 percent surveyed during last year's fourth quarter planned to add inventories, below the 20 percent level of nearly two years ago and down from 23 percent in the second quarter of last year. About 37 percent said they would reduce inventories through mid-year, a sharp decline from the forecasts in the second and third quarters.

"Shippers continue to manage inventories very tightly, with no evidence of any big restocking in the near future," William Greene, the firm's lead transportation analyst, said in a mid-February analysis accompanying the data.

For many years, the dollar values of retail inventories were higher than in the wholesale trade, according to Rosalyn Wilson, a supply chain analyst at Vienna, Va.-based Delcan Corp. and author of the annual "State of Logistics" report. That changed around the second quarter in 2008, she said, and after a period during the recession when both levels moved in near-lockstep, wholesale inventories have grown at a faster clip than retail stocks.

At the end of 2012, U.S. wholesalers held $597.6 billion in inventory, while retailers held $522 billion, said Wilson. In all, the value of inventory at year's end stood at $2.3 trillion, which included about $710 billion in stock held by manufacturers. Wholesale inventories are at their highest levels since before the financial crisis and subsequent recession, she said. Wilson said the data indicate that retailers are becoming more adept at pushing inventory back upstream through the supply chain, at least to the wholesale channel.

The current inventory-to-sales ratio—a measure of a company's on-hand inventory relative to its net sales—would seem to bolster the argument for greater ordering velocity. According to the U.S. Census Bureau, the retail ratio stands at about 1.28, which is at or near all-time lows. The ratio has been trending downward since 2000, but began to drop in earnest in the wake of the 2008-09 recession. The ratio spiked during the worst of the downturn due more to collapsing sales than to any other factor.

That the ratio has stayed at these levels since mid-2010 even with a pickup—albeit modest—in retail sales activity indicates that either sales remain sub-par or retailers are doing a better job of calibrating supply and demand—or a combination of the two.

BETTER TOOLS
The advent of high-tech forecasting tools has clearly been a boon to inventory management. Retailers and manufacturers alike have greater visibility into their demand patterns and can adjust supply flows quickly and precisely. This reduces the need for guesswork and the inventory over-ordering that comes with it.

This is particularly true with e-commerce orders, where an estimated 98 percent of sales data are generated at the point of transaction. Leveraging that data, retailers can do a superior job of gauging customer demand. They then return that information to manufacturers and their suppliers, enabling them to better plan their production schedules.

A further efficiency enhancement is the growing migration to Web-based "cloud" computing, which gives supply chain partners access to the same data instantly. This "single version of the truth," as the cloud model was characterized at a recent industry conference by Greg Brady, founder and CEO of Dallas-based IT firm One Network Enterprises, gives the entire chain complete visibility into orders and dissolves intercompany silos that often thwart the success of such collaborative efforts.

All of this is leading to a best-of-both-worlds scenario for a growing number of retailers: lean inventories without the risk of the dreaded stockouts. Ralph Cox, an inventory management expert and principal at Raleigh, N.C.-based Tompkins International, said the top retailers have mastered the art of the balance, keeping inventory low while recording a high "SKU in Stock" score indicating a minimal amount of empty store space. According to Cox, larger companies began working on these initiatives long before the downturn, while smaller rivals, either lacking resources or foresight, did not.

The result is a tale of two inventory scenarios, Cox said. "The big retailers are lean because they've learned how to do it," he said. By contrast, smaller companies may appear lean, but that's due as much to management's cutting back on orders after the recession as to any proactive measures.

"They reacted one way [after the downturn], and they are still worried," he said, referring to the smaller retailers.

Cox said the next big push in IT systems will not be in forecasting, but in tools that enable efficient distributed order management. Multichannel retailers today have access to software enabling them to determine the best location from which to fill an order, Cox said. For example, a retailer with overstocked SKUs at a store location can leverage e-commerce orders for the same product and ship the item from the store, rather than redeploy it to the distribution center. This would enable store inventory to work harder and more cost-effectively, he said.

Multichannel retailers need this level of flexibility to compete with an e-tailer like Amazon.com, whose efficient online model has forced all retailers to compress their fulfillment and delivery schedules. "Many retailers have been asleep at the switch" as Amazon has gained significant retail market share in the last two to three years, Cox said.

Like other inventory gurus, Cox said the days of inventories driving macro-economic activity are over. Even the less-efficient, more-reactive retailers are adopting the technologies and processes needed to be more productive, and their operations run better today than they did five years ago, he said.

And, Cox added, given the inexorable march toward global digitization, those companies "will be more efficient five years from now than they are today."