The Optionality Of Inventories

I was speaking with a good friend of mine, who was reflecting optimistically on the possible positives to come out of the COVID crisis. The economic system may, thanks to 2020, become less fragile as we are collectively realizing that certain aspects of our system have become very vulnerable to breakage with serious attendant consequences. (Being more of a cynic, I should note that I don’t think this antifragility extends to financial market pricing, certainly at the moment.) For example, he noted, most meat processing in our country is done by a very small number of processors, so when COVID forces a shutdown it can mean…no meat. Most of the saline bags, he told me, are made in Puerto Rico. Of course, we all now know that most of the active pharmaceutical ingredients (APIs) come from one country, China.

Source: Unsplash

Years ago, we had this problem when OPEC controlled the vast majority of the world’s oil. This is less of a problem today because the market worked on it: high prices created an incentive for innovation in the field of energy extraction. Now there are lots of sources of oil, although OPEC still controls a plurality of it. But the system is less fragile, for sure.

As an inflation guy, I am regularly intrigued by the ways that the world has become more fragile with respect to inflation over time, as the threat of inflation has receded into the misty depths of memory. Insurance companies, for example, have only a sketchy institutional memory (and generally only near the top of the organization where the old folks are) of how the inflation of the late ‘70s eviscerated their financial condition. In 2021, we find ourselves at a point in history where it has been nearly 30 years since we have seen a core CPI reading above 3%. And people will run around as if their hair is on fire when we get it again, even though from the perspective of 1985 that would have seemed a funny problem.

But I’m actually not here to talk about inflation but rather another old habit that we’ve “evolved” away from in the C-suites of American industry, and that’s carrying inventory. Now, carrying an inventory balance is one way to reduce a firm’s exposure to inflation, so I’m not entirely ignoring the inflation angle here; the grander point though is that carrying inventory is insurance against lots of things. To name just a few:

1 2 3
View single page >> |
How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.
Gary Anderson 4 weeks ago Contributor's comment

Disinflation is a hard mule to move. Seems like there is weakness and strength depending on where you look. Nurse wages are soaring. But whole industries are suffering. The future power of the virus may determine the success or failure of our economy.

Brittany Lacey 4 weeks ago Member's comment

True, but we're finally nearing the pandemic.