You might ask how I can say that low inventory levels at retailers and other businesses is a good thing for manufacturers. Isn’t the fact that companies have smaller inventories than usual a bad thing for manufacturers, who depend on new orders to keep money flowing into their pockets?
In the short term, sure, it sounds like a bad thing. But over time it actually leads to better results for manufacturers for several reasons:
1. Because companies have lower-than-normal inventories, they have to place larger-than-normal orders to replenish them quickly.
2. Holiday sales were stronger than expected in 2011, which partly explains why inventories are so low right now. Retailers didn’t have enough products to meet demand. This bodes well for consumer spending in the future.
3. Retailers’ oscillating inventory levels could inspire them to invest in retail inventory software to help them stabilize their inventories and keep the right amount of products on hand at all times. This will, in turn, help manufacturers avoid the feasts and famines that punctuate poor inventory management.
I hope that explains how a seemingly negative thing can actually be extremely positive.
As a little aside, according to a Bloomberg article, manufacturing orders fell 1.2 percent in November 2011, which is a good indicator that they’ll recover in early 2012. Tax incentives encouraged companies to make a lot of purchases early in 2011, so that might hurt sales in 2012 a little.