Active destocking
From Wikipedia, the free encyclopedia
Active destocking in supply chain management is an active decision to reduce the inventory-to-sales ratio[1] of a company. The inventory can include finished products, raw materials and goods in process. In general, active destocking is done following an autonomous, often financial decision by a company to improve its efficiency, free up cash and reduce its costs. Decisions for active destocking in general are made by financial executives or general managers.
Active destocking should be distinguished from reactive destocking. Reactive destocking is a reduction of the inventory when expected demand goes down. When a company is only doing reactive destocking the inventory-to-sales ratio[1] remains unchanged. Reactive destocking in general is done by the operational managers of the logistical activities, without additional instructions.
The terms active destocking and reactive destocking were first used in an article about the Lehman Wave, published by Dutch researchers in 2009.[2][3]
A Lehman wave refers to an economy-wide fluctuation in production and in economic activity with a wavelength of between 12 and 18 months, driven by a sudden major disruption of the economic system. The Lehman wave is a dampened, wave-like fluctuation around equilibrium. The amplitude of the Lehman wave is larger for a business that is further away from its end market than for a business that is closer to its end market, which difference is caused by cumulative destocking of the intermediate supply chain.
The first described Lehman wave was caused by global active destocking and reactive destocking after the financial panic following the bankruptcy of Lehman Brothers on September 15, 2008. The Lehman wave can have strong effects on the sales volume and therefore on the profitability of companies higher in the value chain.[4]
The strong dip in the manufacturing industry seen at the end of 2008 was caused by cumulative and synchronized active destocking followed by reactive destocking, triggered by the bankruptcy of Lehman Brothers. Said bankruptcy created a sudden peak in the Libor interest rate, causing the banks to recall credit and companies to start freeing up cash by active destocking, so reducing their stocks. When the customers of a company start active destocking it is experienced by said company as lower demand and said company will respond by doing reactive destocking. End markets also responded by going down, but slower and in most markets not so strongly. The drop in end market plus the active and reactive destocking created a damped wave with a large amplitude, the so-called Lehman wave.
Relation between inventory to sales ratio and inventory
When a company takes an active destocking decision, said company expresses the wish to reduce the inventory-to-sales ratio. In practice, the actual inventory can go up before going down, depending on the behavior of the other firms in the supply chain.