Newton Mass.—Things were looking so good in early September. Manufacturing activity improved slightly in August and orders were beginning to pick up at distributorships across the country. The industry's back-to-school mentality seemed a reliable indicator that business would get better as summer gave way to fall.

Then the tragic events of September 11 shook the nation. Along with the sadness, fear and anger that permeated the country, business began to crumble. In the weeks since the attacks, layoffs have given way to other cost-cutting measures, as distributors try to liquidate much of the inventory they thought surely would be out the door by now.

The issue is giving renewed attention to an age-old problem: How do you keep enough stock on-hand to meet customer needs, while at the same time managing inventory levels to keep cash flowing through your business?

"A lot of [distributors] right now are seriously worried about the homework they didn't do on slow-moving and dead stock — that they didn't look into moving some of this stuff sooner," said Scott Stratman, president of The Distribution Team, a consulting company specializing in inventory issues.

In distributors' defense, Stratman says the September drop-off caught everyone off guard.

"There was a good 30 days of a hiccup in the supply chain," after September 11, explained Stratman. "It got people's attention ... There's no question there are a lot of people talking about managing the inventory asset better."

Scott Parrish, vice president, Nashville region, for Turner Supply Co., agrees.

"Inventory management is probably more critical now than ever before," said Parrish, who is president of the Industrial Distribution Assn. "In our company, we've been attempting to manage it more tightly over the last year as the economy has softened."

Parrish and others make the point that inventory represents dollars — something they say is all-too-often forgotten. And while tough economic times bring such issues painfully to mind, they also provide the opportunity to examine management practices. As Stratman explains, many distributors are now taking a good, hard look at what they carry, why they carry it and how they can do a better job in the future.

"The distributor is saying, I need to trim down my inventory and I need to be a lot more aggressive on the control side from this point going forward," Stratman said.

One way to avoid getting stuck is by implementing systems that better project end-user demands, said Ray Reynertson, president of torque-measurement equipment maker Sturtevant Richmont, a division of Ryeson Corp. This requires getting closer to the customer and improving the flow of information from end user to distributor to manufacturer.

"Those distributors that are going to make it long-term are going to become more sophisticated about the inventory levels they maintain," Reynertson said, explaining that many of his distributors were calling to return merchandise in the weeks following the September 11 attacks, indicating they were seeking to carry less.

That follows an overall trend toward inventory reduction at the distributor level. While that trend is likely to continue, a vital part of it, Reynertson says, is simultaneously developing an "intelligence system" that allows the distributor to get product to the end user when, in fact, he does need it.

And that need will arise.

"Once business picks up, it will pick up rapidly throughout the entire chain, and there will be no inventory buffer sitting there to take up the demand," said Reynertson.

While that may cause a bit of scrambling, industry-watchers like Stratman expect the trend toward a just-in-time mindset to continue throughout the supply chain — especially in light of recent economic woes. For distributors, that doesn't necessarily mean having less of everything on the shelves; rather, it's about having the right inventory levels.

Going forward, Stratman expects more companies to analyze their customer base to determine the areas in which they need to carry a bit of "safety stock" and then figure out how to run leaner everywhere else. For companies that have already done that homework, it's a bit easier to weather the current storm.

"I think everyone is having a tough time," said Reg Middel, business development manager for Brampton, Ontario-based Peel Industrial Supplies. "However, the companies that are well organized, that are already putting a lot of these issues into practice, are better equipped to handle these challenges."

For some, these problems bring to mind the term "vendor managed inventory." VMI involves the sharing of information between end-user, distributor and manufacturer. The customer's usage is monitored by the distributor, whose inventory levels are monitored by the manufacturer and replenished accordingly — all via computer.

"So all of us can get closer to the products needed at the other end," Reynertson said.

As Parrish points out, however, this high-tech system comes with a very human twist: trust.

"Without that personal relationship between the distributor, manufacturer and end-user, you won't have the trust to share that information," said Parrish. "It's really a true partnership when you get into vendor managed inventory. And in my estimation, it really makes the channel more efficient."

Middel agrees. Peel Industrial has been managing customer inventory for years. A big part of that, he says, is communicating with Peel's business partners throughout the channel.

"The nice thing is, if you share information, everybody's working toward the same objective," said Middel. "All in all, the more you're able to communicate and work together on this stuff, the better it is for everybody."

These aren't new issues, of course — and whether or not they will be addressed large-scale by distributors now remains to be seen. There still is, after all, the problem of day-to-day survival to deal with. And for some distributors, that means resisting the urge to unload excess stock.

"There is concern that the Big 3 will have to increase their inventory levels, or that they'll ask their distributors to do that," said Mike Hamzey, president of R.M. Wright Co., a Farmington Hills, Mich., distributor that does considerable business with the automotive sector.

In the days following the terrorist attacks, backups at the Canadian border caused delays and shutdowns at many automotive plants.

"If you have another event take place, we're right back into it," says Hamzey, recalling 16-hour backups at the border in the first few days after the attacks.

To avoid delayed shipments from its suppliers — many of whom deliver truckloads of product from New York via Canada because it's a shorter route — R.M. Wright is hanging on to inventory a bit longer these days.

"We're trying, on our own, to be sure that we have enough on hand to take care of our customers," said Hamzey, adding that he's maintaining inventory levels despite declining sales. "We should be bringing it down further, but we've decided not to do that ... I guess the best way to say it is, we're just working through a very difficult economic period. We've been through it before and we'll make it through this time."