Monday, May 19, 2008

Why build more warehouses and increase inventory in US?

I saw today this newwire:
Amazon to open new facility in Hazelton, Pa., creating 1,100 jobs

I have been an Amazon Prime customer for several years. They give me 2-day free shipping. My average transactions per year is in double digits
I have noticed that starting this year even a 2-day shipment takes only one day. UPS is Amazon's carrier. I tracked UPS orders and found that recently they have increased the number of warehouses (these are either Amazon's warehouses or third part warehouses).
I became so confident about 2-day delivery getting delivered overnight, that I ordered mother's day gift on 8th May. It was delivered on 9th May.
This may look like a bullish news on surface.
I have an alternate theory behind this one. Just in Time (JIT) has been the corner stone of supply chains for over two decades. It is built around the assumption of cheap oil prices. With rise in gas prices, JIT world is slowly collapsing.
This means retailers (regardless of online or brick & mortar) needs to build more warehouses and stock up goods and supplies.

When I look at last quarter's GDP numbers, inventory played a vital role.
Why should companies stock up when they are aware of US consumer's
reduced purchasing power?
It makes sense when warehousing cost is smaller than shipping cost.
Pain at the Other Pump: Shoe Prices Rise
One more factor, China has increased minimum wage and this also adds up to cost.
Here is a crude example:
Lets say I can sell 100 pairs of shoes (each $50 today) in next 2 years and I also know that in next 2 years
shoes prices will $100/pair. It makes sense to stock up 100 shoes today even if I can't sell them in next
If my theory is correct, then we will see significant upside in inventory numbers in next quarter's GDP report
In 2006, Apple shipped an iPod from Shanghai in 2 days via FedEx. I seriously doubt if Apple is still mailing
iPod from Shanghai directly. It would make more sense for them to stock up iPods at local Apple store

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