Five years ago, many people (including the author of this article) binge-watched Tiger King and exchanged their business casual slacks for sweatpants. Behind the scenes, supply chain managers faced a nightmare scenario.

What initially appeared to be a temporary surge in demand quickly escalated into an inventory management dilemma that persists today. With many businesses scrambling to fulfill orders during the pandemic, a significant number of customers turned to stockpiling inventory as a safeguard against supply chain disruptions. Now, as the world stabilizes, manufacturers (producers and distributors) of industrial products are finding themselves in a precarious position, facing the complexities of managing an overstocked market while trying to restore equilibrium.

The Impact of Stockpiling

During the height of the pandemic, demand for industrial products—ranging from raw materials to finished goods—skyrocketed. Manufacturers struggled to keep up with this demand, and lead times extended from days to weeks to even quarters. In turn, their customers sought to mitigate the risks of supply chain interruptions by securing more inventory than they typically would. While this approach provided short-term relief, it has created a long-term ripple effect: customers still have excess inventory on hand that they are now working through nearly five years later.

For manufacturers, this overstocking behavior poses a significant challenge. Many customers who aggressively stockpiled during the pandemic are now either slowing down their orders or, in some cases, putting new purchases on hold until their existing stock levels decrease. The challenges are compounded for manufacturers who continue replacing inventory on all of their products, instead of focusing on their 80’s (the 20% of items generating 80% of revenue). This shift in demand can cause a significant dip in sales volume for manufacturers who are caught in the delicate balancing act between managing excess inventory and preparing for future growth. Further, having cash and resources tied up in managing excess inventory makes it harder to adjust to emergent customers’ needs.

Recently, during a voice of the customer engagement, we heard that a key end-customer had stockpiled nearly a thousand bearings, even though they only used the bearings every six months. They still had hundreds left in stock. Needless to say, it can be a slow burn.

Recent data from the St. Louis Fed supports the countless stories we’ve heard. Total business inventory skyrocketed to record-high levels in 2021, and remains at record highs to this day.

Destocking: What It Means for Manufacturers

Destocking refers to the process of reducing excess inventory that has accumulated in the supply chain. While it may seem like a logical solution to overstocked businesses, destocking has broader implications for manufacturing companies in the industrial sector. When customers reduce their purchasing in response to excess inventory, producers face a decrease in order volume, resulting in production slowdowns and a hit to the bottom line. For distributors, this also negatively impacts their profitability due to a reduction in orders.

Additionally, the pace of destocking is not uniform across industries. While some sectors, such as consumer electronics and fast-moving industrial parts, have seen quicker inventory turnarounds, others such as automotive, aerospace, or automation products, have experienced slower destocking cycles due to the nature of their products. Understanding these dynamics is critical for manufacturers as they plan their supply chain operations and adjust to the changing demands of their customer base.

Strategies for Navigating the Destocking Process

To successfully navigate the destocking process, manufacturers must adopt a multifaceted strategy. Here are several key approaches:

1. Enhance Communication with Key Customers

Strong, transparent communication with key customers is crucial in a period of destocking. Manufacturers must work closely with their top customers (the 20% that represent 80% of sales) to gain a clearer picture of their inventory levels and purchasing intentions. In fact, these conversations can be more valuable than solely “forecasting” with historical data. Regular check-ins can help ensure that customers are not over-committing to orders they do not need, while also giving producers the chance to adjust their production schedules accordingly. Additionally, key customers need to understand that if manufacturers reduce their inventory trigger point due to more recent buying patterns, a large buy may hit production hard. Working with the top accounts on their monthly forecast will help prevent this from happening and allow manufacturers to reset their production schedules accordingly.

2. Flexible Supply Chain Solutions

Flexibility within the supply chain can be a key differentiator in times of destocking. Companies that have diversified supply sources, such as alternative suppliers or flexible contract terms, will be better positioned to adjust quickly to changing demand. This also includes having flexible manufacturing processes that can scale up or down based on real-time demand rather than relying on rigid production schedules set months in advance. Similarly to why frequent conversations with the 80’s customers are important, manufacturers need to work with 80’s suppliers in the same manner. Make sure they are prepared to increase supply when necessary.

3. Promotions and Incentives for Restocking

While customers may be working through existing stock, this does not mean that all customers are averse to future orders. Offering discounts, volume incentives, or customized solutions can encourage customers to restock sooner rather than later. These strategies can also help manufacturers and distributors maintain positive relationships with their client base while working through excess stock.

4. Partnerships with Key Customers

For long-term sustainability, building closer partnerships with key customers can ensure both parties weather the destocking phase together. By aligning forecasts, sharing risks, and being proactive in adjusting to fluctuating demand, both the producer and the distributor can benefit from a more stable and predictable business environment.

5. Simplifying Your Product Offering

Simplifying your product offering before the next disruption (e.g., another recession, tariff uncertainty, etc) is key to minimizing excess inventory.

Begin with analyzing the data to understand which products support top customers, and which are purchased by the trailing tail of customers. Ensure the process is communicated internally and with customers in a professional manner.

The Path Forward

While destocking represents a challenging phase for many manufacturers, it is also an opportunity to refine operational strategies and strengthen customer relationships. By focusing on demand-driven production, enhancing inventory management systems, and maintaining strong communication channels, producers and distributors can mitigate the effects of slowdowns and position themselves for success when the market eventually rebounds.

Ultimately, by paying attention to the 20% of inventory that drives 80% of sales and applying these principles to 80’s customers and 80’s suppliers, manufacturers will be well positioned to emerge from destocking successfully and be ready to capitalize on new opportunities when they arise.