By almost every measure, inventory levels dropped for most companies in 2009, at least after Q1, as companies reacted vigorously - perhaps in some cases too much so - to the sharp drop in demand resulting from the global recession.

In fact, the widely reported inventory to sales ratio, a US government measure of the level of inventories businesses are holding, peaked in early 2009 at a level of about 1.47, before falling all the way to 1.25 by year's end. The measure is still running at about 1.27 currently, the lowest we've seen since 2005.

What factors were responsible for the rapid drop in inventory levels? The researchers at the Tompkins Benchmark Consortium asked recently asked its members for some insight.

Not surprisingly, as shown in the chart below, lower sales levels were at the top of the list when respondents were asked to name the most important factor behind absolute drops in inventories in respondent companies. If the inventory to sales ratios stays constant, lower sales would obviously ultimately result in lower total inventories.

But we know relative inventory levels also dropped - and here respondents cite "smarter planning" and "management focus" on inventories as other key factors in their inventory reduction results. CXOs focused intently on reducing inventory levels in 2009 to bolster corporate cash flows.

Source: Tompkins Supply Chain Consortium

The only thing we wish the survey question would have added was a choice for "reduced SKU counts" - many manufacturers and retailers severely pruned low performing products from their catalogs, which we believe strongly contributed to the lower inventory totals as well.

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