Restocking means replenishing with new inventory. This activity usually occurs when demand is high, so businesses need to restock the sold item. Also known as inventory rebuilding.
How restocking works during business cycles
Stock replenishment correlates with economic growth. When the economy shows signs of recovery, consumers begin to buy durable goods, items that they have postponed to purchase during the previous recession.
Producers will initially be careful and try to use existing resources to meet demand. Thus, they will not increase their inventory until the market demand strengthens.
As the demand gets slightly stronger, producers face higher sales, and it causes inventory to shrink. Businesses realize that lower inventories urge them to increase inventory. For this reason, the company will focus on rebuilding the stock of inputs and semi-finished products. By doing that, they can anticipate the possibility of an explosion in demand.
As the economic expansion is showing stronger growth, producers expand their production. During this period, the demand for goods increased rapidly. They start recruiting new workers and investing in fixed capital to increase production. They also use their input supply more intensively. At the same time, they also replenish finished goods in anticipation of stronger demand.
As the opposite of destocking
At the beginning of the economic contraction, consumer demand seems to be falling. During this period, interest rates are usually high, which encourages consumers to delay the purchase of goods and services, especially for durable goods.
As anticipation, producers will try to sell finished goods in their inventory. This process is called destocking.
Weaker demand urges producers to give incentives for consumers, so they want to purchase. As an alternative, they might offer a discount.
During economic weakness, not only finished goods, producers underutilize their productive capacity. Hence, they will minimize the inventory of inputs and semi-finished products. Overall, they rationalize the inventory-sales ratio to a lower level when they cut production.
