Skip to content
Search AI Powered

Latest Stories

INVENTORY

It’s getting crowded in here

The sudden shutdown of the economy left companies with high levels of on-hand inventory and rising storage costs.

2020 SOL issue

This story first appeared in the Special Issue 2020 edition of CSCMP’s Supply Chain Quarterly, a journal of thought leadership for the supply chain management profession and a sister publication to AGiLE Business Media’s DC Velocity.

During the first half of 2020 supply managers have been faced with unprecedented challenges. Forecasts and long-range plans have been cast aside as lockdowns and virus infection patterns have made planning for the future near-impossible. This uncertainty is reflected in the inventory situation many firms now find themselves in. Efficient inventory management has long been a hallmark of the most successful organizations. Firms went into the spring of 2020 expecting “business as usual,” betting on a continuation of high levels of consumer spending, and they built up inventory levels accordingly. When the economy shut down, sales dried up, and many firms found themselves holding an unprecedented level of inventory.


This is borne out in the U.S. Federal Reserve’s inventory-to-sales ratio, which measures the amount of inventory firms are carrying relative to the number of sales completed. In April 2020 this ratio hit 1.67, an all-time high in the history of this metric. Multiple sectors of the economy essentially shutdown without warning. Inventory was still flowing in when sales suddenly stopped, leading to a spike in the level of goods on-hand. 

Exacerbating this is the fact that the secondary markets that often function as release valves for over-inventoried firms are experiencing the same issues. For example, in normal conditions a firm like Macy’s may disposition unsold inventory to a discount chain like TJ Maxx or Ross Stores. But if TJ Maxx and Ross Stores are also unable to make sales (as was the case during the lockdown), they may not be interested in taking Macy’s inventory. This is the case for many secondary market firms, meaning even the sub-optimal channels of inventory disposition are closed off for many companies. 

Firms are dealing with this excess inventory in a number of ways, including cancelling orders, shifting goods around different network sites, destroying perishable goods, and having clearance sales so massive, The Wall Street Journal dubbed it “Black Friday in April”. Despite all of this, a significant percentage of inventory could not be burned off, meaning firms will need to hold onto it until normal economic activity resumes.

The largest barrier to holding so much inventory is the high cost of storing it. The Logistics Managers’ Index (LMI) measures the growth and/or contraction of key logistics metrics on a monthly basis. Figure 1 presents the LMI’s month-to-month movement for inventory levels, inventory costs, available warehouse capacity, and warehouse utilization. When interpreting this figure, any value over 50.0 (represented by the dashed, black line) indicates month-to-month growth; any value below 50.0 indicates contraction.

[Figure 1] Warehousing & inventory movement July 2019 - June 2020


[Figure 1] Warehousing & inventory movement July 2019 - June 2020
Enlarge this image

Over the last year, inventory levels have steadily risen. We observe a significant spike occurring in June of 2020, when parts of the economy (perhaps temporarily) reopened. This continued inventory buildup has had a significant impact on warehousing. Available warehousing capacity had been increasing and actually trending up for a year before March 2020, when the COVID-19 lockdown began in the United States. Warehouse capacity has contracted in every month since, reaching an all-time LMI low with a reading of 41.7 (a value which indicates significant contraction) in June 2020.

As warehouse capacity has dropped, warehouse utilization has increased, as firms try to squeeze inventory into every available nook and cranny. The lack of available capacity has in turn led to a spike in the costs associated with holding inventory. Some firms are even looking beyond warehouses, utilizing intermodal rail containers to slow-roll inventory, essentially using excess transportation capacity to supplement their limited storage space. Fundamentally, firms find themselves in the unenviable position of paying more for less-desirable space in order to hold goods they had anticipated selling in April.

Unfortunately, there may not be much relief in sight. When asked to predict logistics activity over the next 12 months, LMI respondents indicated that they expect both warehousing and inventory costs, along with inventory levels, to continue to rise. 

Dealing with excess

It is likely that supply managers across multiple industries will spend the next 12 months dealing with the excess inventory built up during the initial COVID shutdown. If the reopening of the U.S. economy falters (at the time of this writing, many economists are predicting a slow-down in consumer spending due to the disruption of enhanced employment benefits), some managers may need to deal with a “double shock” in which they ordered additional inventory when the economy appeared to be reopening, but then faced a second shutdown. Supply managers, and the firms they work for, will continue to feel the financial pressure of holding high levels of inventory until the economy can permanently reopen. 

Unfortunately, not all firms will be able to deal with this pressure. Firms like J.C. Penney and Nieman Marcus have already declared bankruptcy, and it is likely that more will follow over the next 12 months. To paraphrase Warren Buffet, when the tide goes out, everyone can see who is swimming naked. In other words, firms that are not well-positioned financially or are inefficient in the way they manage their inventory will have the most difficulty over the next year. In many ways, the COVID inventory shock will act as a catalyst, speeding up the demise of the firms who were already in decline, while facilitating the ascension of others. 

Supply managers must remain vigilant, placing a premium on smart inventory management and flexibility throughout their supply chains. Managing inventory over the next 12 months will be difficult, but not impossible. The firms that are well-positioned and can make it through to the other side will likely emerge stronger and more efficient than they were before the crisis. 

Author’s Note: For more insights like those presented above, please see the monthly LMI reports, which are posted the first Tuesday of every month at www.the-lmi.com.

 

 

The Latest

More Stories

ITS Logistics truck carrying Sherwin Williams products
ITS Logistics

Transportation challenges, solved

Sometimes, all you need is the right partner to solve your logistics problems.

In 2021, global paint supplier Sherwin Williams faced driver and hazardous material (hazmat) capacity constraints: There simply weren’t enough hazmat drivers available in its fleet to maintain the company’s 90% fleet utilization rate expectations for key partner store deliveries while also meeting growing demand for service. Those challenges threatened to become even more acute in the future, as a competing paint supply company began to scale back its operations in the Pacific Northwest, leaving Sherwin Williams with an opportunity to fill the gap.

Keep ReadingShow less

Featured

drone flying through warehouse

Robotic revolution

Robots are revolutionizing factories, warehouses, and distribution centers (DCs) around the world, thanks largely to heavy investments in the technology between 2019 and 2021. And although investment has slowed since then, the long-term outlook calls for steady growth over the next four years. According to data from research and consulting firm Interact Analysis, revenues from shipments of industrial robots are forecast to grow nearly 4% per year, on average, between 2024 and 2028 (see Exhibit 1).

market forecast for industrial robots - revenues graphEXHIBIT 1: Market forecast for industrial robots - revenuesInteract Analysis

Keep ReadingShow less
Freight Science dashboard screen
Freight Science

High-tech solution helps truckload carrier drive change

The trucking industry faces a range of challenges these days, particularly when it comes to load planning—a resource-intensive task that often results in suboptimal decisions, unnecessary empty miles, late deliveries, and inefficient asset utilization. What’s more, delays in decision-making due to a lack of real-time insights can hinder operational efficiency, making cost management a constant struggle.

Truckload carrier Paper Transport Inc. (PTI) experienced this firsthand when the company sought to expand its over the-road (OTR), intermodal, and brokerage offerings to include dedicated fleet services for high-volume shippers—adding a layer of complexity to the business. The additional personnel required for such a move would be extremely costly, leading PTI to investigate technology solutions that could help close the gap.

Keep ReadingShow less
indigo software screenshot WMS

Aptean adds British WMS vendor in latest acquisition

The Georgia-based enterprise software vendor Aptean today said it had acquired Indigo Software Ltd., a British provider of purpose-built warehouse management and logistics software solutions.

Terms of the deal were not disclosed, but Aptean said the move will add new capabilities to its warehouse management and supply chain management offerings for manufacturers, wholesalers, distributors, retailers, and 3PLs. Aptean currently provides enterprise resource planning (ERP), transportation management systems (TMS), and product lifecycle management (PLM) platforms.

Keep ReadingShow less
schneider app screenshot for owner operators

Schneider seeks more business with owner-operators

Transportation and logistics service provider Schneider National Inc. is reaching out to owner-operators, encouraging them to do more business with the Wisconsin company using an updated digital platform.

Schneider says its FreightPower platform now offers owner-operators significantly more access to Schneider’s range of freight options. That can help drivers to generate revenue and strengthen their business through: increased access to freight, high drop and hook rates of over 95% of loads, and a trip planning feature that calculates road miles.

Keep ReadingShow less