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

Artificial Intelligence

AI: Is it the real deal?

More Stories

Logistics economy picked up speed in January

Logistics Managers' Index

Logistics economy picked up speed in January

Economic activity in the logistics industry expanded in January, growing at its fastest clip in more than two years, according to the latest Logistics Managers’ Index (LMI) report, released this week.

The LMI jumped nearly five points from December to a reading of 62, reflecting continued steady growth in the U.S. economy along with faster-than-expected inventory growth across the sector as retailers, wholesalers, and manufacturers attempted to manage the uncertainty of tariffs and a changing regulatory environment. The January reading represented the fastest rate of expansion since June 2022, the LMI researchers said.

Keep ReadingShow less

Featured

Disrupting the furniture supply chain: An interview with Jay Rogers

Disrupting the furniture supply chain: An interview with Jay Rogers

As commodities go, furniture presents its share of manufacturing and distribution challenges. For one thing, it's bulky. Second, its main components—wood and cloth—are easily damaged in transit. Third, much of it is manufactured overseas, making for some very long supply chains with all the associated risks. And finally, completed pieces can sit on the showroom floor for weeks or months, tying up inventory dollars and valuable retail space.

In other words, the furniture market is ripe for disruption. And John "Jay" Rogers wants to be the catalyst. In 2022, he cofounded a company that takes a whole new approach to furniture manufacturing—one that leverages the power of 3D printing and robotics. Rogers serves as CEO of that company, Haddy, which essentially aims to transform how furniture—and all elements of the "built environment"—are designed, manufactured, distributed, and, ultimately, recycled.

Keep ReadingShow less
chart of GenAI effect on workforce

Gartner: GenAI tools create anxiety among employees

Generative AI (GenAI) is being deployed by 72% of supply chain organizations, but most are experiencing just middling results for productivity and ROI, according to a survey by Gartner, Inc.

That’s because productivity gains from the use of GenAI for individual, desk-based workers are not translating to greater team-level productivity. Additionally, the deployment of GenAI tools is increasing anxiety among many employees, providing a dampening effect on their productivity, Gartner found.

Keep ReadingShow less
warehouse worker driving forklift between racks

German 3PL Arvato acquires two U.S. logistics firms

The German third party logistics provider (3PL) Arvato this week acquired the U.S.-headquartered companies Carbel LLC and United Customs Services, saying the move would grow its client base, particularly in the fashion, beauty, and lifestyle segments.

According to Arvato, it made the move in order to better serve the U.S. e-commerce sector, which has experienced high growth rates in recent years and is expected to grow year-on-year by 5% within the next five years.

Keep ReadingShow less
photo collage of warehouse tech

Supply chain pros are wary of inflation and labor woes

The top worries that supply chain leaders hope to address with new innovations this year include inflationary concerns (68%) and labor shortages (50%), according to a survey on innovation from the third-party logistics provider (3PL) Kenco.

And many of them will have a budget to do it, since 51% of supply chain professionals with existing innovation budgets saw an increase earmarked for 2025, suggesting an even greater emphasis on investing in new technologies to meet rising demand, Kenco said in its “2025 Supply Chain Innovation” survey.

Keep ReadingShow less