Chart of the Week: Logitics Mangers’ Index – Inventory Levels, Total Business Invetory to Sales Ratio – USA SONAR: LMI.INVL, TBIS.USA
Inventories appear to have stabilized after years of volatility. The Logistics Managers’ Index (LMI) Inventory Levels component hovered in slight contraction territory last 12 months while the Census Bureau’s Business Inventory to Sales (TBIS) fell right into a more stable pattern.
It has been a bumpy ride for inventory managers and procurement teams over the past five years. The mix of a trade war, supply chain snarls and erratic demand has created extreme swings in ordering patterns.
The LMI is a measure of movement, with values above 50 indicating expansion and below 50 indicating contraction. Values farther away from 50 indicate stronger movements. So the common value of 49 over the past nine months indicates a slow drawdown in inventory levels.
The Census Bureau’s figures are measuring more where the inventory levels are today in relation to sales. So essentially the most recent value of 1.37 in November translates to firms averaging just over one and a 3rd month’s value of sales readily available.
For context, the common TBIS value in 2019 was 1.42, when the trade war with China created a pull-forward effect. During 2021 it averaged 1.29, in the peak of the pandemic spending.
The story here lies within the recent stability of each the LMI and TBIS values. This is a sign that procurement teams are finding consistency once more of their demand forecasts. The danger is that consistency develops complacency.
While there was a return to a point of normalcy after the pandemic, the world stays more hostile than it was before COVID wrecked supply chains across the globe. There are actually two major conflicts disrupting sea shipping patterns. And while they should not terribly disruptive to North American shipping services, they’ve pushed spot rates higher.
Domestic transportation capability also stays abundant, with prices falling to their lowest levels in three years. Truckload van contract and spot rates are well below their peak 2022 values.
If inventory levels fall too low, they should not buffered against unexpected demand. Unanticipated spikes in demand bleed into the necessity for transportation services, which drives transportation prices up quickly and causes severe service disruptions.
An extreme case of this occurred in March 2020 when unexpected runs on consumer goods created severe shortages and crippled transportation networks as people were locking down. Tender rejection rates spiked from 5% to twenty%, and spot rates jumped 20% in a three-week period.
On the flip side, if inventory levels are too high, firms pay the fee of holding those goods. The LMI warehouse pricing component still measured a comparatively strong increase in prices to begin the 12 months, with a price of 64.2, though that was muted off the pandemic-era increases, when the index averaged an 83 from November 2020 to May 2022.
Holding elevated inventories presents other problems, similar to stagnation and pilferage. Some goods lose value over time. An argument could still be made that underserved inventories are more costly in the shape of missed revenue opportunities if demand increases.
The query is, just how reliable is the present procurement environment? There isn’t any sign of a requirement shock-type event, but there rarely is any warning. The undeniable fact that inventory levels are on the low end of the historical spectrum implies that the probabilities of a March 2020-esque moment are more likely.
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