Newsroom Notes: Is the era of high inventories behind us?

Over the past 16 months, the subject of high—some may even refer to them as “bloated”—inventory levels has been a major theme within freight transportation circles. And for good reason, given that the higher the inventory levels the less amount of freight there is on the roads, rails, in the air and aboard U.S.-bound container vessels.

The many challenges related to increased inventory levels were made very clear in the results of an April 2016 Logistics Management reader survey that found the following:

• 56.8% of respondents noted that their companies were still dealing with high or excess inventories, while 43.2% of respondents said they weren’t;
• 77.9% of respondents indicated that it has been an issue for more than 12 months, and 7.7% said it’s been intact for 9 months to 12 months;
• and on a shorter time scale, only 5.8% said that it has been an issue for 3-6 months, 1% reporting less than 3 months.

The strains of high inventories were also made clear in recent government data, including GDP, the inventory-to-sales ratio (which is derived from dividing the number of sales compared to available inventory), and, of course, declining freight transportation volumes. However, in recent months, it appears that things are trending in the other direction, with inventory levels coming down and thing, perhaps, becoming a bit more normalized.

As a case in point, according to the U.S. Census Bureau, the inventory-to-sales ratio for the month of February was 1.35, which matched January and is down annually compared to last February’s 1.41. Keep in mind that in December it was also 1.35, down from 1.40 a year earlier. In fact, Census data indicate that the inventory-to-sales ratio has fallen or has been flat going back to September 2016.

While this may not seem like a huge deal, it really is a step in the right direction. Why? For one reason, it translates into increased freight volumes, which means business is good for shippers. For carriers, it equates to more moving inventory, which means higher capacity and, in turn, higher rates and margin growth.

According to the American Trucking Associations chief economist Bob Costello, these numbers are encouraging: “Looking ahead, the most recent positive sign for truck tonnage is the large drop in the inventory-to-sales ratio. These decreases put inventories throughout the supply chain, relative to sales, to the lowest level in two years. There’s no doubt that the inventory glut was a drag on truck freight volumes last year.”

Reduced inventory levels were also heralded in the recent “Cass Freight Index Report” issued by Cass Information Systems. The report’s author, Avondale Partners analyst Donald Broughton, reiterated his thesis that the freight recession is over. “Part of our growing confidence is that the data, both from Cass and specific industries, is showing a turn in trend and is not just a false positive, but is the underlying trend in inventories at all levels of the supply chain. At the manufacturing, wholesale and retail levels, inventory to sales ratios have been consistently falling.”

Falling inventory is a good thing that needs to happen on a more consistent basis. The last two months are a good start, with inventory appearing to be trending in the right direction. If this continues, it stands to reason that it will benefit supply chain and logistics operations in terms of continuity, efficiency and fluidity.