Three years after the official end of the Great Recession in June 2009, U.S. companies are still proceeding with caution. The economy's comparatively anemic growth has made them wary of ramping up production or making significant investments, and they're keeping inventory levels lean.
Sales up, but for how long?
This caution remains even though sales in several categories are up (see Figure 1). Retail sales (adjusted for inflation) have surpassed their pre-recession peak, and wholesalers are within striking range of surpassing their own pre-recession mark. Furthermore, while manufacturing sales are still 13 percent below their pre-recession peak, they are well above the low point seen in 2009.
Article Figures
[Figure 1] U.S. sales adjusted for inflation (billions of 2005 chained dollars)Enlarge this image
[Figure 3] U.S. inventory adjusted for inflation (billions of 2005 chained dollars)Enlarge this image
Companies are uncertain about how strong sales growth will continue to be. The manufacturing recovery has been assisted by relatively strong exports to emerging market economies—namely Brazil, India, and China—and a weak dollar. But recent banking and economic problems in the so-called "Club Med" countries (Greece, Italy, Portugal, and Spain) and their wider implications for the euro zone have temporarily strengthened the U.S. dollar. Additionally, in recent months there has been a noticeable slowdown in the economies of China, India, and Brazil (although growth there is still considered very robust by European and North American standards). Both of these developments could slow the growth in U.S. exports.
On the retail side, meanwhile, several indicators point to considerable weakness over the longer term. For one thing, consumers are not spending like they used to, so many chain stores are fighting for market share via price discounting. For another, consumers are spending at the current levels not because they are earning more money but because they are saving less and are using that money for necessities—a classic indicator of weak sales growth. In addition, online retailers are starting to make a dent in the bricks-and-mortar business model. In the first quarter of 2012, seasonally adjusted e-commerce retail sales as a percentage of total retail trade in the United States hit a new high of 4.9 percent. IHS Global Insight projects U.S. e-commerce retail sales will increase by about 17 percent during 2012 to reach around $230 billion for the year.
Overall consumer demand is unlikely to improve in the short term. Many U.S. households are in a fragile state. Poverty rates and income inequality are up while median household income adjusted for inflation is down. Part of the reason for this is that recent job gains have not been sufficient to substantially reduce the unemployment rate. In essence, the economy is caught in a paradox: Companies won't hire more employees until they are confident that there will be sustained growth in consumer demand, yet demand won't pick up until consumers are confident that job prospects are improving and wages are growing.
It's no surprise, then, that consumers' mood—as measured by both the Conference Board's Consumer Confidence Index and the Thomson Reuters/University of Michigan consumer sentiment index—hasn't improved much even though the recession ended three years ago. Likewise, the National Federation of Independent Business' Index of Small Business Optimism is also at a depressed level.
The upshot of all this is that companies are hanging onto the cash they have on hand. Corporate cash holdings are approximately 11.5 percent of U.S. gross domestic product (GDP), or $1.7 trillion. This is partly because there is significant uncertainty on the geopolitical, financial, and economic fronts. For that reason, many large corporations are maintaining a wait-and-see approach when it comes to meaningful investments in plants or factory lines.
The news is not all negative, however. One bright spot in recent quarters has been light vehicle sales, due to the release of pent-up demand and the easing of the auto supply chain disruptions caused by the March 2011 earthquake in Japan. During the Great Recession, many U.S. consumers held onto their cars longer, causing demand to build up. Accordingly, IHS Global Insight projects that light vehicle sales will grow steadily to reach just under 16 million units by the end of 2014, about the same as on the eve of the recession.
Impact on inventories
Companies are keeping inventories lean in this current economic environment because they do not want to be left with unsold goods, which would force them to discount even further. The inventory-to-sales ratio for wholesalers has been flat, declining for retailers, and growing for manufacturers (see Figure 2).
The retail inventory-to-sales ratio in particular has been plummeting in recent years because of a combination of increasing consumer imports from China, weak consumer demand, technological advancements, and e-commerce retail sales. Additionally, retailers do not want to hold excessive inventories during a period of uncertainty, so they have been keeping inventories ultra-thin. We expect the retail inventory-to-sales ratio to continue to remain depressed.
Nevertheless, retail inventories overall are expected to continue to trend upward, although growth will look very sluggish if one removes auto dealerships from the picture (see Figure 3). We do not expect retail inventories to surpass their pre-recession peak before 2015.
Manufacturing inventory levels have bounced back as manufacturers recovered in the last half of 2011 from the supply chain disruptions caused by the Japanese earthquake. Wholesale inventories benefit from manufacturing and retail inventories, and therefore have just surpassed their pre-recession peak. However, they should grow at a slower pace in 2012, mirroring conditions in retail and manufacturing. Expectations for manufacturing inventories, meanwhile, are stronger than for wholesalers; however, the recent global slowdown has introduced serious risks to the overall outlook.
In this current economic environment, supply chain managers must be able to respond in a timely manner to sudden shifts in sales. Keeping lean inventories assists on the downside risks, however a surge in demand or supply chain disruptions will create substantial shortages and bottlenecks. In these circumstances a little extra inventory would be beneficial.
Container imports at U.S. ports are seeing another busy month as retailers and manufacturers hustle to get their orders into the country ahead of a potential labor strike that could stop operations at East Coast and Gulf Coast ports as soon as October 1.
Less than two weeks from now, the existing contract between the International Longshoremen’s Association (ILA) and the United States Maritime Alliance covering East and Gulf Coast ports is set to expire. With negotiations hung up on issues like wages and automation, the ILA has threatened to put its 85,000 members on strike if a new contract is not reached by then, prompting business groups like the National Retail Federation (NRF) to call for both sides to reach an agreement.
But until such an agreement is reached, importers are playing it safe and accelerating their plans. “Import levels are being impacted by concerns about the potential East and Gulf Coast port strike,” Hackett Associates Founder Ben Hackett said in a release. “This has caused some cargo owners to bring forward shipments, bumping up June-through-September imports. In addition, some importers are weighing the decision to bring forward some goods, particularly from China, that could be impacted by rising tariffs following the election.”
The stakes are high, since a potential strike would come at a sensitive time when businesses are already facing other global supply chain disruptions, according to FourKites’ Mike DeAngelis, senior director of international solutions. “We're facing a perfect storm — with the Red Sea disruptions preventing normal access to the Suez Canal and the Panama Canal’s still-reduced capacity, an ILA strike would effectively choke off major arteries of global trade,” DeAngelis said in a statement.
Although West Coast and Canadian ports would see a surge in traffic if the strike occurs, they cannot absorb all the volume from the East and Gulf Coast ports. And the influx of freight there could cause weeks, if not months-long backlogs, even after the strikes end, reshaping shipping patterns well into 2025, DeAngelis said.
With an eye on those consequences, importers are also looking at more creative contingency plans, such as turning to air freight, west coast ports, or intermodal combinations of rail and truck modes, according to less than truckload (LTL) carrier Averitt Express.
“While some importers and exporters have already rerouted shipments to West Coast ports or delayed shipping altogether, there are still significant volumes of cargo en route to the East and Gulf Coast ports that cannot be rerouted. Unfortunately, once cargo is on a vessel, it becomes virtually impossible to change its destination, leaving shippers with limited options for those shipments,” Averitt said in a release.
However, one silver lining for coping with a potential strike is that prevailing global supply chain turbulence has already prompted many U.S. companies to stock up for bad weather, said Christian Roeloffs, co-founder and CEO of Container xChange.
"While the threat of strikes looms large, it’s important to note that U.S. inventories are currently strong due to the pulling forward of orders earlier this year to avoid existing disruptions. This stockpile will act as an essential buffer, mitigating the risk of container rates spiking dramatically due to the strikes,” Roeloffs said.
In addition, forecasts for a fairly modest winter peak shopping season could take the edge off the impact of a strike. “With no significant signs of peak season demand strengthening, these strikes might not have as intense an impact as historically seen. However, the overall impact will largely depend on the duration of the strikes, with prolonged disruptions having the potential to intensify the implications for supply chains, leading to more pronounced bottlenecks and greater challenges in container availability, " he said.
A coalition of freight transport and cargo handling organizations is calling on countries to honor their existing resolutions to report the results of national container inspection programs, and for the International Maritime Organization (IMO) to publish those results.
Those two steps would help improve safety in the carriage of goods by sea, according to the Cargo Integrity Group (CIG), which is a is a partnership of industry associations seeking to raise awareness and greater uptake of the IMO/ILO/UNECE Code of Practice for Packing of Cargo Transport Units (2014) – often referred to as CTU Code.
According to the Cargo Integrity Group, member governments of the IMO adopted resolutions more than 20 years ago agreeing to conduct routine inspections of freight containers and the cargoes packed in them. But less than 5% of 167 national administrations covered by the agreement are regularly submitting the results of their inspections to IMO in publicly available form.
The low numbers of reports means that insufficient data is available for IMO or industry to draw reliable conclusions, fundamentally undermining their efforts to improve the safety and sustainability of shipments by sea, CIG said.
Meanwhile, the dangers posed by poorly packed, mis-handled, or mis-declared containerized shipments has been demonstrated again recently in a series of fires and explosions aboard container ships. Whilst the precise circumstances of those incidents remain under investigation, the Cargo Integrity Group says it is concerned that measures already in place to help identify possible weaknesses are not being fully implemented and that opportunities for improving compliance standards are being missed.
By the numbers, overall retail sales in August were up 0.1% seasonally adjusted month over month and up 2.1% unadjusted year over year. That compared with increases of 1.1% month over month and 2.9% year over year in July.
August’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.3% seasonally adjusted month over month and up 3.3% unadjusted year over year. Core retail sales were up 3.4% year over year for the first eight months of the year, in line with NRF’s forecast for 2024 retail sales to grow between 2.5% and 3.5% over 2023.
“These numbers show the continued resiliency of the American consumer,” NRF Chief Economist Jack Kleinhenz said in a release. “While sales growth decelerated from last month’s pace, there is little hint of consumer spending unraveling. Households have the underpinnings to spend as recent wage gains have outpaced inflation even though payroll growth saw a slowdown in July and August. Easing inflation is providing added spending capacity to cost-weary shoppers and the interest rate cuts expected to come from the Fed should help create a more positive environment for consumers in the future.”
The U.S., U.K., and Australia will strengthen supply chain resiliency by sharing data and taking joint actions under the terms of a pact signed last week, the three nations said.
The agreement creates a “Supply Chain Resilience Cooperation Group” designed to build resilience in priority supply chains and to enhance the members’ mutual ability to identify and address risks, threats, and disruptions, according to the U.K.’s Department for Business and Trade.
One of the top priorities for the new group is developing an early warning pilot focused on the telecommunications supply chain, which is essential for the three countries’ global, digitized economies, they said. By identifying and monitoring disruption risks to the telecommunications supply chain, this pilot will enhance all three countries’ knowledge of relevant vulnerabilities, criticality, and residual risks. It will also develop procedures for sharing this information and responding cooperatively to disruptions.
According to the U.S. Department of Homeland Security (DHS), the group chose that sector because telecommunications infrastructure is vital to the distribution of public safety information, emergency services, and the day to day lives of many citizens. For example, undersea fiberoptic cables carry over 95% of transoceanic data traffic without which smartphones, financial networks, and communications systems would cease to function reliably.
“The resilience of our critical supply chains is a homeland security and economic security imperative,” Secretary of Homeland Security Alejandro N. Mayorkas said in a release. “Collaboration with international partners allows us to anticipate and mitigate disruptions before they occur. Our new U.S.-U.K.-Australia Supply Chain Resilience Cooperation Group will help ensure that our communities continue to have the essential goods and services they need, when they need them.”
A new survey finds a disconnect in organizations’ approach to maintenance, repair, and operations (MRO), as specialists call for greater focus than executives are providing, according to a report from Verusen, a provider of inventory optimization software.
Nearly three-quarters (71%) of the 250 procurement and operations leaders surveyed think MRO procurement/operations should be treated as a strategic initiative for continuous improvement and a potential innovation source. However, just over half (58%) of respondents note that MRO procurement/operations are treated as strategic organizational initiatives.
That result comes from “Future Strategies for MRO Inventory Optimization,” a survey produced by Atlanta-based Verusen along with WBR Insights and ProcureCon MRO.
Balancing MRO working capital and risk has become increasingly important as large asset-intensive industries such as oil and gas, mining, energy and utilities, resources, and heavy manufacturing seek solutions to optimize their MRO inventories, spend, and risk with deeper intelligence. Roughly half of organizations need to take a risk-based approach, as the survey found that 46% of organizations do not include asset criticality (spare parts deemed the most critical to continuous operations) in their materials planning process.
“Rather than merely seeing the MRO function as a necessary project or cost, businesses now see it as a mission-critical deliverable, and companies are more apt to explore new methods and technologies, including AI, to enhance this capability and drive innovation,” Scott Matthews, CEO of Verusen, said in a release. “This is because improving MRO, while addressing asset criticality, delivers tangible results by removing risk and expense from procurement initiatives.”
Survey respondents expressed specific challenges with product data inconsistencies and inaccuracies from different systems and sources. A lack of standardized data formats and incomplete information hampers efficient inventory management. The problem is further compounded by the complexity of integrating legacy systems with modern data management, leading to fragmented/siloed data. Centralizing inventory management and optimizing procurement without standardized product data is especially challenging.
In fact, only 39% of survey respondents report full data uniformity across all materials, and many respondents do not regularly review asset criticality, which adds to the challenges.