The start-stop pattern of the last two years has led U.S. total business inventories to hit record highs in 2022—a total reversal of what we saw at this time last year.
Our annual inventory check-in shows that inventory levels and costs have been continuing their wild roller coaster ride over the past year as many supply chains seem to be in the throes of “the bullwhip effect.” The bullwhip effect occurs when variations in downstream demand lead to large overcorrections upstream due to delays in information, production, and distribution—all of which make forecasting difficult.
After having too much inventory in 2020, then not nearly enough in 2021, the pendulum has swung back towards abundance in 2022. Large retailers like Target and Walmart are marking down prices and cancelling orders, while smaller retailers are simply trying to stay afloat under the weight of too many goods. This is a far cry from this time last year, when the New York Times was writing articles titled “How the World Ran Out of Everything.” Case in point, total business inventories reached $2.38 trillion in May 2022—up 24% from the nadir in July 2021.1
This volatility is reflected in the inventory indices that we calculate each month as part of the Logistics Managers’ Index (LMI). Figure 1 charts the inventory levels (gray line), inventory costs (blue line), and warehousing capacity (green line) metrics from the Logistics Managers’ Index (LMI) from January 2020 to July 2022. A reading above 50.0 (the black dashed line) indicates expansion, whereas anything below 50.0 indicates contraction.
Other than a slight contraction in February 2020, inventory levels have been increasing constantly over the past two and a half years. However, the rate of expansion has looked quite different year-to-year. In 2020, the average rate of expansion for inventory levels (orange dashed line) was 58.4; in 2021, the rate of expansion jumped to 62.7 (pink dashed line); and in the first seven months of 2022, it increased significantly to 72.8 (dashed teal line).
In 2020, inventory levels and inventory costs only expanded at a moderate rate, as low consumer demand led to a decline in imports and manufacturing. As lockdowns lifted in 2021, consumer demand increased. While real inventory levels rose, they struggled to keep up with this booming demand. At the same time, the increased demand combined with global supply chain congestion to drive the costs of holding and storing goods to record highs. This is reflected in the steady increase in inventory costs seen in 2021 that were incurred as firms paid dearly while competing against each other to move products towards consumers.
Through the first seven months of 2022, we have seen a statistically significant increase in inventory levels from what we saw in 2020 and 2021. This change came through a series of events. Due to shortages and congestion slowing shipments both between and within countries, firms over-ordered goods throughout much of 2021. While consumer spending was robust for much of Q4, it dropped off unexpectedly in December due in part to the Omicron surge in the Northeast. Additionally, port and inland transportation congestion meant that goods that had been due at Thanksgiving did not show up until President’s Day. Unfortunately for this late-arriving inventory, Q1 of 2022 looked much different than Q4 of 2021, as robust consumer spending was tempered by record inflation, which crippled demand for the nonessential consumer goods that many firms were suddenly flush with.
While inventory metrics fluctuated throughout the pandemic and recovery, the lack of available warehousing capacity (green line) has remained constant. LMI respondents have reported a contraction in capacity for 27 of the last 29 months. Even the approximately 738.6 million square feet of warehouse space added to the U.S. in 2020 and 2021 was not nearly enough to keep up with demand.2 This shortage of warehousing space has slowed the intake of new goods and made holding overstocked goods incredibly expensive.
Where is this headed?
Firms are attempting to deal with this high level of inventory in various ways. Some large retailers like Walmart and Costco—which reported inventory increases in the most recent quarter of 33% and 26% respectively—are discounting unsold goods to make way for the wave of imports that usually arrives during the second half of the year. Sportswear company Under Armour is pursuing another prominent strategy of cancelling orders, rescinding approximately $200 million of shipments. Meanwhile Target is employing both strategies, marking down prices and canceling orders. This aggressive approach did lead to lower inventories, but also to a 90% drop in quarterly earnings year-over-year.
Another strategy involves offloading overstocked goods into secondary inventory channels, such as off-price retailers, dollar stores, and salvage dealers. The size of these secondary markets reached a record high of over $681 billion in 2021—3% of U.S. gross domestic product (GDP).3 However, this strategy will not work for all overstocked goods. Secondary retailers operate on a high-turn strategy in which inventory moves through their systems quickly, and they are not likely to take on a high volume of off-season or soon-to-be-obsolete goods.
When asked to predict logistics activity over the next 12 months, LMI survey respondents predict that inventory levels will continue to increase, but at a significantly slowed rate of 64.8, with inventory costs growth slowing to a rate of 78.5. This slowing growth is at least partially due to the prediction that available warehousing capacity will finally begin to expand again (at a moderate rate of 51.5) over the next year.
Firms have worked diligently to burn off inventories through the first seven months of 2022, but the back-to-school and holiday seasons—and the wave of imports that come with them—will be here soon. The goal for inventory managers through the rest of 2022 will be to carefully wind down inventories, while not overcorrecting once again and ending up in another shortage situation (which is a common occurrence when the bullwhip swings back too quickly).
Threading this needle while production and delivery lead times continue to vary will make this quite the challenge. The aftermath of a global pandemic was always going to be long tailed. Hopefully, we are now closer to the end of that tail than to its beginning.
Author’s note:For more insights like those presented above, see the LMI reports posted the first Tuesday of every month at: www.the-lmi.com.
3. Z.S. Rogers, D.S. Rogers, and H. Chen, “The Importance of Secondary Markets in the Changing Retail Landscape: A Longitudinal Study in the United States and China,” Transportation Journal (2022), 61(1).
J.B. Hunt President and CEO Shelley Simpson answers a question from the audience at the Tuesday afternoon keynote session at CSCMP's EDGE Conference. CSCMP President and CEO Mark Baxa listens attentively to her response.
Most of the time when CEOs present at an industry conference, they like to talk about their companies’ success stories. Not J.B. Hunt’s Shelley Simpson. Speaking today at the Council of Supply Chain Management Professionals’ (CSCMP) annual EDGE Conference, the trucking company’s president and CEO led with a story about a time that the company lost a major customer.
According to Simpson, the company had a customer of their dedicated contract business in 2001 that was consistently making late shipments with no lead time. “We were working like crazy to try to satisfy them, and lost their business,” Simpson said.
When the team at J.B. Hunt later met with the customer’s chief supply chain officer, they related all they had been doing for the company. “We told him that we were literally sitting our drivers and our trucks just for you, just to cover your shipments,” Simpson said. “And he said to us, ‘You never shared everything you were doing for us.’”
Out of that experience, came J.B. Hunt’s Customer Value Delivery framework. This framework, according to Simpson, provides a roadmap for creating value and anticipating customer needs.
Framework for Excellence
J.B. Hunt created the above framework to help them formulate better relationships with customers.
The framework consists of five steps:
Understand customer needs: It all starts, according to Simpson, with building a strong relationship with the customer and then using the information gained from those discussions to build a custom plan for the customer.
Deliver expectations: This step involves delivering on the promises made in that custom plan.
Measure results: J.B. Hunt believes that they are not done when freight makes it to the destination. They also need to measure how successful they were versus what the customer expected from them.
Communicate performance: This step involves a two-way exchange, where J.B. Hunt walks the customer through their performance and gets verbal agreement on whether or not they have met the customer’s needs.
Anticipate new value: Here J.B. Hunt looks at what they are hearing from their customer today and then uses that information to derive what the customer may be looking for in the future.
Simpson said the most important part of the process is the fourth step, communicating performance (perhaps reflecting the piece that went wrong in that initial failed customer relationship).
Not only can this framework be used to drive excellence in a company, but it can also be adapted as a model for driving personal excellence, Simpson said. Instead of understanding the customer needs, the process starts with understanding yourself: what your strengths and interests are. This understanding helps drive a personal development plan and personal goals for the year, which can be measured and assessed. For example, each year, Simpson gives herself a letter grade on each of her personal goals and communicates her assessment back to her boss. She has also found it helpful to anticipate where opportunities lie beyond what she is personally doing.
Confronted with the closed ports, most companies can either route their imports to standard East Coast destinations and wait for the strike to clear, or else re-route those containers to West Coast sites, incurring a three week delay for extra sailing time plus another week required to truck those goods back east, Ron said in an interview at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
However, Uber Freight says its latest platform updates offer a series of mitigation options, including alternative routings, pre-booked allocation and volume during peak season, and providing daily visibility reports on shipments impacted by routings via U.S. east and gulf coast ports. And Ron said the company can also leverage its pool of some 2.3 million truck drivers who have downloaded its smartphone app, targeting them with freight hauling opportunities in the affected regions by pricing those loads “appropriately” through its surge-pricing model.
“If this [strike] continues a month, we will see severe disruptions,” Ron said. “So we can offer them alternatives. We say, if one door is closed, we can open another door? But even with that, there are no magic solutions.”
Turning around a failing warehouse operation demands a similar methodology to how emergency room doctors triage troubled patients at the hospital, a speaker said today in a session at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
There are many reasons that a warehouse might start to miss its targets, such as a sudden volume increase or a new IT system implementation gone wrong, said Adri McCaskill, general manager for iPlan’s Warehouse Management business unit. But whatever the cause, the basic rescue strategy is the same: “Just like medicine, you do triage,” she said. “The most life-threatening problem we try to solve first. And only then, once we’ve stopped the bleeding, we can move on.”
In McCaskill’s comparison, just as a doctor might have to break some ribs through energetic CPR to get a patient’s heart beating again, a failing warehouse might need to recover by “breaking some ribs” in a business sense, such as making management changes or stock write-downs.
Once the business has made some stopgap solutions to “stop the bleeding,” it can proceed to a disciplined recovery, she said. And to reach their final goal, managers can use the classic tools of people, process, and technology to improve what she called the three most important key performance indicators (KPIs): on time in full (OTIF), inventory accuracy, and staff turnover.
CSCMP EDGE attendees gathered Tuesday afternoon for an update and outlook on the truckload (TL) market, which is on the upswing following the longest down cycle in recorded history. Kevin Adamik of RXO (formerly Coyote Logistics), offered an overview of truckload market cycles, highlighting major trends from the recent freight recession and providing an update on where the TL cycle is now.
EDGE 2024, sponsored by the Council of Supply Chain Management Professionals (CSCMP), is taking place this week in Nashville.
Citing data from the Coyote Curve index (which measures year-over-year changes in spot market rates) and other sources, Adamik outlined the dynamics of the TL market. He explained that the last cycle—which lasted from about 2019 to 2024—was longer than the typical three to four-year market cycle, marked by volatile conditions spurred by the Covid-19 pandemic. That cycle is behind us now, he said, adding that the market has reached equilibrium and is headed toward an inflationary environment.
Adamik also told attendees that he expects the new TL cycle to be marked by far less volatility, with a return to more typical conditions. And he offered a slate of supply and demand trends to note as the industry moves into the new cycle.
Supply trends include:
Carrier operating authorities are declining;
Employment in the trucking industry is declining;
Private fleets have expanded, but the expansion has stopped;
Truckload orders are falling.
Demand trends include:
Consumer spending is stable, but is still more service-centric and less goods-intensive;
After a steep decline, imports are on the rise;
Freight volumes have been sluggish but are showing signs of life.
CSCMP EDGE runs through Wednesday, October 2, at Nashville’s Gaylord Opryland Hotel & Resort.
The relationship between shippers and third-party logistics services providers (3PLs) is at the core of successful supply chain management—so getting that relationship right is vital. A panel of industry experts from both sides of the aisle weighed in on what it takes to create strong 3PL/shipper partnerships on day two of the CSCMP EDGE conference, being held this week in Nashville.
Trust, empathy, and transparency ranked high on the list of key elements required for success in all aspects of the partnership, but there are some specifics for each step of the journey. The panel recommended a handful of actions that should take place early on, including:
Establish relationships.
For 3PLs, understand and get to the heart of the shipper’s data.
Also for 3PLs: Understand the shipper’s reason for outsourcing to a 3PL, along with the shipper’s ultimate goals.
Understand company cultures and be sure they align.
Nurture long-term relationships with good communication.
For shippers, be transparent so that the 3PL fully understands your business.
And there are also some “non-negotiables” when it comes to managing the relationship:
3PLs must demonstrate their commitment to engaging with the shipper’s personnel.
3PLs must also demonstrate their commitment to process discipline, continuous improvement, and innovation.
Shippers should ensure that they understand the 3PL’s demonstrated implementation capabilities—ask to visit established clients.
Trust—which takes longer to establish than both sides may expect.
EDGE 2024 is sponsored by the Council of Supply Chain Management Professionals (CSCMP) and runs through Wednesday, October 2, at the Gaylord Opryland Resort & Convention Center in Nashville.