Ever since the Great Recession ended in late 2009, it's been the hope of executives and analysts alike that shell-shocked retailers would emerge from their foxholes to begin a cycle of inventory replenishment that would buoy shipping and economic activity.
Hope continues to spring eternal. Yet retail inventory levels, which hit their lows on an absolute basis during the recession as businesses froze ordering and sold from their existing stocks, are today as lean as ever. Thanks to improvements in inventory management processes and advances in forecasting and distribution management technology, what many initially thought to be a short-term trend influenced by macroeconomic forces has become a secular phenomenon unaffected by the economic conditions of the moment.
The Institute for Supply Management's (ISM) influential monthly "Manufacturing Report on Business" said in its February edition that its Customers' Inventories Index, which measures inventory at the retailer level, came in at 45. That marked the 45th consecutive month with a reading below 50, an indication that finished goods inventories are too low.
Bradley J. Holcomb, former head of procurement for Dallas-based food and beverage giant Dean Foods Co. and chair of the ISM committee that publishes the report, said the below-50 readings have persisted for so long that the decline in inventories may be irreversible. "I just don't see anything changing here," he said.
Holcomb added that order lead times have shortened to the point that no one wants to hold inventory for any prolonged period.
A quarterly survey by Morgan Stanley & Co. of 500 U.S. and Canadian shippers that forecasts inventory levels six months out found that about 46 percent of respondents surveyed in Q4/2012 planned to maintain their current inventory levels through mid-2013. About 37 percent of respondents said they would reduce inventories through the middle of this year, while only 17 percent said they planned to increase them.
"Shippers continue to manage inventories very tightly, with no evidence of any big restocking in the near future," William Greene, the firm's lead transportation analyst, said in a mid-February analysis accompanying the data.
For many years, the dollar values of retail inventories were higher than for inventories in the wholesale trade, according to Rosalyn Wilson, a supply chain analyst at Vienna, Va.-based Delcan Corp. and author of the Council of Supply Chain Management Professionals' annual "State of Logistics Report." That changed around the second quarter of 2008, and after a period when levels of both types of inventory moved in near-lockstep, wholesale stocks have grown at a faster clip than those for retail, she said.
At the end of 2012, U.S. wholesalers held $597.6 billion in inventory, while retailers held $522 billion, Wilson said. Wholesale inventories are at their highest levels since before the financial crisis and subsequent recession, suggesting that retailers are becoming more adept at pushing inventory back upstream through the supply chain, at least to the wholesale channel, she said.
According to the U.S. Census Bureau, the current inventory-to-sales ratio (a measure of a company's on-hand inventory relative to its net sales) for retailers stands at about 1.28, which is at or near all-time lows. The ratio has been trending downward since 2000, but began to drop in earnest following the 2008-09 recession. It spiked during the worst of the downturn, mostly due to collapsing sales.
That the ratio has stayed so low since mid-2010 even with a modest pickup in retail sales activity indicates that either sales remain subpar or that retailers are doing a better job of calibrating supply and demand, or possibly both.
Better tools
The advent of high-tech forecasting tools has clearly been a boon to inventory management. Retailers and manufacturers alike have greater visibility into their demand patterns and can adjust supply flows quickly and precisely. This reduces the need for guesswork and the overstocking that comes with it.
This is particularly true with e-commerce orders, where an estimated 98 percent of sales data are generated at the point of transaction. By leveraging that data, retailers can do a superior job of gauging customer demand. They then share that information with manufacturers and their suppliers, enabling them to better plan their production schedules.
Further enhancing efficiency is the migration to Web-based "cloud" computing, which allows all partners in a supply chain to have instant access to the same data. This gives all parties visibility into orders and dissolves the intercompany silos that often thwart the success of such collaborative efforts.
All of this is leading to a best-of-both-worlds scenario for a growing number of retailers: lean inventories without the risk of stockouts. Ralph Cox, an inventory management expert and principal at Raleigh, N.C.-based Tompkins International, said the top retailers have mastered the art of keeping inventory low while recording a high "SKU (stock-keeping unit) in-stock" score. According to Cox, larger companies began working on these initiatives long before the downturn, while smaller rivals, either lacking resources or foresight, did not.
The result is a tale of two inventory scenarios. "The big retailers are lean because they've learned how to do it," Cox said. Smaller companies may appear lean, but that's due as much to cutting back on orders after the recession as to any proactive measures, he said.
Cox said the next big push in IT systems will not be in forecasting, but in tools that enable efficient distributed order management. Multichannel retailers today have access to software that allows them to determine the best location from which to fill an order, he said. For example, a retailer with overstock at a store location can leverage e-commerce orders for the same product and ship the item from the store, rather than redeploy it to the distribution center. Multichannel retailers need this level of flexibility to compete with an e-tailer like Amazon.com, whose efficient online model has forced all retailers to compress their fulfillment and delivery schedules, he said.
Like other inventory gurus, Cox believes the days of inventories driving macroeconomic activity are over. Even the less-efficient, more-reactive retailers are adopting the technologies and processes needed to be more productive, and their operations run better today than they did five years ago, he said. Given the inexorable global march toward e-commerce, he added, those companies "will be more efficient five years from now than they are today."
Residents and businesses along the Florida panhandle today are keeping a close eye on Tropical Storm Helene, which is forecasted to strengthen into a major hurricane by the time it strikes the northeast Gulf Coast on Thursday.
Hurricane and storm surge watches are already in effect for that area, which could see heavy rain and flash flooding across portions of Florida, the Southeast U.S., Southern Appalachians, and the Tennessee Valley, according to predictions from the National Hurricane Center.
The storm would come a month after Hurricane Debby delivered drenching rainfall for days over Florida in August and after Hurricane Beryl hit Houston in July, knocking out power across the region.
As Helene continues to gather strength from the warm waters of the Gulf of Mexico, experts are warning that the storm’s impacts could include the Port of New Orleans, agricultural operations throughout the Southeast, and additional citrus and fruit farming business in Florida, according to a report from Everstream Analytics’ chief meteorologist Jon Davis.
From a supply chain perspective, additional disruptions could include rail and road transportation stoppages, closures of interstate highways I-10 and I-75, widespread power outages, and shutdowns of offshore energy operations in the eastern portion of the Gulf of Mexico, Davis said.
As the third potential hurricane to hit the area within as many months, the arrival of Helene shows that extreme weather events aren’t just anomalies, but rather they’re the new normal for shipping companies and port authorities, according to Frank Kenney, Director of Industry Strategy at the technology consulting firm Cleo.
To cope with that constant battering, businesses need to adopt a new mindset, he said. “The only way to keep supply chains running smoothly is to build resilience into every aspect of operations. This starts with diversifying logistics strategies. If a shipper is dependent on a single route or port, they’re setting themself up for trouble. Instead, it’s crucial to have multiple backup routes and options ready to deploy when the unexpected happens,” Kenney said.
Following that strategy, inland ports such as Savannah and Macon, Georgia, will likely gain importance in coming years since their locations offer proximity to ocean ports while also providing access to major highways and some protection from coastal flooding. “In short, the storm isn’t going away, but by embracing diversification, leveraging technology, and ensuring supply chain visibility, U.S. ports and shipping companies can stay ahead of the curve. The companies that prepare for these challenges now will be the ones that continue to thrive, no matter how extreme weather events rock the boat," Kenney said.
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.”