“The reports of my death have been greatly exaggerated.” Mark Twain said this about himself in 1897, but 127 years later the same sentiment could be applied to the concept of just-in-time (JIT) inventory management.
During the supply chain crunch of 2020–2021, firms struggled to build up inventories sufficient to meet demand. This led to speculation that firms should move away from JIT management and toward a just-in-case (JIC) model. The subsequent rapid buildup of inventories then resulted in the opposite problem in 2022. Inventories spiked up to near-record levels, and measures needed to be taken to reduce inventories, leading directly to the contraction of U.S. gross domestic product (GDP) in Q2 of that year. It took over a year to correct the inventory overages, meaning the traditional peak season did not materialize in 2023, as firms continued to run inventories down.
Taken altogether, the 2020s have seen firms abandon traditional inventory cycles. However, this no longer seems to be the case in 2024.
A return to peak
The Inventory Levels and Inventory Costs Indices show a return to more traditional inventory cycles.
Zachary S. Rogers/Logistics Managers' Index
This shift back to more traditional inventory cycles is evident in Figure 1, which displays the Inventory Levels (orange line) and Inventory Costs (green line) indices from the monthly Logistics Managers’ Index (LMI) for August 2022 to August 2024. (These are both diffusion indices, so any number above 50 represents expansion, and any number below 50 represents contraction.)
After three months of contraction throughout the summer of 2024, Inventory Levels expanded with a reading of 55.7 in August. When compared to the last two years, this is a good sign. In August of 2022, firms still had too much inventory left over from early in the year, and there was no peak season. In August of 2023, inventories were being run down due to high costs and the anticipation of weak consumer demand. Once again, there was no true peak season.
August of 2024 seems to be telling a different story. After truly leaning out over the last 18 months, firms are bringing goods in at an accelerated pace. (See, for example, the record levels of twenty-foot equivalent units (TEUs) coming into the ports of Los Angeles and Long Beach and the Port of New York and New Jersey.) The gradual increase in inventory levels in August and September suggests that firms are anticipating strong consumer demand in Q4.
A lot of the inventory that has passed through the ports is currently being held upstream in places like the Inland Empire, California; Western Phoenix, Arizona; and Las Vegas, Nevada. However, the majority of it did not reach retailer shelves until well into September. The August increase in overall inventory levels was primarily driven by upstream firms like manufacturers, wholesalers, distributors, and logistics service providers. These upstream firms reported a robust inventory growth reading of 59.4, significantly higher than the slight contraction of 46.3 reported by downstream retailers. This only shifted in September, when retailers began to build inventories for the first time since spring. The difference between upstream and downstream inventory levels suggests that JIT inventory management practices are alive and well in the retail industry. Essentially, inventory is being held at upstream central locations, while retail stores are keeping a minimal amount of inventory on hand and are depending on fast replenishment from partners.
Both upstream inventory growth and downstream inventory contraction are reflected in the continued expansion of inventory prices, represented by the green line in Figure 1. Upstream inventory costs are up due to the high levels of inventory upstream companies are storing. Downstream inventory costs are up because, despite the low overall levels of goods retailers are currently holding, recent reports have shown that retail sales are up this summer, suggesting that retailers are constantly shipping in new goods. Doing so enables them to turn their lean inventories over quickly (a key tenet of classic JIT practices), but it also pushes up transportation and overall costs, which is why inventory prices are also up.
The average "retail inventory to sales" ratio is currently lower than it was pre-pandemic.
Macrolevel data suggests that retail inventory-to-sales ratios are actually leaner than they were pre-COVID (see Figure 2). Inventory-to-sales ratios are a measure of the value of inventory carried relative to the value of sales. Higher values indicate that inventory is high relative to sales and vice versa. Figure 2 shows that in the five years before COVID lockdowns, U.S. retailers maintained an average inventory-to-sales ratio of 1.47, with minimal variation (represented by the dashed gold line). From 2020 to 2022, however, inventory-to-sales ratios varied greatly. Then starting in July of 2022, inventory-to-sales ratios reached a “new normal,” averaging around 1.28 for the next two years. This new normal reflects retailers’ commitment to maintaining lower inventories in an attempt to keep costs down. The lower inventory levels also reflect retailers’ confidence that enough slack exists in the freight industry for them to be able to receive orders quickly.
Future outlook
HASAN via Adobe Stock
That slack will not last long. Respondents to the LMI survey predict that an increasing volume of this inventory will soon begin trickling downstream to retailers, and as it does, freight capacity will likely tighten up. This is good news for carriers. After two years of contraction, the freight market has been trending up throughout 2024, and we expect to see a return to seasonal movements of Q4 inventory. This month's report strongly suggests that—barring any unforeseen disruption—peak freight season and traditional holiday spending should be back in 2024.
LMI respondents also predict that the Inventory Level index will expand to a reading of 61.0 over the next 12 months. Similar to what we’re seeing now, this will be primarily driven by bustling activity upstream (63.8) and lean, frequently turning inventories (51.7) downstream. A reading of 50.0 indicates no movement, so the fact that retailers are planning for inventory levels at 51.7 over the next year is a clear statement of intent to pursue JIT policies in 2025.
Part of this increase in upstream inventories is likely reflective of the Federal Reserve’s announced (and through mid-September partially carried out) plan to cut federal funds rates. There is anecdotal evidence that manufacturers have been “keeping their powder dry” and not pursuing CapEx spending. As interest rates decrease and cash becomes cheaper, it is likely that activity in the manufacturing and construction will pick up—activity that will require the continued growth of inventories upstream.
Over the last four years, inventory managers have had to deal with a lot of excitement, as stocks swung back forth due to black swan events including COVID, the invasion of Ukraine, and record inflation. Now, at the end of 2024, it appears as if inventory managers are finally seeing a return to normal.
JIT is not dead. Long live JIT.
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.
