There's a shift coming in inventory volume across the economy. And it's going to have an impact not only on the amount of inventory being handled, but on the ability of companies to keep pace.

The physical volume of inventory is almost the same now as it was in late 1999, excluding inflation and motor vehicles on dealer lots. During the recession, inventory levels jumped 4.5%. But by the second quarter of 2001, levels started to decline, returning to late 1999 levels by early 2002. Since then, inventory levels have remained stagnant.

Much of this stability is attributable to improved inventory management techniques that actually offset the cyclical rise in inventory. But this is not going to be the case for much longer.

The past cyclical behavior of inventories suggest that inventory levels, excluding inflation, will increase almost as much as the increase in the volume of goods sold in the economy during the mature phase of the expansion cycle. This happened most recently when inventory volume rose 10% during 1998–1999.

With 9% growth in the goods portion of GDP expected from mid-2004 to mid-2006, the real volume of inventory will expand 6%. This increase assumes continued improvement in inventory management with the nominal inventory/sales ratio (including inflation) dropping to 1.26 from 1.30 reported for May.

Within two years, managers will need the capacity to handle the additional 6% of inventory. And following that, the volume of inventory will expand as much as 5% more due to the inevitable surplus inventory pile up when the expansion ends.

Will you be ready to handle as much as 11% more inventory? The scramble to get ready for more inventories has begun.

That is why materials handling equipment orders were 25% higher in May than a year ago. Along with equipment orders, expect construction spending for both warehouses and factories to jump as much as 20% next year.