Issue of high inventories remains intact

Regardless of industry sector, for more than a while, shippers have been dealing with a common problem: high inventories.

This has been made clear in government data, including GDP, the inventory-to-sales ratio (which is derived from dividing the number of sales compared to available inventory, with the higher the ratio meaning inventory levels are running too high), and, of course, declining freight transportation volumes.

Another factor for elevated inventories stems back to the West Coast port labor issues from late 2014 into early 2015 that created port congestion and delays and led to an inventory overhang of sorts that Ben Hackett, founder of maritime consultancy Hackett Associates, said “remains stubbornly high” and reflects how, even several months after the port labor situation was resolved, it has still not been fully worked through and reduced inventory levels.  Also working against inventory reduction is lower personal consumption spending, with the rate slower compared to a year ago, he said.

What’s more, he added that the inventory-to-sales ratio remains stubbornly high, which reflects how the West Coast port labor disruption from earlier this year has not yet been fully worked through and reduced inventory levels.  Also working against inventory reduction is lower personal consumption spending, with the rate slower compared to a year ago, he said.

Recent data based on reader feedback from 183 respondents in a Logistics Management reader survey bears out the still-intact high inventory levels as well, with 56.8 percent of respondents noting how their companies are still dealing with high or excess inventories, while 43.2 percent of respondents indicate they are not.

Taking that a step further, when it comes to how long companies have been dealing with high inventories it is telling in that 77.9 percent of respondents indicate it has been an issue for more than 12 months, and 7.7 percent said it has been intact for 9-12 months and another 7.7 percent saying it has been 6-9 months. On a shorter time scale, 5.8 percent cited 3-6 months and 1 percent said less than 3 months.

While the majority of respondents indicated high inventories have been an issue for more than a year, there was a bit more parity in terms of the steps they are taking to improve supply chain operations impacted by high inventory levels.

Making changes in demand planning and increasing usage of inventory visibility and demand planning tools and technologies both led the pack at 66 percent, respectively. Improving inbound processes through collaboration with product planning and procurement people to understand their plans for bringing products into warehouses and distribution centers was next at 48.5 percent and followed by establishing KPIs focused on streamlining inventory management processes was next at 41.8 percent. Also receiving attention was improving picking and accuracy verification processes at 29.1 percent and improving returns processes at 23.3 percent, with another 9.7 percent citing other things.

Even though the survey’s respondents made it clear that they are doing what is needed to ease the effects of high inventories on their supply chain operations, it is fair to say it is easier said than done.

“The inventory glut is the unknown factor across the freight economy,” wrote Stifel analyst John Larkin in a research note. While overall inventory levels have been coming down slowly in recent months, there [is] much debate regarding how long it will take to draw down these surplus inventories across the board. The inventory glut continues to mute freight volumes. There is some evidence in a few of the data series we track that inventories have begun to correct, but at a relatively slow pace. We expect the gluts to be a drag on freight demand for much if not all of 2016.

Larkin added that there is some evidence in a few of the data series Stifel tracks that inventories have begun to correct, but at a relatively slow pace. It is unclear how long it will take for each of the inventory sub-gluts to reach targeted levels. With end user demand remaining less than robust, we suspect that some supply chains will be normalized faster than others. We expect the gluts to be a drag on freight demand for much if not all of 2016.”