Inventory costs are growing at the fastest rate in years while warehouse capacity continues to shrink at a near record pace, according to the Logistics Managers Index (LMI). In 2019 shippers crammed warehouses with imports to get around tariffs, coinciding with a slowdown in the freight market. Could rapidly increasing warehousing costs and shrinking warehouse capacity push shippers to keep their freight moving?
The LMI is a diffusion index that measures expansion and contraction rates — anything showing a value over 50 is expanding, with sub-50 values indicating contraction. Right now inventory costs are increasing as fast as they have since the index was created in 2016 with a record value of 84.58 in April.
The warehouse capacity measure has been below 50 since the summer of 2020 and has dropped in each of the first four months of this year — meaning shippers have less space to store their stuff.
Inventory management has become a much bigger deal over the past few years as suppliers experience shortfalls in production for a wide range of reasons. Unexpected demand has been at the heart of most inventory crises.
Forecasting what people will want when they want it is hardly a perfect science — a hard lesson learned in 2020 for many companies. Missing a peak time in the economy for either a business-to-business-driven expansion (2017-18) or a consumer-focused one (2020-21) can put a company back for years — if it ever recovers at all.
Peloton knows the value of having inventory when needed and is willing to invest millions of dollars in transporting its bikes to ensure it maximizes its market share in the at-home fitness space while demand is peaking. Peloton has some of the stickiest customers in the industry and knows rapid growth will be less possible once the pandemic ends as people leave their homes more often.
The easy solution to all this is to stockpile raw materials and finished products in a giant warehouse and wait. Many companies utilized this strategy in 2019 to avoid increasing tariffs. Freight poured into the country and sat in warehouses for months. Trucking volumes stagnated until March of 2020, when the pandemic hit.
The beginning of the pandemic may have been much worse had we not had a relatively decent amount of goods stored — one reason trucking recovered faster than many other parts of the economy last year. Warehousing costs are on the rise and space is becoming less available, making this a less financially viable option. So what about keeping a low inventory level?
A just-in-time or low-inventory operation takes years to set up and the financial risks are extreme for most businesses. The pandemic displayed the worst-case scenario for companies utilizing this strategy thanks to commodity and production shortages of inputs. A consistent and predictable supply chain is needed for this to be effective. Dedicated trucking and private fleets thrive in this space.
That leaves something in the middle — a solution that does not require a stockpile but can flex up when needed. This is the sweet spot for the for-hire trucking market. The current truckload capacity situation is an argument against this strategy, however.
This topic was addressed on this past week’s Freightonomics episode in which Zachary Rogers, an assistant professor of supply chain management at Colorado State University and one of the authors of the LMI, stated that “supply chain management has never gotten as much attention as it did this year” because of the massive impact on businesses.
He went on to say that “people are coming up with different solutions … how to deal with the balance between how much you want to pay to hold [the freight] or move it. And a lot of it is being dictated by the OTRI.”
OTRI is the Outbound Tender Rejection Index that measures the percentage of loads electronically tendered that are being rejected by carriers for a variety of reasons. OTRI is currently around 24%, meaning that one in four loads is being rejected. This is historically high and very disruptive to supply chains.
Many of the people surveyed do not believe transportation costs will ease over the next year, according to the forward-looking aspect of the LMI survey. This means companies will probably be exploring multiple solutions to gain more control over the logistics of their business while keeping costs predictable.
Private fleets are extremely expensive and are not well suited for emerging businesses. The for-hire trucking space is still the simplest solution, even as costs are elevated. Increasing warehouse prices will support more freight movement as shippers look for optimal solutions. In the absence of control, visibility is the cheapest and next best option in a chaotic market.
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