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Inventories clog supply chain again in February

E-commerce demand has raised bar for inventory levels moving forward

Supply chain likely to stay bogged down with inventory (Photo: Jim Allen/FreightWaves)

A Tuesday report showed activity across the supply chain was near record levels again in February. A sizable amount of inventory in the system was met by a lack of capacity to either move it or store it, a trend that continued from January.

The Logistics Managers’ Index (LMI), a survey measuring supply chain conditions, came in at 75.2 during the month, 3.3 points higher than January and the second-highest level recorded in the dataset’s five-year history. This was the 13th consecutive month the index stood above 70, a level noted as “significant expansion.”

A reading above 50 indicates expansion while a reading below 50 indicates contraction.

“An accumulation of inventory throughout the supply chain and not enough transportation capacity to turn it quickly drove the increase … with no obvious signs of a slowdown on the horizon,” the report stated.

The subindex for inventory levels jumped 9.1 points to 80.2, a record and well ahead of a 58.8 reading in November. The subindex stood at just 48.4 in February 2020, the early days of the pandemic.

“This is a complete 180 from the fall of 2021, when firms struggled to build up inventories,” the report continued. “Now it seems that a combination of over-ordering to avoid shortages, late-arriving goods due to supply chain congestion and a softening of consumer spending has created a logjam.”


The “quite unseasonable” surge in inventories, however, is likely tied to a jump in e-commerce fulfillment, which requires incremental merchandise levels and warehouse space to facilitate.

Census Bureau data for January released Monday showed seasonally adjusted retail inventories increased 1.9% from December and 6% year-over-year. Excluding motor vehicles and parts, inventories increased 14.9% year-over-year.

“Beyond the drop in sales and shipping delays, it is possible that recent supply chain challenges may have taught manufacturers, suppliers, retailers and customers that holding inventory provides an important element of resilience and are not as lean as they once were.”

While there was a sequential decline in retail sales in December, January sales increased 3.8% sequentially (13% year-over-year) following record spending during the 2021 holiday season.

When survey respondents were asked to estimate inventory levels one year from now, the group returned an average reading of 74.3, suggesting higher stock levels may be the new norm.

“The square root law would predict that the trend towards more DCs to satisfy e-commerce demands could also lead to greater levels of inventory.”

Warehousing prices (86.4) ticked one-half point higher from January with warehouse utilization (74.3) moving 3.3 points higher and capacity (42.4) dipping 4.7 points.

Industrial real estate vacancies have reached record lows in many regions even as 270 million square feet of new space came on line last year. The tightness in the market has pushed lease rates to record highs.

Higher inventories and rents drove inventory costs (90.3) 2.3 points higher, also a new record.

“For both of the inventory metrics to be at an all-time high is especially unusual given that it’s February, which is often a slower time in supply chains with the wind down from Q4 and the Chinese New Year.”

Transportation capacity (44.4) was down slightly and remained in contraction territory for the 21st straight month. Utilization (68.5) was up 6.1 points and transportation prices (89) remained near all-time highs. The report noted that companies closer to the consumer were feeling the pinch of a tight transportation market more than upstream wholesalers and distributors.

The LMI is a collaboration among Arizona State University, Colorado State University, Rochester Institute of Technology, Rutgers University and the University of Nevada, Reno, conducted in conjunction with the Council of Supply Chain Management Professionals.

Click for more FreightWaves articles by Todd Maiden.

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Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.