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Warehouse, transportation capacity tight with retailers potentially ‘over-ordering’

December LMI trends highlight merchants’ efforts to meet holiday rush

Warehouse availability contracts as inventory levels rise, LMI report says (Photo: Jim Allen/FreightWaves)

Tightness throughout the transportation, logistics and warehousing sectors carried through the end of the year, according to a report published Tuesday. The Logistics Managers’ Index (LMI), a survey measuring supply chain activity, registered a reading of 70.1 during December.

The LMI is a diffusion index, wherein a reading above 50% indicates expansion and a reading below 50% indicates contraction.

While the index was down 3.3 percentage points from November, the industry continues to see “significant expansion.” The survey has now logged a reading of 70 or better for 11 straight months and 14 of the past 16.

“Abnormally high inventory metrics, combined with tight capacity and unseasonably high price growth, are the drivers behind this month’s continued expansion,” the report stated. “They also suggest that some supply chains may now be carrying too much inventory — potentially a result of firms choosing the ‘lesser of two evils’ and stocking up to avoid potential missed holiday sales.”

Inventory pull forward from retailers shows up in numbers

The inventories subindex logged in at 61.6, up 280 basis points sequentially, bucking the seasonal downward trend as goods are normally sold off during the holidays. The current inventory reading was 480 bps higher year-over-year.

“When faced with the choice of stocking out or over-ordering, many firms (particularly larger ones with the resources to do so) seem to have chosen the latter path,” the report continued.

Retailers were busy in the months leading up to the holiday shopping season. Several large chains pulled forward inventory to mitigate supply chain and transportation challenges. While inventories moved higher, they still lagged sales growth on a two-year comparison. Further, retailers kept buying in the fourth quarter, onboarding spring and some summer merchandise ahead of schedule, a sign that they don’t expect supply chain congestion to ease anytime soon.

“This could foreshadow a coming bullwhip effect in which supply chains over-ordered to avoid shortages and are now dealing with the burden of having too much inventory — or too much of the wrong type of inventory — on hand,” the report continued.

Inventory levels for downstream firms (those closer to the consumer) registered at a 50 reading in December compared to upstream wholesalers and distributors, which returned a 67.9 result. Downstream retailers found difficulty finding transportation capacity, whereas upstream firms struggled with space to store goods.

“The month’s report indicates that supply chains are now dealing with the aftermath of this herculean effort,” the report said. “This is likely to continue to strain supply chain capacity well into the new year, and possibly through to 2023.”

The 12-month forward-looking indication for inventory levels stood at 81.7, well above the 72 logged a month ago.

Stocking up kept warehousing capacity (46.5) in contraction territory for the 16th straight month, with utilization (67.3) and warehouse prices (82.1) remaining high. The forward-looking price indication (86.5) from respondents shows a lack of storage space will keep warehouse rates elevated for some time. Respondents expect no change (50) in the availability of storage space a year from now, which is a 10-point decline from October.

“This less-optimistic prediction of growth suggests that capacity will remain tight over the next year, as the appetite for storage space and optimal last-mile delivery facilities continues to increase.”

No real letup in transportation capacity or rates

“Capacity remains constrained, and prices continue to grow quickly,” the report said, making reference to a lack of equipment and labor.

The transportation capacity subindex (42.6) remained in contraction mode for the 19th consecutive month, albeit up 290 bps sequentially. The reading for downstream companies was 30.2, and “likely a product of the record-breaking level of last-mile deliveries that was expected from downstream firms in December.”

Capacity utilization (67.1) expanded at a slower pace, with transportation prices (87.6) pulling back from recent all-time highs.

Relief may be on the way. The future expectation for capacity registered at 53.1, indicating “respondents do expect to see some expansion of transportation capacity over the next 12 months.” However, the outlook was 540 bps less optimistic than in November.

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.

Watch: Is your warehouse strategy ready?


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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.