Is the era of high inventories behind us?

For more than a while now, the subject of inventories, specifically those among the high, bloated, or elevated type have been a major theme within supply chain and freight transportation circles.

And for good reason, too, given that the higher inventory levels are, the less amount of freight there is on the roads, rails, planes, and aboard U.S.-bound container vessels.

The myriad challenges related to increased inventory levels were made very clear in the results of an April 2016 Logistics Management reader survey, which found the following:

• 56.8 percent of respondents noted their companies were still dealing with high or excess inventories, while 43.2 percent of respondents indicate they were not;
• 77.9 percent of respondents indicated 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; and
• on a shorter time scale, 5.8 percent cited 3-6 months and 1 percent said less than 3 months

The strains of high inventories were also made very 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.

But in recent months it appears that things are trending in the other direction, with inventory levels coming down, and thing, perhaps, becoming a bit more normalized.

As a case in point, the most recent inventory-to-sales ratio, according to the United States Census Bureau for the month of January, the most recent month for which data is available, was 1.35, which is down from January 2016’s 1.41.

And in December, it was also 1.35, down from 1.40 a year earlier. In fact, Census data indicates that the inventory-to-sales ratio has fallen or been flat going back to September 2016. While this may not seem like a huge deal, it really is a step in the right direction, with the hope that this trend remains intact going forward.

Why? For one reason, it means that it should translate into increased freight volumes, which means business is good for shippers, and conversely for carriers in that more moving inventory means higher capacity, and, in turn higher rates i.e. margin growth.

American Trucking Associations Chief Economist Bob Costello was very bullish this week in the ATA’s release of February truck tonnage volumes.

“Looking ahead, the most recent positive sign for truck tonnage is the large drop in the inventory-to-sales ratio during December. The decrease put inventories throughout the supply chain, relative to sales, to the lowest level in two years. There is no doubt that the inventory glut was a drag on truck freight volumes last year,” he said.

And last year is in the past, with things looking reasonably better and brighter at the moment, not just for trucking but for other modes, too, like rail and parcel to be sure.

Reduced inventory levels were also heralded in the most recent edition of the Cass Freight Index Report issued by Cass Freight Index.

The report’s author, Avondale Partners analyst Donald Broughton, reiterated his thesis that the freight recession is over, adding that “part of our growing confidence that the data (both from Cass and specific industries) is showing a turn in trend and is not just a false positive, is the underlying trend in inventories at all levels of the supply chain. At the manufacturing, wholesale and retail levels, inventory to sales ratios have been consistently falling.”

Falling inventory levels is a good thing that needs to happen on a more consistent basis. The last two months, especially, are a good start, with things appearing to be trending in the right direction. If this continues, it stands to reason it will benefit supply chain and logistics operations in terms of continuity, efficiency, and fluidity.