Saturday, April 30, 2016

Inventories Continue to Grow

For those who read this blog regularly, you know a key metric I track regularly is the Inventory to Sales ratio.  The reasons I do this are threefold:

  • As a supply chain professional and one who takes pride in our industry I feel this one measurement is a core metric to how the industry is doing.  Of course, inventory is built when information is less than optimal and therefore we miss forecasts or we feel the only solution to this problem of lacking information is to build inventory stocks. Finally, we all know inventory ties up working capital, has the problems of obsolescence, damage and shrinkage and consumes resources.  All of which is bad for business.
  • It is an early warning indicator of economic issues.  As either consumers stop buying or business start overproducing (due to irrational exuberance to borrow a phrase) inventories build.  So, it is a signal that one of those two things are happening and sooner or later either the consumer has to come raging back (highly unlikely given the wage situation) or businesses will start cutting back.
  • It is an indicator of pricing in transportation.  As inventories build, inbound will start slowing, transportation capacity will become in excess and ultimately prices fall for transportation.  It is, in fact, that simple.
As we look at the latest Inventory to sales ratio we see continuation of a troubling pattern:

Inventory to Sales Updated 4/2016 Data through February 2016
What we see is inventories have increased pretty dramatically since 2012 and do I dare say this - they are almost at recession levels.  

This is not a good indicator for the economy or for transportation in general.  Perhaps the wild bull is coming to an end. I guess we shall see but one of two things has to happen - consumers better start buying or businesses better slow down.  

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