A 25 year veteran of the supply chain and logistics industry blogs on all things logistics. Experience in 3PL, automotive and consumer goods logistics help bring a unique insight to this topic
Goes to show, I should never take a break from blogging. "While I was out", the inventory to sales ratio in the economy has made a very nice move. While not even close to the post recession area it is starting to move down which indicates the bleeding off of inventory has begun. Of course, for transportation to tighten, and rates to go up, this will need to tighten some more.
There is also the wild card of autos. Ford has already warned on inventory and slow sales which means a lot of capacity becomes available as the automotive industry adjusts (read: idles plants).
More to come but let's call this a "good sign" if you are on the capacity side and an "early warning" if you are on the shipper side.
I have talked a lot about the inventory to sales ratio and how it is such a great predictor of what will happen in the transportation industry. Back in April I was sending a warning sign in my post "Inventories Continue to Grow" and I even signaled this all the way back in 2012 in a post titled "Inventory to Sales Ratio Tells A Grim Story". It appears the Wall Street Journal now agrees.
In an article today titled "At Ports, A Sign of Altered Supply Chains", they discuss the muted growth (or at least not shrink) of the trucking and ocean business. The cause? You guessed it - the fact that inventories are high, the consumer is moving to on line purchasing, and the more disciplined approach to inventory management. There are some key shifts happening:
Demand Sensing Supply Chains: These have finally come into their own. Companies are much better at identifying the purchase trends and immediately shifting inventory purchases to adjust. If the consumer slows (or moves from apparel to electronics for example), Demand Sensing Supply Chains adjust almost in real time. Gone are the days of huge inventory buys "just in case".
On Line Purchases and The Death of Excess Inventory: Anyone who has managed inventory knows these key tenets of inventory management: As you move inventory out and disperse it among stores or other storage points, your forecast accuracy decreases, your errors increase and the likelihood you will "orphan" inventory in the network increases dramatically.
To solve these gaps in information, you generally overbuy inventory to keep "in stocks" high.The inventory benefits of on line are clear: Far fewer inventory points (probably 4 at most) result in much higher accuracy which translates into far fewer inventory dollars to service the same consumer base. This, of course, translates into much less transportation needed. Those who say it does not matter, we are selling the same amount of stuff, do not know how the "laws of inventory" work.
The Growth of The Supply Chain Data Scientist: This is an entirely new field in supply chain and is different than just being an analyst. This is deep diving into data, pulling "fuzzy" data points together and identifying trends. These people see changes in buying patterns far earlier than ever before and provide that information to management which responds far faster than ever before. Inventory buys can be shut off in a nano second.
These factors are resulting in a far more disciplined inventory management process. We have been in an "over inventoried" position, in the aggregate, for a very long time and I have been predicting this will keep the demand for transportation services muted. This is what is happening.
A special edition of Marcoeconomic Monday today! The results are in and they are really showing a slowing economy (GDP adjustments have been lowered), inventory adjustments being made and therefore truckload and intermodal rates going down.
I have shown throughout this year that the inventory to sales ratio was telling me that inventory was growing at an unsustainable rate and sooner or later a correction will come. The Wall Street Journal recently acknowledged this with an article called: Inventory Pullback a Drag on Logistics Spending. As companies have realized the need to adjust inventory levels, the need for more product decreases and therefore the need for transportation goes down. Result? A capacity / demand imbalance that supports lower rates.
The newest CASS readings show this is coming out in the industry rate structure. The truckload index fell 1.2% in May after reductions in April and March. The intermodal index reduced by 2% and Cass has acknowledged this is 17 consecutive months of YoY declines.
Bottom line: Rates are going down, the economy continues to sputter and another year of "this is the year" seems to be fading away.
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.
All the data I am seeing is indicating some real softness in the economy. At first, people thought it was the weather and then we went to the port strike. However, now we are starting to see some real convergence of data pointing to a slower economy:
Inventory to Sales Ratio:
As we can see by the FRED graph, this has been on a climb however the slope has increased. Essentially, this is indicating that inventory is building in the supply chain and there is not adequate sell through. Every time this indicator has turned this way, we have seen ultimate softness (as companies work to right size the inventory) and this means softness in the freight markets:
You can see that this is nothing like the spike during the "great recession" however you also clearly can see that when this goes up, recessions do follow (or this is just an indicator of the recession as it happens.
ATA Truck Tonnage Drops in April; Off 5.3% from High in January: The ATA freight tonnage index peaked in January and has been struggling ever since. While increasing 1% over prior year, it is down 5.9% against previous month, down 5.3% against high in January and indications are the freight index will stay soft. This will drive lower expectations for GDP and, once again, our dream of a year above 3% GDP is starting to fizzle.
While the CASS freight index is still showing some healthy gains in pricing, I really attribute that to the successful "fear mongering" of the carrier base. If buyers of freight truly were objective about the data, they would aggressively be seeking price decreases and not stand for any price increases. This will utimately turn down once the shippers realize what is happening and once the buyers start getting pressured by their managers to adjust the cost basis to reflect what is really happening.
Manufacturer's Alliance for Productivity and Innovation (MAPI) Adjusts Manufacturing Growth to 2.5% From Previous Estimate of 3.5%.
This is a big movement and they attribute this to four key areas from their report:
Oil and natural gas prices collapsed, causing a sudden contraction of the energy supply chain.
The strong U.S. dollar reduced growth, a result of cheaper imports to
the U.S. and U.S. exports becoming more expensive to foreign buyers, as
well as deflation pressure on exports.
Consumers spent some of their fuel savings in the fourth quarter of 2014.
The inventory-to-sales ratio rose sharply in the first quarter, while
the inventory runoff in the second quarter slowed production growth
The interesting item of all of this is in item #3 above. Where is all the money gone that the consumer is saving due to low fuel prices? I think it is has gone into the bank or the continued deleveraging of households - meaning people are still not buying.
Without some real big changes, I think we are in for another "sputter" and halt type economy - we are far to used to this now.
Somehow last week got away from me, perhaps too much sun in Florida the week prior, so I did not post this on Thursday as I would have liked. On March 13, 2013 the census bureau released the numbers showing the total business inventories to sales ratio for January. If you remember, I posted the wholesale numbers a few days back at this post and said I was getting concerned about the inventory levels backing up in the supply chain.
This number did not fail me and as you can see by the chart above, the ratio continues to climb albeit ever so slowly. The bottom line is either sales are going to have to pick up dramatically or the production machine is going to have to slow down. And, of course, the latter is not good for the transportation industry as a whole. While it may be good for those in the procurement roles trying to get capacity I think everyone would say they would rather have a robust economy.
Of course this data is for January and much has happened since then. It certainly does appear either the economy has truly started to pick up or anticipated euphoria is at least moving the stock market forward.
One item I would watch closely however is consumer credit. While sales may be picking up in February and March (numbers next month will show us if this is a trend as I anticipate it will be) we are seeing a large growth in consumer credit again (7% growth in January as reported by the Federal Reserve). This means the consumer, for the most part, is starting to leverage again and we all know this cannot sustain itself. The recession caused the consumer to "de-leverage" a lot and now it appears the consumer is back to being willing to leverage themselves.
One of my favorite measurements of business activity which actually relates to transportation volume is the Inventory to Sales Ratio. As I get ready for January's numbers to be released I remembered I did not comment on December's numbers. And, they tended to move as I would expect:
What we saw in December was that there was barely a move down which indicated the sales season for Christmas was not very good - which I had predicted since around September. This, as is known for those procuring transportation services, led to excess capacity and very favorable procurement activities.
The key question is what will January show us. My guess is not much and while we may get down to the 2010 / 2011 levels we will, most likely, not see enough of a change to effect the dynamics of the transportation capacity equation. Companies continue to favor strict inventory management and good cash flow management over just about every other aspect of the balance sheet and income statement. In the end, companies have learned it is better to miss a few sales than to be stuck with inventory.
The real interesting number will be released in April then May when February / March numbers are released. Right now there is a lot of excitement in the economy and whether this will translate into a lot of buying activity is yet to be seen.
Right now all the data continues to hold that the transportation network is in balance at best and probably favors the shipper community.
I will have more on this later tonight however my fear about inventories seems to be coming true. Inventory appears to be building in the supply chain which means the "great restocking" transportation companies tend to expect after the holidays may very well not happen.
First, Merry Christmas and my wishes for a very happy holiday season. Regardless of what you celebrate at this time of the year the messages all are the same: Happiness to all of you and your families!
Unfortunately, it was not a happy retailing holiday season. As ABC and others are reporting, holiday sales have disappointed and have actually had the lowest year over year increase since 2008. That is a haunting statistic yet not one my readers would be surprised about. The impact on transportation can be summed up in two words: Excess Inventory.
Normally, after the holiday season the transportation industry prays for an "inventory restocking" cycle. However given the dismal sales, and the fact inventories were already elevated (as measured by the inventory to sales ratio), my estimation is the restocking cycle will not even be noticeable. Transportation rates will remain somewhat depressed and my predictions of the transportation industry continue to hold:
Rates are somewhat elevated (relative to the true capacity and demand picture) and the buyer who holds their ground should be able to negotiate good contracted rates.
The buyer needs not "fear" the capacity issue (which has been discussed since about 1980) until deep into 2013 at the earliest.
Great rates favor those who do their homework, understand these macro trends, and are prepared to discuss them at "the table".
Going into last year, FTR predicted a potential for a 10% increase in rates which was very far off the mark. I saw some "panic buying" (i.e, shippers accepting large increases using this prediction as justification). Going into this year we continue to hear "this is the year of the capacity crunch" and while shipping conditions are "benign", "shippers can expect to see increases in 2013" (again, have heard that since 1980). However, the macro economic data, along with the data around the digitization and miniaturization of products, leads me to believe demand is being pulled faster than capacity and shipping conditions will favor the shipper for the vast majority of 2013.
As my readers know I follow this very closely as this ratio tells us whether product is "backing up" in the supply chain or flowing as it should from manufacturer to consumer. We are already hearing anecdotes of sales not being where they should be for the holidays, slow movements of imports, extended automotive shutdowns and now this... the inventories in the pipeline relative to sales are growing:
Inventory to Sales - Published 12/11/2012
The slope of the line looks very ominous and it certainly looks like it did back in the 2006 time frame. Of course, we came out of that but only for a short period before we had a collapse. This clearly leads us to believe freight will be very soft for Q1 and perhaps into Q2 as companies execute the "final mile" by selling what is inventory but not restocking until these inventories get back to normal.
Some may look back into the '90's and say "we have a long way to go before we get to those levels". To this I say retailers and manufacturers learned their lesson during the "great recession" and I would not anticipate ever going back to those levels of inventory (At least until those who lived through the great recession die off then the new younger hip crowd says "this time is different" and go back to it - it is a generational cycle).
This data, along with the idea that we will have extended automotive shutdowns (at least with GM on the Cruze line) leads me to believe my prediction for soft freight in the first half of the year is very reasonable.
As always, I hope I am wrong however I truly just let the data speak.
Last week could have been a "Seinfeld" week where it was the week about nothing. It was a very bad week (worst since June) for the stock market as people continue to anticipate poor earnings and forecasts for even slower earnings. It then had some nuggets of macroeconomic data which essentially said things were "flat".
I do want to start with the Producer Price Index. The PPI went up by 1.1% ("Core" PPI held flat) v. an expected value of .7%. As can be seen in the graph below, this is a bounce back from the beginning of a decline. It is difficult to see how a recession could be in the near future when there is such inflation at the PPI (unless you think the increase is due to speculators hoarding commodities:
FRED® PPI Index
This will be an interesting trend to watch to see if we continue to have inflationary pressure at the PPI level which ultimately will need to come into the CPI or will be a drag on corporate earnings.
Inventory to Sales Ratio:
The vaulted inventory to sales ratio was released on Monday October 15 so I thought I would include it in this week's report. First, why is this number so important? What it shows is whether companies are building inventory or are they lowering inventory. If they are building inventory it is a signal that the economy is slowing since it usually takes a few months for companies to adjust to lower sales. There is seasonality to these numbers and for sure they are not adjusted for prices (if prices go up the value of the inventory goes up but the quantity does not) but it is still a great indicator to watch.
FRED® Inventory to Sales Ratio
The graph shows this has increased over the last few months and it had started coming down but this month it actually increased ever so slightly. This is a clear indication the economy is "tilting" to slowing down and inventory is building. What do companies do when inventory starts building? They lay people off, slow down factories and slow down 2d and 3d tier purchases.
This is a key metric to follow and if you are not sure why just look at what happened during the recession - it ballooned.
Jobless Claims:
Initial jobless claims came in lower than expected (339K v. 370k expected) however I am going to let these numbers "mature" before I make any conclusions. There has been a lot of "noise" in these numbers lately so I am going to see some trends. By the way, I do not subscribe to the conspiracy theories related to these numbers but rather understand there are real statistical reasons why the numbers are moving around. Let's see how it develops in the next few weeks.
Transportation Data:
In the last couple of weeks many indices have shown the transportation freight is slowing dramatically and rates have not only stabilized but in some cases are showing year over year declines. Transportation executives have "warned" already about slowing freight volumes and the inventory to sales ratio reported above would support the decrease in freight volumes in the future. All in all the story is not great for the near future for freight volumes. This report from Reuters a few weeks ago titled Dow Transports Raise Warning Flag For US Economy says it best:
"Transportation and logistics companies are also worried. At least seven of them - FedEx, Norfolk Southern, UTi Worldwide (UTIW.O), Swift Transportation Co (SWFT.N), Arkansas Best Corp (ABFS.O), XPO Logistics Inc (XPO.N) and Werner Enterprises Inc (WERN.O) have scaled back their profit forecasts in recent weeks. United Parcel Service Inc (UPS.N) led the pack when it cut its outlook in July."
Morgan Stanley, Bank of America and others who follow the transportation industry clearly are indicating a slowing transportation spend and all the macroeconomic data would support that theory.
Advantage:
Clearly the data is showing a continued advantage for the shipper. This is another week of Slight Advantage: Shipper®. Last week also reported this measurement so it is clear the extreme tightening of capacity and drivers and its effects on rates is being offset by the slowing economy and the potential for a slowing economy (yes, the negative feedback loop actually will effect this even more).
You have heard me say over and over again that the ultimate goal is not just cost reduction it is the actual elimination of costs. Think e-books and iTunes® and think of all the costs which just were totally eliminated. No one figured out how to "reduce" the costs of shipping books rather they just eliminated the shipment all together.
An early trend I am watching now is the idea of 3D printing. This may even be too early to call it a "Mega-trend" however I think it is something we should be aware of. Just like the elimination of shipments of things which have been digitized (books and music) the next frontier are physical "hard" parts.
At the end of this post is a neat little video which explains this technology. Think of it this way: If you need to make something which is made out of one material you could just load the material, load the digital specs and the printer does the rest. The key for Logistics people is the part is printed at the point of use and on demand. This has two implications.
First, as this gets better and better and costs come down for the machines more and more product will be made this way. This means less product is made at some far away factory and shipped. This will result in a continued headwind on shipping volumes.
Second, this will also dramatically reduce or even eliminate inventory. No need to stock 30 days supply of something when you can "print on demand". This also puts downward pressure on freight demands as less and less distribution will be needed (also has huge implications for warehousing).
To the left you can see what these machines look like. I just found these off the Tasman Machinery website (no endorsement just a good picture). Like all electronic machines during their infant stage there is a lot more development to happen and I am sure it will happen.
Here is a picture of actual wearable shoes made with 3D printers and above is a picture of a model / replica of a ship made with 3D printers.
You may look at these products and say there is nothing to worry about as it will take a long time for these types of products to be brought into production. Of course, I would have to remind you this is what people say about all disruptive and new technologies at the beginning.
I think this will develop rapidly and this could be the "new normal" for a lot of manufacturing of sub assemblies and parts. As I said above, this will eliminate the need to ship this product and, of course, lessen the demand for transportation. One can clearly imagine a day when you walk into a store, need a basic product and rather than the hassle of inventory and distribution, the store clerk will just "print on demand" for you in the store. Huge implications for freight costs and demand, inventory and warehousing and S&OP processes.
According to a blog post by Richard Gottlieb at Global Toy News we may be at a tipping point as it relates to the use of 3D printing in the toy industry. He rightfully highlights the implications and benefits of this technology by saying:
If you own enough 3D printers, why would you need to own any inventory? You could print out on demand. It’s JIT (Just in Time) in its truest sense.
If you can print out small batches without the need for molds or factories? Anyone can enter the marketplace with a new item. The only cost is for the material.
If the need for factories and engineers declines, what happens to people who currently hold those jobs?
Again, this is pre "mega trend" stage but watch it closely as these types of technologies have a way of taking off.
Below is a great little video explaining what this is all about:
To the left you can see what these machines look like. I just found these off the Tasman Machinery website (no endorsement just a good picture). Like all electronic machines during their infant stage there is a lot more development to happen and I am sure it will happen. 
Here is a picture of actual wearable shoes made with 3D printers and above is a picture of a model / replica of a ship made with 3D printers. 