US Inventory Shortfall Keeping Pressure on Supply Chains

The sale of goods at many businesses is outstripping available inventory and that will keep pressure on supply chains, constraining capacity and pushing up transportation costs throughout 2021.

Shippers have struggled to keep adequate inventory and determine what level of inventory is needed. Shippers large and small are still struggling today, as supply chain disruption collides with US consumers who are still spending more money on physical goods than services, drawing down inventories across many industries.

That demand is driving increases in imports currently clogging many US ports at a time of year when shippers typically catch their breath. US imports from Asia rose 14 percent year over year in January, according to data from PIERS.

That’s more than twice the annualized percentage increase in January 2019 and compares with a 2.9 percent year-over-year decrease in January 2020.

US retailers are projecting that imports in the first half of 2021 will increase 22.1 percent over the same period last year and, more importantly, that each month will set a new record for import volumes for those months.

Those containers swamping US ports are slowing an increase in production at US manufacturers that rely on components sourced overseas. Manufacturers also are trying to build up inventories, although their shortfall tends to be smaller than that of retailers.

However, replenishing inventory is coming at a high price for manufacturers and, as a result, some manufacturers are passing their transportation costs on to customers. Some retailers and manufacturers are changing strategies more radically, either keeping more inventory on hand to prevent shortages as they build new distribution centers or putting a cap on inventories to avoid overstocking amid uncertainty over what consumers will buy.

“This year is going to be the peak season that never ends in many ways,” said Brian Bourke, chief growth officer for freight forwarder and third-party logistics provider (3PL) SEKO Logistics. “We see it getting worse before it gets better, and we don’t see it getting better for a long time.”

In manufacturing, inventories built up during the spring and then declined from June through October before rising again in November, the US Bureau of Economic Analysis (BEA) data shows. Inventory-to-sales ratios remained flat, however, at about 1.68, indicating a need for even faster replenishment.

The COVID-19 pandemic created a hopefully once-in-a-lifetime drain on inventories in many sectors of the economy, from retail to manufacturing and wholesale distribution. It also generated a wave of consumer demand supported by government stimulus.

In 2020, overall retail inventories steadily increased each month after June, when they hit their lowest point. Still, overall US retail inventories were down 12 percent year over year as of November, while sales were up 8 percent year over year. The picture painted by BEA data varies across the economy, but in many sub-sectors the trend lines are very similar, with large gaps opening up between actual inventories and inventory-to-sales ratios, an indication that replenishment is falling behind demand.

The US manufacturing recovery took hold in late 2020, and continued into January, when output rose at the fastest pace since August 2014, according to IHS Markit. But delays in transportation, especially from overseas, are limiting expansion.

“Excluding December's record low, vendor performance deteriorated to the greatest extent since data collection began in May 2007,” IHS Markit said in its January Purchasing Managers' Index (PMI) report. Disruption reportedly stemmed from raw material and transportation shortages, “notably trucking.”

Noting extended lead times for raw materials, manufacturers increased their purchasing activity in January, resulting in the fastest rise in pre-production inventories since December 2019, according to IHS Markit. But that also means more containers of inputs headed to US ports.

“Right now, [Asian] factories are working extra shifts during the Chinese New Year,” SEKO’s Bourke said. “But there are no truckers to pick up the goods and no containers to put them in. So, the backup will take months to work through,” he said.

Another stimulus check could soon be heading to US consumers, which could bump up demand for goods even higher. “We’re preparing additional labor and ships for the upcoming stimulus,” Bourke said. He expects the stimulus will increase spending on goods such as exercise bikes.

“Last year with the stimulus we had a peak in demand. There’s a certain percentage that will use that money on a new TV or Peloton bike and that will translate to demand.”

With demand and disruption continuing, “inventory-to-sales ratios may not catch up until 2022,” Bourke said. “But what happens if we get vaccines into 300 million Americans by the end of the first half? Maybe we stop buying stuff, because we want to spend money on trips.”

Source: Journal of Commerce