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Logistics Back to Contraction

Logistics Back to Contraction

Dec. 7, 2023
The Logistic Managers’ Index dropped in November after three consecutive months of growth.

November’s Logistics Manager’s Index read in at 49.4, down (-7.1) from October’s reading of 56.5, according to the recent Logistic Managers’ Index. Researchers at Arizona State University, Colorado State University, Florida Atlantic University, Rutgers University, and the University of Nevada, Reno, and in conjunction with the Council of Supply Chain Management Professionals (CSCMP) issued this report today.

The dip back, while mild, ends what had been three consecutive months of expanding rates of growth. The 7.1-point drop is the largest since the start of the ongoing downturn back in April 2022.

November’s dip was largely triggered by a decline in Inventory Levels (-9.1) which is attributable to Q4 holiday sales and the subsequent dips in Warehousing Capacity (+3.6) and Transportation Capacity (+5.2) and slowdown in Warehousing Utilization (-14.0) and Transportation Utilization (-10.7). 

Retail Anlysis

The author pont out that “Cyber Week” – the five-day period between Thanksgiving and Cyber Monday has often functioned as the true kickoff to holiday spending. According to the National Retail Federation 200.4 million shoppers made purchases between Thanksgiving and Cyber Monday. This was significantly higher than predicted turnout. Consumers spent $12.4 billion on Cyber Monday and $38 billion in online sales across Cyber Week which is up 7.8% from 2022.

The jump in sales at the end of the month is a potential explanation for the increase in activity we see in the second half of November. The increase did not only come from ecommerce, as physical retail store traffic grew as well, up 1.5% from 2022. Electronics, apparel, furniture, groceries, and toys led the way, accounting for 60% of all consumer spending in November.

This wave of spending comes after consumer spending was only up 0.2% in October, which was the slowest increase in spending since May – which is one of the reasons Inventory Levels had built up last month. The low spending was a major contributor to the continued slowdown of inflation. 

Transporation Analysis
The slowdown in the Panama Canal is sending fuel prices skyrocketing in Asia as the LPG carriers are being given last priority (behind passenger and cargo ships) to get through the canal.  Sailings through the Panama Canal will be restricted through at least February. 

 Another byproduct of the issues with the Panama Canal is more freight shifting back to the Pre-Covid pattern of coming in through West Coast ports, eschewing the Gulf and East Coast ports that had seen a spike in activity over the last few years. This has led to a reversion of volumes, with places like the Atlanta market down 11% year-over-year but Ontario California up 14% This overloading of freight to one side of the country is less of an issue now when capacity is high. However, as supply and demand move back towards equilibrium, the geographic concentration of freight could lead to issues with cost on the West Coasts, and availability in the East.

Inventory Analysis
Much of the decline in this months’ LMI is attributable to shifts in inventories. Inventory Levels are down (-9.1) to 44.3, putting them squarely back into contraction territory after a one-month reprieve. This is consistent with anecdotal inventory reports. Several large retailers including Dick’s, Walmart, and Target have purposely kept inventories low. Target epitomizes this strategy as their inventory was down 14% year-over-year at the end of Q3. This seems to be further evidence for the move towards JIT strategies that we have discussed for the last several months in this report, as well as an explanation for the declining inventories we saw in November.

Retail sales are expected to be up slightly in from last year, so it remains to be seen whether the cuts to inventory were too deep and will lead to missed sales, or if they are exactly what the doctor ordered after the inventory boondoggle many firms faced in 2022. 

The authors note that it will be interesting to see how inventories are affected some large retailers turning towards AI to determine inventory levels. The swift adoption of this technology is at least partially due to the unprecedented swings baked into the historical sales data over the last few years, making classic historical forecasting techniques somewhat unreliable. The hope is that AI generated forecasting will also make planning more dynamic and help companies to avoid disruptions. An additional reason for firms to be aggressive in adopting cognitive technology is to bring down Inventory Costs, which though down (-7.6) continue to increase at a rate of 62.1 and have still never contracted.

Perhaps the primary reason that Inventory Costs continue to rise in spite of declining Inventory Levels is the continued tightness in the warehousing market. Warehousing Capacity did move up (+3.6) to 60.6 in November, but the increase capacity was not enough to sate the continuous growth in the cost of storage. While space has come online, there is still not enough square footage of the fulfillment space in urban areas that will allow for the efficient last-mile delivery consumers crave. 

Firms are taking several different approaches to dealing with this lack of space. Walmart will add parcel stations to 40 of its stores across nine states by the end of 2023. The purpose of these stations is to facilitate last mile delivery, relieving pressure from their warehouse and distribution network. Similarly, in mid-November Walgreens announced a plan to pivot towards fulfillment out of their brick-and-mortar stores. While this has been tricky for other large retailers, Walgreens hopes that their dense network of stores – of which one is within 5 miles of 78% of all Americans – will allow them to increase service levels and decrease shipping costs. 

For further commentary see the full Logistic Managers' Index 

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