Will increasing warehouse and inventory costs fuel the demand for trucking?
Inventory costs are increasing at the fastest rate in years, while warehouse capacity continues to decline at an almost record rate, according to the Logistics Managers Index (LMI). In 2019, shippers filled warehouses with imports to bypass tariffs, coinciding with a slowdown in the freight market. Could rapidly rising warehousing costs and declining warehousing capacity push shippers to keep their freight moving?
LMI is a diffusion index that measures the rates of expansion and contraction – anything that shows a value above 50 is expanding, with values below 50 indicating contraction. Right now, inventory costs are rising as fast as they’ve been since the index’s inception in 2016 with a record 84.58 in April.
The warehouse capacity measure has been below 50 since the summer of 2020 and has dropped in each of the first four months of this year, meaning shippers have less space to store their stuff.
Inventory management has become much more important in recent years as suppliers experience production shortfalls for a wide variety of reasons. Unexpected demand has been at the heart of most inventory crises.
Predicting what people want when they want it isn’t a perfect science – a hard lesson learned in 2020 for many companies. Missing a peak period in the economy for either business-driven (2017-18) or consumer-driven (2020-2021) expansion can set a business back for years – if it ever recovers.
Peloton knows the value of having inventory when needed and is willing to invest millions of dollars in transporting their bikes to ensure they are maximizing their market share in the home fitness space as demand reaches. its maximum. Peloton is one of the industry’s most demanding customers and knows that rapid growth will be less possible once the pandemic is over, as people leave their homes more often.
The simple solution to all of this is to store raw materials and finished products in a giant warehouse and wait. Many companies used this strategy in 2019 to avoid price increases. Freight poured into the country and sat in warehouses for months. Trucking volumes stagnated until March 2020, when the pandemic struck.
The onset of the pandemic could have been much worse if we hadn’t had a relatively decent amount of cargo in storage – one of the reasons trucking has recovered faster than many other sectors of the economy during the year. last. Warehousing costs rise and space becomes less and less available, making it a less financially viable option. So what about keeping inventory low?
A just-in-time or low-inventory operation takes years to set up and the financial risks are extreme for most businesses. The pandemic presented a worst-case scenario for companies using this strategy due to shortages of commodities and input production. A consistent and predictable supply chain is necessary for this to be effective. Dedicated trucking and private fleets thrive in this space.
That leaves something in the middle – a solution that doesn’t require inventory but can scale when needed. It is the ideal location for the for-hire trucking market. The current situation of truck loading capacity is, however, an argument against this strategy.
This topic was touched on in last week’s Freightonomics episode in which Zachary Rogers, assistant professor of supply chain management at Colorado State University and one of the authors of ITM, said that “the Supply chain management has never received as much attention as it has. this year ‘because of the massive impact on business.
He went on to say that “people come up with different solutions… how do you manage the balance between what you want to pay to hold? [the freight] or move it. And much of it is dictated by OTRI.
OTRI is the Outbound Bid Rejection Index which measures the percentage of electronically submitted loads that are rejected by carriers for various reasons. The OTRI is currently around 24%, which means that one in four loads is rejected. This is historically high and very disruptive for supply chains.
Many of those surveyed do not believe that transportation costs will decrease over the next year, according to the prospective aspect of the LMI survey. This means that companies will likely explore several solutions to better control their business logistics while keeping costs predictable.
Private fleets are extremely expensive and not suitable for emerging businesses. For-hire trucking space remains the simplest solution, even if the costs are high. Rising warehouse prices will promote movement of goods as shippers seek optimal solutions. When left unchecked, visibility is the cheapest option and the second best option in a chaotic market.
About the chart of the week
This Week’s FreightWaves Chart is a selection of charts from SONAR that provide an interesting data point to describe the state of the freight markets. One chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real time. Each week, a market expert will post a chart, along with commentary, live on the front page. After that, the week’s chart will be archived on FreightWaves.com for future reference.
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