Are we out of the inventory woods yet?

It is fair to say that the topic of inventory management has always had a permanent seat at the table, so to speak, when it comes to mapping out logistics and supply chain planning and operations processes. That theme became especially heightened, as we all well know, during the height of the pandemic nearly four years ago.

Taking a quick look back, there are various reasons for that, no questions about it.

One key reason for that was driven by retailers and wholesalers bulking up their inventory levels very high levels that proved to be too high, much too high, in some cases, really. That, in turn, created a significant inventory glut, which took more than a while to alleviate.

Fast-forward a few years later and there are some optimistic signs on the inventory front. That has been evident in improving inventory-to-sales ratio readings showing things are getting back in line, inventory-wise, compared to pre-pandemic levels, coupled with, in many cases, deep discounting by retail shippers to get rid of the excess inventory they were carrying. As the pandemic also showed sitting on too much inventory is never ideal, coupled with inventory carrying costs, as well as tight warehousing capacity at the time.

In some recent conversations I had with some industry stakeholders, a common theme came back to how the overall inventory management situation is improving, but we are not fully out of the woods, at least not yet. 

Chris Rogers, Head of Supply Chain Research for S&P Global Market Intelligence, explained that while inventories are showing a return to what could be viewed as normal activity, following the destocking and demand-driven downturn in 2022, questions remain regarding overarching inventory concerns, amid mixed economic conditions.

“From an economic standpoint, it feels like most companies and most industries have gotten their inventory back to where they want it to be,” he said. “When you look at the inventory-to-sales ratio [data] coming out of some of the Census Bureau figures, for a lot of sectors, they're back to where they were pre-pandemic. That is interesting, because it shows a return to the days of just-in-time tightly managed inventories. Nobody is thinking they need to lay inventories aside because they have learned their lessons [from the pandemic].”

While inventory levels are not back to normal, Rogers posed the question of: if there is an overshoot and see inventories drop lower than they need to be? That would represent a supply shock rather than a demand shock, which he said is viewed as a risk. 

Inventories being “right-sized” sooner than expected is welcomed news, according to Eric Starks, Chairman of freight transportation consultancy FTR.

The reason for that, he explained, is that FTR’s expectation was that the inventory holdover would be an issue, at least through the first half of 2024.

“The initial data that we've been seeing through the end of the year basically says that we have already turned that corner a little bit,” said Starks. “Some of the inventory-to-sales ratio numbers have been coming back down. It was the wholesale market, that was a huge problem; that has started to moderate. So, a lot of those fears basically have been alleviated. And what that does, is that gives us a lot more optimism as we move into the second quarter of this year.”

The topic of inventory management will continue to have a high logistics profile, going forward. The ability to know where your inventory is and how much is on hand will never not be imperative. As noted, that importance was evident over the course of the pandemic, for certain. What’s more, this has been heightened since then, as noted in a recent Wall Street Journal, which observed that many retailers are reducing the number of items they keep in stock, as they finally able to shift away from a pandemic-influenced pattern of deep discounting to pare down excess inventories and, instead, “focus their supply chains more tightly on products that shoppers want.” 

That makes a ton of sense, especially on the heels of what our sectors have gone through in recent years. So, based on recent trends and data, coupled with expert analysis from both Rogers and Starks, if we are not quite fully out of the inventory woods, we are at least starting to see a fair amount of light.