Usually inventory-to-sales ratios are one of myriad geeky numbers released monthly that only other statisticians—and historians—follow with any regularity.
However, as anyone connected with the current whacky freight environment can attest, these are not normal times.
“I have never seen a freight environment like this in my 40 years in this business,” Pitt Ohio President Chuck Hammel told LM.
The reasons are numerous. Supply chains are being flipped. One month demand is virtually nil. The next, customers are clamoring for goods. Raw materials – everything from computer chips to lumber to basically anything produced from crude oil – are either tough to find or historically expensive.
Couple those factors with the fact that experienced, well-qualified truck drivers are nearly impossible to hire – effectively putting a lid on truck capacity—and that’s the situation shippers and motor carriers are in as we enter the second half of 2021.
The inventories-to-sales ratios compiled by the Census Department show the relationship of the end-of-month values of inventory to the monthly sales.
These ratios can be looked at as indications of the number of months of inventory that are on hand in relation to the sales for a month. For example, historically, a ratio of 2.5 would indicate that the retail stores have enough merchandise on hand to cover two and a half months of sales.
In April, the last full month for which statistics are available, that number was an historically low 1.07. In March, it was 1.10.
“Inventory-to-sales ratios are basically one-to-one—they’ve never been that low before,” said Kevin Smith, president and CEO of Sustainable Supply Chain Consulting, Windermere, Fla. “That means essentially companies have about one month’s worth of inventory.”
Smith said if this situation had arisen 10 or 20 years ago, it would have been a “big, big problem” because shippers lacked visibility into their supply chains and processes that are common nowadays. But today, he said, the situation is different.
“This is going to be a big challenge, but it’s a challenge I think today’s supply chain industry is up to,” he added. “I don’t think we should stay at one-to-one long term because it will hurt ability to service customers, hurt the ability to give consumers what they want. But right now it seems to be doing pretty well. But it’s a scary number, a one-to-one inventory-to-sales ratio.”
That’s because of what Pitt Ohio’s Hammel called the “extremely tight” U.S. ground freight market as we approach what typically is the peak season for freight.
“It’s so tight that we have to limit the freight that comes into our system to prevent our service from suffering,” Hammel told LM. “We are still at near historical service levels and it takes limiting the freight growth to achieve that. Adding additional capacity in today’s market with the driver shortage is a very slow process.”
Hammel said eventually inventory replenishment should be a major plus for carriers, but he’s hardly banking on it.
“Overall, I think it’s a plus but I’ve been in this business too long to count on what looks (in) the future,” Hammel explained. “This pandemic has caused a sizable shift in the supply chain so we’ll just have to see how it plays out vs. historic trends. In the meantime, all of our focus is on the current environment and protecting our customers service levels.”
Yellow Corp President and CEO Darren Hawkins recently called the LTL capacity situation “very fragile,” with carriers in control of a market with significant barriers to entry and no large new entrants in the past two decades.
Recently, FedEx Freight, the largest single player in the LTL market with $7.1 billion revenue last year, trimmed 1,400 shippers from its ranks because it needed capacity elsewhere in its system.
These “targeted volume controls” FedEx Freight began are joined by other LTL carriers, who are facing overloaded freight networks.
Asked recently whether his company was willing to take on some of the freight left by FedEx’s recent cutbacks, Pitt Ohio’s Hammel responded, “It’s not that we’re not interested in that business. It’s just we have no capacity to take that on.”
Last February, President Joe Biden signed an executive order calling for a 100-day review of key supply chains. In response to shortages across various industries, a “strike force” led by the U.S. trade representatives is trying to uncover unfair trade practices that undermine U.S. supply chains.
In response to shortages in the critical microchip industry, the Biden administration opened a new “Supply Chain Disruptions Task Force” as part of its response to ongoing shortages of semiconductors and other critical goods.
The task force is led by the secretaries of commerce, transportation and agriculture. The aim is attack bottlenecks in the chip industry, as well as in transportation, home building, construction, agriculture and food.
Also the Biden administration is establishing a public-private consortium for advanced manufacturing and onshoring of essential medicines production, and other products.