Don’t sleep on the inventory-to-sales ratio

One byproduct of an improving economy is the current state of United States inventory levels.

Remember, it was not all that long ago that the “inventory glut” was a real drag on transportation productivity in more ways than one, whether it was decreased production, slower and longer transit times, and other related inefficiencies, too.

And let’s not forget that when higher inventory levels are intact, the less amount of freight there is on the roads, rails, planes, and aboard U.S.-bound container vessels.

As previously noted in this space, the strains of high inventories were also made very clear in government data, including GDP, the inventory-to-sales ratio (which is derived from dividing the number of sales compared to available inventory, with the higher the ratio meaning inventory levels are running too high), and, of course, declining freight transportation volumes.

But now the inventory outlook has improved significantly. Perhaps the best, and first, place to confirm this is by taking a look at the inventory-to-sales ratio data from the United States. The inventory-to-sales ratio is derived from dividing the number of sales compared to available inventory, with the higher the ratio meaning inventory levels are running too high.

Based on data issued today by the United States Department of Commerce’s U.S. Census Bureau, the total business inventories/sales ratio based on seasonally adjusted data at the end of March (the most recent month for which data was available) was 1.34, which marks a 0.04% annual gain.

That is a pretty good number, especially when considering back in January 2016, which is really not all that long ago, the ratio was checking in a 1.41. But it is clear that the period of high inventories may really be in the rearview mirror, with the inventory-to-sales ratio for total business inventories coming in at 1.36 or lower in nine of the last 13 months through March 2018. That may not be quite enough to hang your hat on, but it is still pretty good overall.

The current state of inventories, as it relates to the supply chain, was laid out in detail by American Trucking Associations (ATA) Chief Economist Bob Costello on a recent conference call hosted by investment firm Stifel.

Costello explained that the current inventory cycle is in a much better place than it has been going back to 2014, which he called a “great year for trucking.” But things started to weaken in 2015 and 2016 and into early 2017, due to higher inventories.

“That was from a host of reasons including factory outputs slowed down and the economy overall slowed down,” said Costello. “Thus, companies overshot the inventory cycle. They have since brought it down, so now you have inventories that are no longer a drag on truck freight volumes. However, you can see that we're not at all-time lows there, and certainly if you went back even further than 2014 this ratio was even lower. I would argue that we are not going to go down to those all-time lows. Online sales are a fast growing part of retail sales, and when you have more and more online sales, demand to have these products delivered in just a couple of days also increases.”

Costello took the online sales impact a step further, noting that current inventory levels appear to be in the “zone” they will remain in for a while, with the rapid pace of online sales preventing inventory levels From getting down to all-time lows for some time.

This is something he tells motor carrier fleets to keep an eye on, because is the ratio starts to head up, it could translate into a freight slowdown.

But at this point, when you take all of these together, not since we've came out of the great recession have all of these come together to provide an environment where freight is the solid,” he said. “So again, it’s very unusual because we're so late in the inventory cycle.”

Old Dominion Freight Line (ODFL) President and CEO Greg Gantt offered up some practical analysis regarding the impact of current inventory levels on the less-than-truckload sector in a recent interview.

Most everything ODFL hauls is on the truck one day and probably being sold the next, which, in many cases, Gantt said, is not likely to change.

“I think you will continue to see just-in-time movements, as it can be too expensive for [shippers] to invest a lot in space,” he said. “If you don’t have to have it, then why make those investments? I don’t see that changing. I would expect to continue to see just-in-time to continue growing. What we are seeing is shorter lengths-of-haul to warehouses and more fulfillment centers, with customers moving them closer to their business and closer to their customers. There has been a lot of that activity lately.”

With lower inventories, comes quicker cycle and replenishment times, as well as an overall more fluid and efficient supply chain and transportation network. While much is made of what may be viewed as more attractive economic indicators, don’t sleep on the inventory-to-sales ratio. It is more important than most people think.