Inventory levels suggest demand is not going to be a priority in early 2025

Photo: Jim Allen – FreightWaves

Chart of the Week: Logitsics Manager’s Index – Inventory Levels SONARLMI.INVL

The Logistics Manager’s Index (LMI) component measuring inventory levels was 50 in December, indicating that total inventories were essentially flat in comparison with November. This implies that firms accurately forecasted demand for the vacation season. Nonetheless, a better look reveals a stark divergence between upstream and downstream inventory levels, suggesting significant freight movement opportunities in early 2025.

On essentially the most recent Freightonomics podcast, Dr. Zac Rogers from Colorado State University highlighted the strong differences between upstream and downstream activity inside the combination supply chain.

On this context “upstream” refers back to the warehousing of finished goods not expected to be sold for an prolonged period. These facilities are typically positioned removed from the tip consumer. Major upstream warehousing hubs are found near port cities like Los Angeles (commonly known as the Inland Empire) and Savannah, GA. In recent times, cities like Phoenix, AZ, and Laredo, TX, have seen accelerated growth in such facilities as a consequence of available real estate and proximity to U.S. import gateways.

In contrast, downstream facilities, that are closer to finish users, have expanded and evolved to handle higher throughput volumes with greater speed. These facilities are generally known as distribution or achievement centers.

Dr. Rogers noted that upstream facilities experienced moderate inventory growth in December, registering a 57.9 on the LMI. Readings above 50 indicate expansion, while those below 50 signify contraction. Conversely, downstream retailers recorded a surprising 33.9, suggesting a highly successful holiday shopping season for a lot of firms.

The takeaway is that upstream firms could have over-ordered in response to concerns comparable to tariffs, while downstream firms possibly underestimated customer demand. In consequence, many downstream firms are prone to spend early 2025 replenishing their inventories.

It’s plausible that some retailers aimed to scale back inventories in response to rising warehousing costs. The warehouse pricing component of the LMI has never fallen into contraction because the index’s inception in 2016. Distribution and achievement centers are particularly expensive to operate.

Nonetheless, this argument has a flaw: these facilities don’t cost less after they hold less inventory, and missing revenue opportunities as a consequence of insufficient stock is way more costly than warehousing goods. Moreover, shippers don’t seem like scaling back their importing activity, which counters the cost-control theory.

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