Inventory restocking seems to be on summer vacation. Softer-than-expected demand this spring seemed to bring the memories of the economic meltdown rushing back to the nation’s retailers, leading companies to put a tighter rein on orders heading into the annual peak shipping season for back-to-school and holiday sales.
“Many retailers have made a conscious decision to err on the side of having stock-outs on some items rather than be stuck with inventory at the end of the selling season,” said Casey Chroust, executive vice president of the Retail Industry Leaders Association.
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After a surge in inventory restocking that boosted the economy earlier this year, companies have turned skittish. Retailers, wholesalers and manufacturers still have bad memories of the 2008-09 recession. They’re reluctant to order goods that may not sell.
The U.S. business inventory-to-sales ratio, which rose to 1.40 in February, slumped to 1.26 in April, the Commerce Department said. For retailers, the ratio was 1.33, the lowest for any April in statistics dating to 1992. Ratios for manufacturers and wholesalers have shown similar declines.
For transportation providers — and for the broader economy, for that matter — the stricter controls on the shelves are a poor signal for the coming months of an economy still highly dependent on consumers. And with the housing market still on life support and unemployment exceeding 9 percent, the buying power of consumers isn’t sending confidence through supply chains.
Automotive inventories remain depressed nearly three months after the devastating March 11 earthquake and tsunami in Japan disrupted supply chains. For other business categories, lower inventories reflect weak demand.
“Retailers began building inventory earlier this year with expectations of stronger demand,” Chroust said. “During the last couple of months, we’ve had economic numbers that did not indicate the economy has stalled but suggested it isn’t recovering as quickly as everyone had expected.”
Those indicators include stubbornly high unemployment rates, a housing bust with no end in sight and a stock market that has lost momentum in recent weeks. Gasoline prices are straining household budgets, even after falling from their springtime range of $4 a gallon.
“Consumers are stepping back a bit,” said Chris G. Christopher Jr., senior principal economist at IHS Global Insight. His firm expects personal spending, adjusted for inflation, to rise only 1.2 percent in the second quarter, compared with a 2.2 percent in the first quarter and 4 percent in the fourth quarter of 2010.
Soft consumer demand is rippling up supply chains to wholesalers and manufacturers. The Institute for Supply Management’s widely followed manufacturing index slowed markedly in May, with a 53.5 reading that compared with 60.4 in April.
The manufacturers’ inventories component of the index fell to 48.7 from 53.6 in April. The index’s new orders component plunged to 51.0 from 61.7. A reading above 50 signals expansion.
Transportation providers are feeling the slowdown in inventory growth. Several trans-Pacific ocean carriers have delayed peak-season surcharges until mid-July, a sign of slow demand. The National Retail Federation’s Global Port Tracker forecasts traffic through the 10 busiest U.S. container ports to be virtually flat until the peak season begins in August and September.
“With rising gas prices and challenges in the labor and housing markets, consumer spending has slowed, and retailers have adjusted their inventory levels accordingly,” said Jonathan Gold, the NRF’s vice president for supply chain and customs policy.
In addition to uncertain demand, companies are having to adjust inventory strategies to deal with slower vessel transits and renewed emphasis on supply chain resilience following disruptions from the Japan earthquake.
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“The trend is to keep mean and lean inventory levels, but that can catch you off-guard, as we saw with the Japan disaster,” Christopher said. But instead of adding inventory, most companies seem to have reacted by adding backup suppliers and probing more deeply into their suppliers’ supply networks.
Many ocean carriers adopted slow-steaming during the recession to cut fuel costs, reduce emissions and employ ship capacity. When the Federal Maritime Commission opened an inquiry into slow-steaming this year, shippers complained the practice had raised their costs by forcing them to keep more inventory in transit at sea.
Forest products manufacturer Rayonier said it had to boost inventory levels because of transit-time increases ranged from few days on the trans-Atlantic to a week or more on the trans-Pacific.
Health care products supplier Becton, Dickinson & Co. said slow-steaming has added two to five days to its transit times. “Increased inventory requirements have stressed our supply chain. In some cases, expedited shipments have been required at higher costs,” the company told the FMC.
Slow-steaming’s introduction coincided with a recession-driven push by companies to trim inventory costs. Macy’s said it has saved $5 million this year by working with suppliers to simplify distribution and provide more store-ready merchandise that bypasses import distribution centers. The retailer also is expanding an “omnichannel” strategy combining store and online inventories once run separately
“Manufacturers and suppliers continued to follow very lean order and inventory practices in 2010,” Rosalyn Wilson, senior business analyst at transportation consultant Delcan, said in the Council of Supply Chain Management Professionals’ annual State of Logistics Report.
Inventory carrying costs by U.S. companies grew 10.4 percent last year despite rock-bottom interest rates, the report said. The rise in costs, however, was inflated by comparisons with depleted inventory levels in 2009.
Will the current slowdown in inventory rebuilding continue, or is it merely a temporary respite?
Investment firm Wolfe Trahan said its quarterly survey of shippers showed inventories rose from last year, but that companies plan to keep stockpiles low. The firm said its survey suggests restocking could continue to boost freight volumes, but that “the big push from inventory stocking may now be behind us.”
Wilson said she was optimistic a couple of months ago but now sees signs the economic recovery “may have hit a wall.” She noted the Conference Board’s Consumer Confidence Index dropped in May to 60.8 from 66.0, reflecting uncertainty and pessimism about inflation, income prospects and the housing market.
The National Retail Federation expects the summer slowdown to be temporary. The NRF’s Port Tracker forecasts imports will rise significantly this fall as consumer demand revives. Any spike in demand will require quick replenishment, which would boost shipment volumes.
“2011 is turning out to be an uncertain year for shipping,” said Ben Hackett of Hackett Associates, which produces the Port Tracker report. “The good news for the coming few months is that inventories are too low, which will generate shipping demand as the supply chain moves to restock, albeit cautiously.”
RILA’s Chroust said he believes the current slowdown will be a short-lived break in a gradual recovery. He said the next few weeks should provide a clearer indication of companies’ inventory plans for the rest of 2011. “Retailers are going to be watching the economic indicators closely during the next one to two months,” he said.
Retailers are stocking up now for back-to-school sales, which rank second only to Christmas as a revenue producer. “They’re going to wait until mid-August or September to see how good the back-to-school season is,” Christopher said. “Then they’ll re-evaluate how they think holiday sales will be.”