Inventory Index

Inventory Index

Copyright 2004, Traffic World, Inc.

How low can you go? The latest State of Logistics report, this year put out by the Council of Logistics Management, certainly raises that question.

Pioneered by the late Bob Delaney, this year''s report measures historic new lows for logistics costs in the United States business world, spelling out the remarkable and continuing progress industrial America is making at making supply chains more efficient.

The big numbers are the 8.5 percent cost of logistics as a percentage of the national economy and the record low 1.32 inventory to sales ratio. Can it possibly get any more efficient?

"We just don''t know," said Rosalyn Wilson, who is carrying the logistics analysis ball since Delaney''s death. "Every year, companies find new ways to surprise us and get more out of their supply chains."

Yet, more so than in any previous year other than 2001, the State of Logistics seems to offer more a look back than a look forward. The business world has changed drastically since those record-setting efficiencies of 2003: consumer demand in the United States is surging, transport prices are climbing a ladder straight up and fuel is adding cost up and down the supply chain.

More up-to-date information suggests American business already is responding to market changes.

The Institute for Supply Management''s monthly survey for May showed manufacturers'' inventories declined slightly but that the overall index actually grew 4.5 percentage points from April. That says manufacturers weren''t paring inventories in May as much as they were the month before, perhaps correcting for tighter inventories in months'' previous.

In fact, customer inventories were at what look like bare-bones levels. The ISM Customers'' Inventories Index hit a new low of 37, with about a third of the respondents'' in the survey saying "their customers do not have sufficient inventories on hand at this time." ISM says its pricing levels are reaching levels not seen since 1979; 74 percent of supply executives reported prices were higher in May than in April, one reason industry is having a hard time investing in inventory.

"The manufacturing sector has moved very quickly from a position of significant surplus capacity to a more constrained supply position," said Norbert J. Ore, group director of strategic sourcing and procurement at Georgia-Pacific and chairman of the ISM Manufacturing Business Survey Committee.

So is supply chain efficiency a thing of the past? Well, the U.S. Commerce Department reported last week that wholesale inventories fell in April even as sales grew 0.8 percent.

That cut the inventory to sales ratio at the wholesale level to 1.12 - that is, it would take wholesale providers 1.12 months to draw down inventories at the current pace of sales.

The next step is to ramp up production - no one wants to leave money on the table by leaving goods unmade or unshipped.

And J.P. Morgan says manufacturing on a global scale is, in fact, picking up steam. The investment house says the index it produces with ISM and the British-based NTC Research hit a high of 57.7 percent not seen since 1999 and the 11th straight month of growth. The good news for American companies is that the United States remains "the principal growth engine of the global manufacturing economy."

After pulling their factories back to less than 65 percent of capacity three years ago, semiconductor manufacturers now have them humming at a better than 90 percent production rate.

Clearly, more goods than ever are in the pipeline. Logistics planners now must find a way to make fat supply chains as efficient as the lean ones, a challenge any way you index it.