Inventories plummet as indices find soft demand picture in Western economies
June releases paint a picture of smaller inventories and increased capacity in transportation and storage networks
June releases of data from the Logistics Managers’ Index (LMI) Report and GEP Global Supply Chain Volatility Index show companies aggressively running down inventory to try and rebalance, while demand for transportation weakens.
The Logistics Managers’ Index Report reported that inventory levels are contracting at the second-fastest rate in its history, recording a score of 42.9. Any reading below 50.0 signifies contraction.
GEP’s results found that safety stockpiles now sit just above the long-run average in June, which continues a trend they have also seen of winding down stock.
According to LMI report authors: “It appears that firms are getting back to the inventory-to-sales ratios that they saw pre-pandemic – something they have been striving to do through 2021 and 2022.” However, they also noted that “there is a mismatch between capacity and demand, but if demand is beginning to stabilise, then supply chains should have an easier time right-sizing their logistics capacity going forward.”
This trend is most intense in North America, followed by Europe, but GEP report authors noted more resilience in Asia.
Excess capacity at suppliers in North America and Europe in June rose faster than May, indicating that weakening of input demand and therefore less requirements for supply chain operations.
Asia, led by continuing strength in the Indian economy, bucked this outlook, with the GEP results noting that “purchasing activity across the region is broadly tracking in line with its historical average”.
“Weakening demand for components and raw materials in the Western economies, low levels of inventory and excess global supplier capacity suggests that storm clouds are gathering,” observed Joel Johnson, vice president, supply chain consulting, GEP. He believes that: “The softening of demand in the manufacturing sector in the last few months is a leading indicator that broader economy in the Western hemisphere will slow in the second half of 2023. It’s a perfect time for companies’ procurement to re-negotiate terms for 2024 and 2025 from suppliers.”
The flipside to increasing capacity within supply chains, is reduced friction and disruption, with the GEP index noting that a third straight month of excess capacity, sitting at a score of -0.26, which brings into the pre-pandemic range and far away from the May 2022 score of 3.53. The index is reporting the lowest level of material shortages since January 2020, and authors also highlighted the labour situation, where backlogs caused directly by a lack of employees are historically low”.
LMI measures similarly noted that warehousing capacity was up 6.8 points and transportation capacity was up 1.9 points.
However, they also noted positive movements in pricing and utilisation. Warehouse utilisation was up 2.1 points, warehousing prices were up 0.6 points, and transportation prices rose by 4.8 points.
Transportation utilisation and prices are, however, predicted to contract.