Business media has of-late pointed out that that overall inventory levels among retailers and manufacturers has been unusually high, which is impacting both current procurement activity as well as logistics and transportation trends.

We at Supply Chain Matters decided to have a detailed look at the data to extract some insights

The most accepted and readily available measure of any inventory overhang is the inventory-to-sales ratio. The generally accepted definition of this ratio equates to the amount of total amount of inventory that businesses report has compared with the amount of goods that they have sold in a particular period of time. In essence it represents total business inventories divided by total business sales.  A ratio value in excess of one would indicate how much more inventory is available to support existing sales levels. During times of severe recession, such as which occurred during the years 2008-2009, the ratio is high. During good economic times when sales are robust, the ratio should be lower.

For U.S. related activity, the U.S. Census Bureau calculates and reports this ratio.  We downloaded adjusted historic data with a start year of 2008, just prior to the prior severe global recession, with values up to and including May of this year. (The last reporting value).

There are three different variants available from the U.S. Census:

Total Business (Adjusted)

Total Manufacturing (Adjusted)

Total Retail Trade (Adjusted)

For purposes of our analysis, we elected to analyze and share Total Business and Total Retail Trade.  However, we elected to sort and present this trending data by month, which we believe would be far more of interest to our supply chain, manufacturing and product management reading audience.  This is because inventory is managed continuously in daily, weekly or monthly dimensions.

Indeed, the data does present some insightful trends.

Our first figure is Inventory to Sales Ratio-Total Business Activity (Adjusted), 2008 to Date.



First, notice the distinctive spikes in the ratio for the early and late months of 2009, when the global recession took a severe toll on businesses. The average ratio across all of 2009 monthly values was 1.34, with the highest values ranging from 1.48 to 1.43 during the first-half of that year. What we further noticed was the ratio began a steady creep upwards beginning in November 2013 (1.33) thru May 2016. The average ratio value for the five months of 2016 was 1.41, rather close to the spikes in early 2009. Notice further that the spike in the ratio extends across all months

So what happened?

Again, we do not portend to be trained economists but it would seem by our knowledge of supply chain events that there were two rather significant events that occurred in the designated latter period. One was the U.S. West Coast port disruptions that extended from the latter-half of 2014 well into the first-half of 2015. The other was the ongoing boom of online commerce that has impacted retail channels, resulting in a boom in the construction of new online fulfillment distribution centers.

We further analyzed the ratios for Total Retail Trade (Adjusted) for the same period of 2015 and the first five months of 2016.


Notice that the 2009 spike was far larger and that a somewhat similar pattern of current creep is manifest in the 2015-2016 data. The average ratio for Retail Trade was 1.46 for 2015, and 1.52 for the five months in 2016. While not to the 1.6 levels of 2009, the trend is indeed worrisome.

We therefore suggest that with more and more products being offered online, and with consumers expecting immediate availability and delivery, it would seem that inventory levels have risen to the challenges in the explosion of online.

We conclude with the following takeaways:

  1. There is indeed strong evidence of a building overhang in inventory levels. Supply chain, procurement and sales and operations teams need to take a hard look at inventory trending in relation to supporting expected sales volumes.
  2. The U.S. West Coast port disruption appears to have provided its own impacts in ongoing inventory management. Whether that resulted in increased safety stocks, changed global transportation patterns or continued concerns, the ratio creep correlates in timing.
  3. The ongoing explosion of online commerce, online consumer demands for immediate availability, and the added build-out of new fulfillment centers seems to have a direct correlation to ratio creep timing, however there may be other factors at-play. Bottom-line, inventory levels are indeed creeping up to concerning levels, despite all the current advanced planning and technology tools currently available. It may further explain why global PMI indices have trended more toward contraction levels.

We encourage our readers, particularly those of economic and/or academic backgrounds to weigh-in on the above. What do conclude from the current high levels of inventory overhang?

Bob Ferrari

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