Have inventories found their sweet spot?

Inventory levels finally appear to have found balance

Inventories appear to have stabilized after years of volatility. The Logistics Managers’ Index (LMI) Inventory Levels component hovered in slight contraction territory last year while the Census Bureau’s Business Inventory to Sales (TBIS) fell into a more stable pattern.

It has been a bumpy ride for inventory managers and procurement teams over the past five years. The combination of a trade war, supply chain snarls and erratic demand has created extreme swings in ordering patterns.

The LMI is a measure of movement, with values above 50 indicating expansion and below 50 indicating contraction. Values farther away from 50 indicate stronger movements. So the average value of 49 over the past nine months indicates a slow drawdown in inventory levels.

The Census Bureau’s figures are measuring more where the inventory levels are today in relation to sales. So the most recent value of 1.37 in November translates to companies averaging just over one and a third month’s worth of sales on hand.

For context, the average TBIS value in 2019 was 1.42, when the trade war with China created a pull-forward effect. During 2021 it averaged 1.29, in the height of the pandemic spending.

The story here lies in the recent stability of both the LMI and TBIS values. This is an indication that procurement teams are finding consistency once again in their demand forecasts. The risk is that consistency develops complacency.
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