Dr. Zac Rogers is an associate professor of supply chain management at Colorado State University's College of Business. He is a co-author of the monthly Logistics Managers’ Index.
During the first half of 2020 supply managers have been faced with unprecedented challenges. Forecasts and long-range plans have been cast aside as lockdowns and virus infection patterns have made planning for the future near-impossible. This uncertainty is reflected in the inventory situation many firms now find themselves in. Efficient inventory management has long been a hallmark of the most successful organizations. Firms went into the spring of 2020 expecting “business as usual,” betting on a continuation of high levels of consumer spending, and they built up inventory levels accordingly. When the economy shut down, sales dried up, and many firms found themselves holding an unprecedented level of inventory.
This is borne out in the U.S. Federal Reserve’s inventory-to-sales ratio, which measures the amount of inventory firms are carrying relative to the number of sales completed. In April 2020 this ratio hit 1.67, an all-time high in the history of this metric. Multiple sectors of the economy essentially shutdown without warning. Inventory was still flowing in when sales suddenly stopped, leading to a spike in the level of goods on-hand.
Exacerbating this is the fact that the secondary markets that often function as release valves for over-inventoried firms are experiencing the same issues. For example, in normal conditions a firm like Macy’s may disposition unsold inventory to a discount chain like TJ Maxx or Ross Stores. But if TJ Maxx and Ross Stores are also unable to make sales (as was the case during the lockdown), they may not be interested in taking Macy’s inventory. This is the case for many secondary market firms, meaning even the sub-optimal channels of inventory disposition are closed off for many companies.
Firms are dealing with this excess inventory in a number of ways, including cancelling orders, shifting goods around different network sites, destroying perishable goods, and having clearance sales so massive, The Wall Street Journal dubbed it “Black Friday in April”. Despite all of this, a significant percentage of inventory could not be burned off, meaning firms will need to hold onto it until normal economic activity resumes.
The largest barrier to holding so much inventory is the high cost of storing it. The Logistics Managers’ Index (LMI) measures the growth and/or contraction of key logistics metrics on a monthly basis. Figure 1 presents the LMI’s month-to-month movement for inventory levels, inventory costs, available warehouse capacity, and warehouse utilization. When interpreting this figure, any value over 50.0 (represented by the dashed, black line) indicates month-to-month growth; any value below 50.0 indicates contraction.
[Figure 1] Warehousing & inventory movement July 2019 - June 2020 Enlarge this image
Over the last year, inventory levels have steadily risen. We observe a significant spike occurring in June of 2020, when parts of the economy (perhaps temporarily) reopened. This continued inventory buildup has had a significant impact on warehousing. Available warehousing capacity had been increasing and actually trending up for a year before March 2020, when the COVID-19 lockdown began in the United States. Warehouse capacity has contracted in every month since, reaching an all-time LMI low with a reading of 41.7 (a value which indicates significant contraction) in June 2020.
As warehouse capacity has dropped, warehouse utilization has increased, as firms try to squeeze inventory into every available nook and cranny. The lack of available capacity has in turn led to a spike in the costs associated with holding inventory. Some firms are even looking beyond warehouses, utilizing intermodal rail containers to slow-roll inventory, essentially using excess transportation capacity to supplement their limited storage space. Fundamentally, firms find themselves in the unenviable position of paying more for less-desirable space in order to hold goods they had anticipated selling in April.
Unfortunately, there may not be much relief in sight. When asked to predict logistics activity over the next 12 months, LMI respondents indicated that they expect both warehousing and inventory costs, along with inventory levels, to continue to rise.
Dealing with excess
It is likely that supply managers across multiple industries will spend the next 12 months dealing with the excess inventory built up during the initial COVID shutdown. If the reopening of the U.S. economy falters (at the time of this writing, many economists are predicting a slow-down in consumer spending due to the disruption of enhanced employment benefits), some managers may need to deal with a “double shock” in which they ordered additional inventory when the economy appeared to be reopening, but then faced a second shutdown. Supply managers, and the firms they work for, will continue to feel the financial pressure of holding high levels of inventory until the economy can permanently reopen.
Unfortunately, not all firms will be able to deal with this pressure. Firms like J.C. Penney and Nieman Marcus have already declared bankruptcy, and it is likely that more will follow over the next 12 months. To paraphrase Warren Buffet, when the tide goes out, everyone can see who is swimming naked. In other words, firms that are not well-positioned financially or are inefficient in the way they manage their inventory will have the most difficulty over the next year. In many ways, the COVID inventory shock will act as a catalyst, speeding up the demise of the firms who were already in decline, while facilitating the ascension of others.
Supply managers must remain vigilant, placing a premium on smart inventory management and flexibility throughout their supply chains. Managing inventory over the next 12 months will be difficult, but not impossible. The firms that are well-positioned and can make it through to the other side will likely emerge stronger and more efficient than they were before the crisis.
Author’s Note: For more insights like those presented above, please see the monthly LMI reports, which are posted the first Tuesday of every month at www.the-lmi.com.
Economic activity in the logistics industry expanded in November, continuing a steady growth pattern that began earlier this year and signaling a return to seasonality after several years of fluctuating conditions, according to the latest Logistics Managers’ Index report (LMI), released today.
The November LMI registered 58.4, down slightly from October’s reading of 58.9, which was the highest level in two years. The LMI is a monthly gauge of business conditions across warehousing and logistics markets; a reading above 50 indicates growth and a reading below 50 indicates contraction.
“The overall index has been very consistent in the past three months, with readings of 58.6, 58.9, and 58.4,” LMI analyst Zac Rogers, associate professor of supply chain management at Colorado State University, wrote in the November LMI report. “This plateau is slightly higher than a similar plateau of consistency earlier in the year when May to August saw four readings between 55.3 and 56.4. Seasonally speaking, it is consistent that this later year run of readings would be the highest all year.”
Separately, Rogers said the end-of-year growth reflects the return to a healthy holiday peak, which started when inventory levels expanded in late summer and early fall as retailers began stocking up to meet consumer demand. Pandemic-driven shifts in consumer buying behavior, inflation, and economic uncertainty contributed to volatile peak season conditions over the past four years, with the LMI swinging from record-high growth in late 2020 and 2021 to slower growth in 2022 and contraction in 2023.
“The LMI contracted at this time a year ago, so basically [there was] no peak season,” Rogers said, citing inflation as a drag on demand. “To have a normal November … [really] for the first time in five years, justifies what we’ve seen all these companies doing—building up inventory in a sustainable, seasonal way.
“Based on what we’re seeing, a lot of supply chains called it right and were ready for healthy holiday season, so far.”
The LMI has remained in the mid to high 50s range since January—with the exception of April, when the index dipped to 52.9—signaling strong and consistent demand for warehousing and transportation services.
The LMI is a monthly survey of logistics managers from across the country. It tracks industry growth overall and across eight areas: inventory levels and costs; warehousing capacity, utilization, and prices; and transportation capacity, utilization, and prices. The report is released monthly by researchers from Arizona State University, Colorado State University, Rochester Institute of Technology, Rutgers University, and the University of Nevada, Reno, in conjunction with the Council of Supply Chain Management Professionals (CSCMP).
Specifically, 48% of respondents identified rising tariffs and trade barriers as their top concern, followed by supply chain disruptions at 45% and geopolitical instability at 41%. Moreover, tariffs and trade barriers ranked as the priority issue regardless of company size, as respondents at companies with less than 250 employees, 251-500, 501-1,000, 1,001-50,000 and 50,000+ employees all cited it as the most significant issue they are currently facing.
“Evolving tariffs and trade policies are one of a number of complex issues requiring organizations to build more resilience into their supply chains through compliance, technology and strategic planning,” Jackson Wood, Director, Industry Strategy at Descartes, said in a release. “With the potential for the incoming U.S. administration to impose new and additional tariffs on a wide variety of goods and countries of origin, U.S. importers may need to significantly re-engineer their sourcing strategies to mitigate potentially higher costs.”
Grocers and retailers are struggling to get their systems back online just before the winter holiday peak, following a software hack that hit the supply chain software provider Blue Yonder this week.
The ransomware attack is snarling inventory distribution patterns because of its impact on systems such as the employee scheduling system for coffee stalwart Starbucks, according to a published report. Scottsdale, Arizona-based Blue Yonder provides a wide range of supply chain software, including warehouse management system (WMS), transportation management system (TMS), order management and commerce, network and control tower, returns management, and others.
Blue Yonder today acknowledged the disruptions, saying they were the result of a ransomware incident affecting its managed services hosted environment. The company has established a dedicated cybersecurity incident update webpage to communicate its recovery progress, but it had not been updated for nearly two days as of Tuesday afternoon. “Since learning of the incident, the Blue Yonder team has been working diligently together with external cybersecurity firms to make progress in their recovery process. We have implemented several defensive and forensic protocols,” a Blue Yonder spokesperson said in an email.
The timing of the attack suggests that hackers may have targeted Blue Yonder in a calculated attack based on the upcoming Thanksgiving break, since many U.S. organizations downsize their security staffing on holidays and weekends, according to a statement from Dan Lattimer, VP of Semperis, a New Jersey-based computer and network security firm.
“While details on the specifics of the Blue Yonder attack are scant, it is yet another reminder how damaging supply chain disruptions become when suppliers are taken offline. Kudos to Blue Yonder for dealing with this cyberattack head on but we still don’t know how far reaching the business disruptions will be in the UK, U.S. and other countries,” Lattimer said. “Now is time for organizations to fight back against threat actors. Deciding whether or not to pay a ransom is a personal decision that each company has to make, but paying emboldens threat actors and throws more fuel onto an already burning inferno. Simply, it doesn’t pay-to-pay,” he said.
The incident closely followed an unrelated cybersecurity issue at the grocery giant Ahold Delhaize, which has been recovering from impacts to the Stop & Shop chain that it across the U.S. Northeast region. In a statement apologizing to customers for the inconvenience of the cybersecurity issue, Netherlands-based Ahold Delhaize said its top priority is the security of its customers, associates and partners, and that the company’s internal IT security staff was working with external cybersecurity experts and law enforcement to speed recovery. “Our teams are taking steps to assess and mitigate the issue. This includes taking some systems offline to help protect them. This issue and subsequent mitigating actions have affected certain Ahold Delhaize USA brands and services including a number of pharmacies and certain e-commerce operations,” the company said.
Editor's note:This article was revised on November 27 to indicate that the cybersecurity issue at Ahold Delhaize was unrelated to the Blue Yonder hack.
The new funding brings Amazon's total investment in Anthropic to $8 billion, while maintaining the e-commerce giant’s position as a minority investor, according to Anthropic. The partnership was launched in 2023, when Amazon invested its first $4 billion round in the firm.
Anthropic’s “Claude” family of AI assistant models is available on AWS’s Amazon Bedrock, which is a cloud-based managed service that lets companies build specialized generative AI applications by choosing from an array of foundation models (FMs) developed by AI providers like AI21 Labs, Anthropic, Cohere, Meta, Mistral AI, Stability AI, and Amazon itself.
According to Amazon, tens of thousands of customers, from startups to enterprises and government institutions, are currently running their generative AI workloads using Anthropic’s models in the AWS cloud. Those GenAI tools are powering tasks such as customer service chatbots, coding assistants, translation applications, drug discovery, engineering design, and complex business processes.
"The response from AWS customers who are developing generative AI applications powered by Anthropic in Amazon Bedrock has been remarkable," Matt Garman, AWS CEO, said in a release. "By continuing to deploy Anthropic models in Amazon Bedrock and collaborating with Anthropic on the development of our custom Trainium chips, we’ll keep pushing the boundaries of what customers can achieve with generative AI technologies. We’ve been impressed by Anthropic’s pace of innovation and commitment to responsible development of generative AI, and look forward to deepening our collaboration."
A growing number of organizations are identifying ways to use GenAI to streamline their operations and accelerate innovation, using that new automation and efficiency to cut costs, carry out tasks faster and more accurately, and foster the creation of new products and services for additional revenue streams. That was the conclusion from ISG’s “2024 ISG Provider Lens global Generative AI Services” report.
The most rapid development of enterprise GenAI projects today is happening on text-based applications, primarily due to relatively simple interfaces, rapid ROI, and broad usefulness. Companies have been especially aggressive in implementing chatbots powered by large language models (LLMs), which can provide personalized assistance, customer support, and automated communication on a massive scale, ISG said.
However, most organizations have yet to tap GenAI’s potential for applications based on images, audio, video and data, the report says. Multimodal GenAI is still evolving toward mainstream adoption, but use cases are rapidly emerging, and with ongoing advances in neural networks and deep learning, they are expected to become highly integrated and sophisticated soon.
Future GenAI projects will also be more customized, as the sector sees a major shift from fine-tuning of LLMs to smaller models that serve specific industries, such as healthcare, finance, and manufacturing, ISG says. Enterprises and service providers increasingly recognize that customized, domain-specific AI models offer significant advantages in terms of cost, scalability, and performance. Customized GenAI can also deliver on demands like the need for privacy and security, specialization of tasks, and integration of AI into existing operations.