While the smart money tries to get into the head of the Federal Reserve and its interest rate strategy, it’s baffling to see that after three years the market makers still do not understand the inflationary pressures each pipe in the supply chain can have on the economy.
There is one pipe in particular that will continue to stoke the flames of inflation, and it will last for months to come. The solution is in the hands of the retailers. I’m talking inventory management, which so far is graded at a dismal D.
Companies have used a combination of time and cutting back in manufacturing to whittle down their inventories, but it has not happened at the speed they projected. Some companies predicted inventories would be down by the end of the first quarter and yet warehouses are still near 100% capacity, according to WarehouseQuote. While “time heals all wounds” in some areas of life, time has only exacerbated retailer problems.
What has materialized is the compounding impact of increased warehouse rates. The ugly unwanted items in storage are still ugly and unwanted. The only difference is the lofty price at which they are stored.
This pile of inventory is not going down fast enough, and even with less freight coming in, there is still little room for it to find a home.
It is for this reason this pipe of the supply chain will continue to be white hot for inflation.
National storage pricing is up 1.4% month over month and 10.6% year over year. This is a reflection of the full warehouses across the nation.
And warehouse costs are passed onto the consumer.
Until the retailers figure out what to do with the items in these warehouses, the rates will continue to go up and thus be passed onto the consumer. While some of these items are being purchased on the secondary market, they are still in warehouses. The only difference is the owner.
“National warehousing capacity remains low and will remain tight for the foreseeable future as U.S. industrial construction starts have fallen considerably year over year due to rising interest rates,” said Chris Huwaldt, vice president of solutions at WarehouseQuote.
The ripple effects of the warehouse bloat will also exacerbate future late charges.
ITS Logistics is warning of exploding per diem charges in the second and third quarters. It is seeing more items being held in ocean containers on chassis. While some say only truckers pay per diem, that is not entirely true. Shippers can pay per diem.
“On the surface, in a lot of cases, it is dependent on the contract the BCO/shipper has with the NVO/ocean carrier,” explained Paul Brashier, vice president of drayage and intermodal at ITS Logistics. “If that contract bills these charges to the trucker, the trucker outlays and then bills back to the BCO/shipper. If the contract bills these charges to the shipper/BCO, the trucker does not have to outlay and those charges go directly to the shipper/BCO.”
Brashier continued, “Regardless, shippers pay these fees. In some cases, if the MSA between the shipper/BCO and the trucker has a clause for negligence, the trucker could be on the hook if they did not pull a container from the terminal in time or terminate an empty quickly. If the trucker’s operations are on point, this is very rare and usually happens less than 1% of the time.”
Simply put, per diem rates are passed onto the consumer, which stokes inflation. It’s another cost that the Fed has no control over.
Supply chain challenges continue
This comes at a time when imports are still coming in healthy pre-pandemic levels. While the ports are no longer processing at pandemic highs, they are still moving more containers than they have had in the past. Manufacturing disruptions are also still happening. These two challenges are translating into delivery delays. One of my contacts has a client that received its snow tires in January instead of October. These tires will now go into storage.
HVAC systems are delayed by 99 weeks for some construction companies. Windows have been delayed a year and large electrical lights used in construction also have been delayed.
On top of these postponements, the inflationary bump up on the commodities and equipment needed for infrastructure projects are eating away at how many projects can be done. The cost of capital is so high now that borrowing for projects is also attributing to projects being axed. That impacts not only jobs but the local economies that serve those workers.
For college students who want to go into logistics, these last three years have given them a wealth of knowledge. Now they will learn in real time about inventory management. They are seeing challenges on both ends of the inventory spectrum.
Inventory management is huge for a company’s survival and we are already seeing some retailers struggling. The increase in the cost of these stockpiles will continue to go up until they can figure out how to get the product out of storage. Donations to those in need around the world? A bonfire? Use sustainable recycling to make something else?
Bottom line: The inflation on certain products will not be squelched until this inventory problem is addressed.