Chart of the Week: Logitsics Manager’s Index – Inventory Levels SONAR: LMI.INVL
The Logistics Manager’s Index (LMI) component measuring inventory levels was 50 in December, indicating that total inventories were essentially flat compared to November. This suggests that companies accurately forecasted demand for the holiday season. However, a closer look reveals a stark divergence between upstream and downstream inventory levels, suggesting significant freight movement opportunities in early 2025.
On the most recent Freightonomics podcast, Dr. Zac Rogers from Colorado State University highlighted the strong differences between upstream and downstream activity within the aggregate supply chain.
In this context “upstream” refers to the warehousing of finished goods not expected to be sold for an extended period. These facilities are typically located far from the end consumer. Major upstream warehousing hubs are found near port cities like Los Angeles (commonly referred to as the Inland Empire) and Savannah, GA. In recent years, cities like Phoenix, AZ, and Laredo, TX, have seen accelerated growth in such facilities due to available real estate and proximity to U.S. import gateways.
In contrast, downstream facilities, which are closer to end users, have expanded and evolved to handle higher throughput volumes with greater speed. These facilities are generally referred to as distribution or fulfillment centers.
Dr. Rogers noted that upstream facilities experienced moderate inventory growth in December, registering a 57.9 on the LMI. Readings above 50 indicate expansion, while those below 50 signify contraction. Conversely, downstream retailers recorded a surprising 33.9, suggesting a highly successful holiday shopping season for many companies.
The takeaway is that upstream firms may have over-ordered in response to concerns such as tariffs, while downstream firms possibly underestimated customer demand. As a result, many downstream firms are likely to spend early 2025 replenishing their inventories.
It’s plausible that some retailers aimed to reduce inventories in response to rising warehousing costs. The warehouse pricing component of the LMI has never fallen into contraction since the index’s inception in 2016. Distribution and fulfillment centers are particularly expensive to operate.
However, this argument has a flaw: these facilities don’t cost less when they hold less inventory, and missing revenue opportunities due to insufficient stock is far more costly than warehousing goods. Additionally, shippers don’t appear to be scaling back their importing activity, which counters the cost-control theory.