Why the Inventory Question is Really about Public vs Private Pools
Welcome to the 88th edition of The LogTech Letter. TLL is a weekly look at the impact technology is having on the world of global and domestic logistics. Last week, I looked at whether carnage in public markets, and rationalized valuations in the tech sector, are likely to bleed significantly into the logistics technology world. This week, I’m exploring why it’s hard to focus on inventory and ocean freight capacity through the same lens.
As a reminder, this is the place to turn on Fridays for quick reflection on a dynamic, software category, or specific company that’s on my mind. You’ll also find a collection of links to stories, videos and podcasts from me, my colleagues at the Journal of Commerce, and other analysis I find interesting.
For those that don’t know me, I’m Eric Johnson, senior technology editor at the Journal of Commerce and JOC.com. I can be reached at eric.johnson@spglobal.com or on Twitter at @LogTechEric.
Like everyone else, I’ve seen the headlines. Target is done ordering stuff. That whole buying products from overseas suppliers, shipping them across the world, and selling them to us here at reasonable prices…so 2021. Except, maybe they aren’t done with that model quite yet?
That’s from Jason Miller. Let’s forget for a second that Target alone only counts for 3 percent of the eastbound Trans-Pacific market. Let’s also acknowledge that inventory within a single large shipper is a complicated puzzle. Target, or even mid-sized retailers, don’t sell a single product, but rather a massive matrix of seasonal, daily, and long-term, big-ticket items. As one shipper put it to me:
In general, demand has changed, so every retailer is going through a shift in inventory mix. In [this shipper’s category], to lock production the bigger guys had placed orders which they didn't need so they are cancelling. And for us who never overbought, we have done well maintaining the cadence of product flow despite choppiness in transportation and production; which means we don't have to cancel - we never overbought.
In that vein, let’s instead focus on the asymmetry between inventory levels and ocean freight capacity. By that, I mean that for shippers, inventory management is an individual challenge, whereas access to capacity is collective challenge.
Look at it this way. When Target decides to pull back on orders for some products in which it is overstocked and does not anticipate strong demand, that doesn’t impact the inventory situations for the 1,000-plus other major importers on the Trans-Pacific. A glut of inventory at one retailer has little to no bearing on another retailer’s situation, even within the same retail category: the only one being supplier capacity if they use the same suppliers. And it has zero impact on retailers in non-overlapping categories.
Target made a purposeful choice in the pandemic to prioritize full shelves, at the cost of higher transportation costs, and, most pertinently, at the risk of being overstocked when demand cooled. As I wrote here, I have a very hard time believing they did not understand that risk, even if it appeared they were caught unaware.
However, all those retailers are vying for the exact same space on a container ship. An FEU slot on a ship is exactly the same physical space, subject to the exact same time constraints (ie cutoff and sailing dates) whether the user of that space is Target or a 10-TEU a month shipper. Think of it like a public pool and a private backyard pool. If you go to a public pool, you’re fighting for space in the pool, prescribed hours of operation, limited chairs on the pool deck, and you’re all waiting in line at the same snack shack. At your house, the pool is yours to build and use as you see fit. The kitchen is available whenever you want it. You can overfill it with water, let all the water evaporate, stock it with a single chair for yourself, or with 20 chairs for your friends.
This asymmetry is important to understand in the context of where the market is right now compared to a year ago, when we were in the middle of a historic demand crush that laid bare the limitations of existing supply (both on vessels, at ports, and in terms of inland infrastructure). If a certain percentage of retailers are overstocked with inventory right now, that carries with it inventory holding costs, but those costs are confined to the retailer and its supplier ecosystems. If a certain percentage of carriers and ports are undersupplied, that affects everyone.
Some might point to market concentration as the culprit - including the US president - but a situation where there as many liner carriers as importers would simply not be workable. Plus, and this is important, that’s not the situation that exists. Lamenting a lack of diversity in the market doesn’t change the way things are. Shippers and everyone that caters to them are far better off playing the game that exists, not the one they hope to see exist.
One last thing…let’s dig deeper into whether cooling orders from some retailers benefit others. In other words, could the very individual impacts of inventory management bleed into the common impacts of capacity availability? Perhaps, a bit. Back to the shipper on how canceled orders for one retailer might slightly impact the capacity situation for others:
Yes, we have seen a slowdown in demand, but in our industry, with huge backlogs and people waiting for their product, in the near term we are still seeing a lot of demand for space. And the good news is we are getting it, because for the first time we are getting more than MQC on some carriers.
Look, big picture, this is a complicated market that doesn’t move in binary terms. I’ve lost track of the number of market participants I’ve talked to this week - companies that would greatly benefit from advanced intel (the figurative crystal ball we all seek) - that have told me this week “we just need to wait and see how this plays out.”
Here’s a roundup of recent pieces on JOC.com from my colleagues and myself (note: there is a paywall):
There was some sorta big news in my world this week. There’s more to come from me and others on this subject soon, but suffice to say this was pretty tectonic.
I wrote today about interesting data from Dray Alliance about the level of dual transactions (where a dray driver drops an empty and picks up a loaded container in the same move) they’re seeing in their network of carriers.
Cargobase, a Singapore-based transportation management and procurement tech provider, has opened an office in Mexico to tap into demand for supplying into the US, but also as a base to serve the Latam market.
Risk management is a key category in tech - between Everstream and Overhaul and a few others - which makes it natural for Blume Global to partner with Resilinc. First appearance in The LogTech Letter for my new awesome colleague Teri Errico Griffis!
And here are some recent discussions, reports, and analysis I found interesting:
Great report by Brian Nemeth and his colleagues at AlixPartners on ocean contracting.
Worthwhile blog from CloudTrucks on technology and US owner-operators.
More on the prospects of a freight recession from a trio of supply chain professors.
McKinsey followed its 2020 report on logistics technology funding with an updated version for 2022.
My colleagues at S&P Global describe how to lay down the data foundation for an effective carbon reduction strategy.
Some upcoming events I’ll be involved in:
The agenda for our Inland Distribution Conference in Chicago Sept. 26-28 is taking shape. I’ll be doing a one-on-one with Emerge CEO Andrew Leto and then leading four tech-oriented discussions on LTL, freight procurement, small carrier tech, and venture’s future role in trucking. Don’t miss this - it’s the most substantive surface transportation conference in the market.
Disclaimer: This newsletter is in no way affiliated with The Journal of Commerce or S&P Global, and any opinions are mine only.