Why Are Order Lead Times Plummeting?

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Order lead times — the time between order placement and expected ship date for containerized imports — have dropped 23% since late April as supply chain managers are forced to change their strategy in an economic environment that is once again in a transitional state, reports Freight Waves.

 Is the economy doing well?

Last week, Target reported that it had essentially too much inventory on hand and needed to “right-size” its stock. This was an inevitability for many retailers who are struggling to accurately predict what the consumer will do in the post-pandemic environment.

Many macroeconomic figures, like unemployment and retail sales, still suggest that the economy is doing quite well. The difficulty arises in trying to predict when consumption will slow and at what rate that will occur.

Looking at traditional macroeconomic figures like those mentioned, you will think that the consumer is still doing just fine. However, if you look at near-real-time data like tender volumes (OTVI) and the monthly reported Logistics Managers’ Index that measures inventory growth, you will see that shippers are slowing down domestic transportation shipping due in part to record inventory growth that started in January.

Consequences of pandemic

The macro data is not inaccurate, it is just slow. Since the pandemic began, demand forecasting has become a near impossibility. The most sophisticated algorithms have broken as traditional relationships between data points have fallen apart amid changes in societal and personal behavior patterns.

Pair the demand side uncertainty with production and supply inconsistencies, like the current shutdown in Shanghai, and you have a supply chain management hellscape to wade through, especially at scale.

The global environment has become riddled with “black swan” events that are relatively unpredictable, especially in the long term. Even if you can predict them, their economic impacts are even more uncertain. The only real solution is to become more flexible, which is what you see reflected in the import lead times.

With inventories being elevated, companies have some buffer in the way they can make smaller, more frequent orders.

Drop in TEU

Earlier this week, FreightWaves Head of Ocean Intelligence Henry Byers wrote about import volumes falling off a cliff. This is reflected in the Inbound Ocean TEUs Index (IOTI). The IOTI shows over a 30% drop in TEUs over the past month, indicating companies are ordering far fewer goods by quantity.

If you pair that index with the Inbound Ocean Shipments Index (IOSI) that measures bills of lading, you only see a marginal drop in comparison. This shows that shippers are ordering less volume per order.

No one has a crystal ball, and many predictive algorithms will to some extent have ingested pandemic-era data that is no longer applicable. The best many supply chain professionals can hope for until the global environment settles is to be nimble while monitoring the environment with more frequency, and work towards a diversified approach to supply management.

On this week’s Freightonomics episode, supply chain experts Dale and Zac Rogers predicted that consumers would be resilient this fall and winter and return to their old habits, but they also warned that volatility was here to stay. Inflation grew at its highest rate since 1981 this May, which any economist will tell you is unsustainable. Cloudy, the future remains.

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Source: Freight Waves

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