The surge in American demand for consumer goods coupled with logistics bottlenecks around the world have led to uncomfortably low retail inventories as stores scramble to get goods on their shelves. As retailers try to bring a surge of imports into their distribution centers, they are exceeding the capacity of logistics providers to move them through choked hubs like the Union Pacific Global 4 intermodal terminal in Joliet, Illinois outside of Chicago. A shortage of truck chassis means its difficult to get containers out of the terminal to warehouses, that in turn leads to congestion that makes it is difficult to unload trains. According to a recent discussion hosted by the Journal of Commerce on top importers, that means the traffic has backed up to the marine terminals in Los Angeles and Long Beach, and to a lesser extent Seattle/Tacoma. That’s why now would be a good time to understand what we mean by pipeline inventory.

Pipeline inventory are the goods that are in-transit between different links in a supply chain. It may be inbound to a manufacturer in the form of raw materials or parts, or it may be finished goods on the way from a factory to a retail or online distribution center and ultimately a store or some other point of purchase. Some manufacturers also call goods that are on their way to the buyer in-transit inventory, if it hasn’t been received yet and ownership hasn’t changed hands.

The reason this is a good time to think about pipeline inventory is because there is a lot of it out there, and logistics disruptions are causing it to build up. All those containers stuck at UP Global 4 are pipeline inventory for somebody, and rail congestion out of West Coast ports means pipeline inventory is building up there (and remember it’s on trucks and trains as well). The Port of Los Angeles Signal report for last week projects import volumes up 54.9% this week and 71.6% next week, with big jumps in on-dock and off-dock rail containers. So that furniture or freezer you are waiting for might be sitting in a container stack in a yard somewhere.

That pipeline inventory goes well beyond the West Coast. Los Angeles/Long Beach terminals have been catching up on the import surge, working through a backlog of ships waiting to unload that earlier this year had regularly approached 40 at anchor. But the recent disruptions in southern China means more inventory unable to move. There were an estimated 300,000 TEUs of export containers waiting to be loaded at terminals in the Shenzhen area, with a backlog building every day at the Yantian International Container Terminal (YICT) which was operating at 70% of capacity as it recovered from a Covid-19 outbreak. That means pipeline inventory is increasing! 60 ships were waiting for pickups and many others bypassed the port. Meanwhile with limited alternatives, some firms are turning to air cargo to get their goods out.

What happens to all that pipeline inventory?

The key question is will those goods stuck in pipeline inventory make it to the consumer while the demand is still there? The recent precipitous collapse in lumber prices suggests that as Americans shift towards a more normal consumption pattern, we might end up with a lot more of some goods than retailers planned. Neglect of pipeline inventory, or increased ordering to make up for the pipeline lag, is one of the major causes of the bullwhip effect in supply chains. Sophisticated retailers like Walmart or Target are probably always on top of how much inventory they have in the pipeline, but the challenge is will the demand still be there when those goods finally arrive? For fashion retailers, this could be “Hello, TJX” as they end up looking for help to liquidate excess inventory.

If there is one thing that we should learn from all of this is that when you exceed the capacity of a system, you don’t get very good performance. We have exceeded the capacity of our marine terminals, our rail intermodal terminals, our trucking networks, and many of our distribution centers. Typically we have some slack capacity to handle surges, but shippers have been running flat out since last August, in the face of Covid-19 infections, labor shortages, and disruptions like weather. When you run things at the redline or beyond for so long, things break down. It’s a challenging time to be in the global logistics business.
Source: Forbes