Using the Logistics Managers’ Index to Predict the Future of the Market

By James Daniels

Economists have a wide range of tools and techniques available to them for assessing economic growth. Measuring and predicting the state of economic markets is more complicated than many people realize, as evidenced by the multitude of different tools that are used to do so. Now that online shopping is so common, the volume and quality of data available to economists have both increased rapidly. With everyone’s shopping habits now largely or entirely digitized, it is much easier to track what’s going on, on both an individual and societal level.

The Logistics Managers’ Index is the culmination of a years-long collaboration between a number of academics around the world. With Covid-19 now forcing people to once again review their spending habits and shaking up global markets, a tool like the LMI is more important than ever before. A better understanding of how our economy is reacting to Covid-19 and the direction that it is likely to move in in the near future are both invaluable.

Who Is Involved?

The LMI was devised by a group of US-based academics over the last four years or so. Those academics are:

• Dale Rogers from Arizona State University
• Zachary Rogers, assistant professor at Colorado State University
• Shen Yeniyurt from Rutgers University
• Steven Carnovale from the Rochester Institute of Technology
• Ronald Lembke from University of Nevada, Reno 

What Is LMI for?

• Tracking: The primary function of the LMI is to enable economists to more accurately track the movements of the global logistics industry. According to LMI’s creators, this is important because many of the metrics that are used to track the logistics industry are also useful general economic indicators. This means that changes in the logistics market often serve as upstream indicators of other impending economic changes, rather than just being indicative of movements at the consumer level.
• Measure consumer spending: According to its creators, LMI is a much better indicator of what’s going on with individual consumer spending, especially as the US economy has moved closer to a service-based economy. Any business that is expecting to expand imminently will have to secure the appropriate storage and transportation services.

How Is It Updated?

Because of the metrics that the LMI uses, it provides an accurate picture of the movement and storage of goods as they travel from manufacturers and distributors, but before they reach the end consumer. This is achieved by monitoring economic shifts in logistic components. The researchers that maintain the LMI speak to over 100 logistics professionals on a monthly basis, gathering their responses to a number of key metrics.

What Does the Survey Ask?

The monthly LMI service asks respondents to report the current and future state of the following metrics:
Once the data from all of the respondents have been gathered together, they are then combined and analyzed to update the LMI. New versions of the LMI are released every month on the first Tuesday of each month.

• Inventory levels
• Inventory costs
• Warehouse capacity
• Warehouse utilization
• Warehouse prices
• Transportation capacity

What Has the LMI Taught Us?

The LMI has already provided us with some insights into the uneven impact that Covid-19 has had across the global economy. Retailers that have been able to remain open and keep trading have, of course, fared much better than those that have had to close. However, the LMI has revealed some other interesting facts about the impact of Covid-19 on the global economy:
What Does This Mean for the Transportation Sector?

• Warehousing capacity has increased significantly over the last year. Prior to the last 2 months, any business that needed to find more warehouse space would have no trouble doing so. However, this has changed in the last 2 months as capacity has nosedived massively. It is now imperative that manufacturers find ways to store more, potentially for the long-term. Warehouses are continuing to be utilized heavily by businesses, and prices have continued to rise accordingly.
• Manufacturers and producers of goods have continued to report rising inventory levels. This is being driven in large part by the impact of Covid-19, which is causing inventories to build up around the world. However, some retailers who are still open and are able to keep selling have seen the inventory levels decrease. Some businesses are also being forced to either sell off stock at below market rates, or look at alternative means of disposing of stock that won’t keep.
• Transportation is the logistics sector that has been impacted the most dramatically by Covid-19. Despite many respondents reporting a scarcity in transportation capacity as late as March, the situation seems to have turned around in April. Transportation capacity has increased significantly.

At the beginning of the pandemic, transportation utilization had been on a steady increase. However, it has now fallen precipitously as fewer goods are being shipped around the country. This has meant that transportation capacity is now much more available than it has been as the utilization of said capacity has dropped off. This drop off in utilization has been accompanied by a reduction in prices which have also fallen dramatically in recent months. The LMI has shown an overall trend towards more online shopping over the last few years. Despite many people’s predictions, it seems like the pandemic has in fact temporarily slowed the advance of that trend.

Amazon Impact

Amazon is a typical example of a retailer that has managed to escape the worst of the pandemic. Amazon has proven to be a valuable lifeline for many consumers who are currently unable to go and buy products physically. While many people assumed that the advent of Covid-19 would lead to an explosion in online shopping, it seems that any such explosion quickly fizzled out.

In practice, while there may be more people looking to shop online than before, Amazon is still reliant upon human workers. Those human workers are impacted by the pandemic, as reflected in absences and other logistical challenges. This has forced Amazon to reprioritize the items that it ships out, giving priority to essential goods rather than simply trying to sell as much as they can.

LMI in the Future

So far, LMI has succeeded in achieving its main goals and is proving to be an invaluable resource for a better understanding of the logistics market. It has been well over a decade since two of the principal architects of LMI, Lembke and Rogers, first started the research that would evolve into LMI. Their goal was to establish a metric that would enable them to quickly and easily measure the current relative levels of transport capacity across the United States. It was a combination of this research and efforts to establish a national truck pricing index that would ultimately lead to the emergence of LMI.

PMI & LMI

For a long time, MBA courses with a focus on engineering or logistics, like this course from Kettering University Online, have placed a great emphasis on the Purchasing Managers Index as an economic indicator. The Purchasing Managers Index is focused mostly on manufacturing. By combining the two indexes together, both of which are based on data collated from a monthly survey, deeper insights can be gleaned. Both of these indexes also utilize diffusion indexes as a means of analyzing managers’ responses and measuring whether economic activity associated with each index is trending upwards or downwards.

But whereas the PMI is focused almost entirely on the manufacturing sector, the LMI is more focused on the logistics sector. The LMI can indicate the current and future state of key logistics activities such as warehousing, inventory, and transportation. Using the LMI, it is possible to determine whether the logistics market is likely to expand or contract. Combining this with the PMI then enables researchers to gain insights into related sectors like manufacturing.

Beginning in November 2016, the LMI team has been publishing monthly reports, sponsored by the Council of Supply Chain Management Professionals. CSCMP also posts a copy of the report to their own website so it is easily available to anyone that wants to read it. Making this key indicator freely available for anyone to use increases the chances of citizen scientists taking the data and putting it to a hitherto unimagined use. It could potentially form the basis of other new economic indicators.

Given that we still don’t know what the full long-term impact of Covid-19 will be, it is important that we have the tools to appropriately monitor the situation. The Logistics Managers’ Index gives us an accurate tool for assessing the current and future state of the logistics market in the United States. Logistics are at the heart of every other business sector. Without a healthy logistics infrastructure, online retailers like Amazon cannot ship their goods to consumers. What’s more, regular brick-and-mortar retailers will be unable to fill their warehouses without logistical support.

Predicting the future is always a tricky proposition. No matter how good your tools and data are, it is all but impossible to speak about the future with any degree of certainty. However, the LMI is showing promise as a tool for predicting the future of the logistics market.

About the Author

James Daniels is a freelance writer, business enthusiast, a bit of a tech buff, and an overall geek. He is also an avid reader, who can while away hours reading and knowing about the latest gadgets and tech, whilst offering views and opinions on these topics.