December 2025 delivered one of the most perplexing developments in recent supply chain history: inventory levels crashed to an all-time low while inventory costs remained stubbornly elevated. This counterintuitive dynamic—a 27.8-point gap between falling volumes and rising costs—reveals fundamental shifts in how enterprises manage inventory strategy amid tariff pressures, lean operations, and structural cost inflation.
Historic Inventory Drawdown Shatters Records
The Logistics Manager's Index (LMI) recorded December's inventory levels at 35.1, marking the lowest reading in the index's entire history. The 17.4-point month-over-month decline from November's 52.5 represents the largest single-month movement ever recorded for this metric, surpassing the previous all-time low of 41.9 set in July 2023.
The velocity of this drawdown proved even more dramatic than the final reading suggests. Early December inventory levels plummeted to 28.2—which would have represented an even more extreme record low—before moderating to 42.9 later in the month. This unprecedented sell-through reflects the culmination of retailers' lean inventory strategies, which prioritized aggressive holiday season sales over maintaining buffer stock.
According to the December 2025 LMI Report, downstream respondents (primarily retailers) reported the most dramatic inventory shift, with levels dropping from 65.8 in November to 34.1 in December—a staggering 31.7-point decline. This validates the just-in-time inventory approach many retailers adopted throughout 2025, building inventory only in October and November before aggressively selling through in December.
The Inventory Cost Paradox Explained
While inventory volumes reached historic lows, inventory costs told a starkly different story. Despite the record depletion, inventory costs remained in expansion territory at 62.9 in December—down from November's 70.8 but still representing significant cost pressure. The resulting 27.8-point gap between inventory costs and inventory levels creates what supply chain analysts are calling the "inventory cost paradox."
Multiple factors drive this widening spread between volume and cost. Tariff impacts are the most significant contributor, with over $200 billion in tariffs collected throughout 2025, adding direct costs to goods regardless of inventory volumes. The removal of the de minimis exception in August 2025 particularly affected smaller shipments, resulting in a 54% decline in sub-$800 imports.
Storage and handling fees for remaining inventory continued climbing despite lower utilization rates. Warehousing prices expanded 3.3 points to 66.2 in December—a metric that has never contracted in LMI history. This demonstrates structural cost pressures in warehousing operations that persist regardless of demand conditions.
Transportation costs for moving inventory downstream also factor into the inventory cost equation. With transportation prices reaching 66.7 in December—the highest level since January 2025—the expense of distributing lean inventory from centralized locations to retail endpoints added significant per-unit costs.
Warehousing Dynamics Reflect Inventory Volatility
The warehousing sector experienced its own paradox in December, with utilization hitting a second consecutive all-time low while capacity expanded at the fastest rate in over two years. Warehousing utilization fell to 42.9, marking the second straight month at a historic nadir. Early December conditions proved even more severe, with utilization contracting to 37.5 before moderating to 48.6 later in the month.
Available warehousing capacity jumped 6.4 points to 61.2—the fastest expansion since July 2023 at the height of the previous freight recession. However, this surge reflects dynamic inventory movement rather than static storage demand. Goods moved quickly through warehouses to retail locations and ultimately to consumers, creating available capacity without reducing overall facility utilization costs.
U.S. warehousing vacancy reached 7.6% in Q3 2025, exceeding the pre-pandemic average of 7.1%. This elevated vacancy rate reflects both the completion of facilities from the early-decade construction boom and ongoing manufacturing slowdowns that reduced demand for storage space. Research from supply chain industry publications indicates that manufacturing PMI remained below the 50% expansion threshold at 47.9%, contributing to subdued industrial warehousing demand.
Upstream Versus Downstream Strategy Divergence
The inventory cost paradox reveals a fundamental strategic divergence between upstream suppliers and downstream retailers that will shape 2026 supply chain dynamics. Retailers demonstrated throughout 2025 that lean inventory strategies can succeed even in volatile markets, building just enough stock to meet holiday demand before aggressively selling through.
For 2026, downstream enterprises predict maintaining lean inventories at 50.0—essentially flat growth—attempting to replicate their successful 2025 low-inventory approach. This strategy minimizes capital tied up in inventory and reduces exposure to obsolescence, but requires exceptional demand forecasting and supply chain responsiveness.
Upstream suppliers, conversely, predict robust inventory expansion to 63.0 over the next 12 months. This divergence likely reflects suppliers' desire to improve cash flow through faster inventory turnover and their need to maintain buffer stock against potential downstream stockouts. The tension between these opposing strategies could create supply chain friction if downstream demand exceeds retailers' conservative inventory plans.
Financial Implications of Elevated Inventory Costs
The persistent elevation of inventory costs despite record-low volumes carries significant financial implications for enterprises. Traditional inventory management metrics like days of inventory outstanding (DIO) and inventory turnover ratios may appear favorable due to low volumes, masking the underlying cost pressures that compress margins.
Chief Financial Officers face particular challenges in this environment. While lower inventory volumes improve balance sheet efficiency and reduce working capital requirements, the elevated per-unit costs mean that even lean inventory carries higher absolute dollar values than historical norms would suggest.
Cost allocation becomes critical when inventory costs exceed traditional benchmarks. Enterprises need granular visibility into which cost components—tariffs, storage, transportation, or handling—drive the elevated expenses. This detailed understanding enables targeted mitigation strategies rather than broad-brush cost-cutting that might inadvertently damage service levels.
Strategic Inventory Management for 2026
The December inventory paradox provides clear lessons for 2026 planning. Enterprises must recognize that lean inventory strategies, while effective for managing volume, do not automatically translate to cost control in a high-tariff, elevated-transportation-cost environment.
Scenario planning becomes essential given the divergent predictions from upstream and downstream enterprises. Supply chain teams should model multiple inventory scenarios: maintaining current lean strategies, modest inventory buildup to buffer against potential supply disruptions, and aggressive inventory expansion if demand exceeds conservative forecasts.
Supplier collaboration becomes even more important when upstream and downstream strategies diverge. Transparent communication about inventory plans, demand forecasts, and replenishment triggers can help align strategies and prevent costly stockouts or excess inventory situations.
Technology investments in freight data management and inventory visibility provide the real-time insights needed to execute dynamic inventory strategies. Rather than relying on static safety stock formulas developed in more stable cost environments, enterprises need systems that continuously optimize inventory positioning based on current cost structures, demand signals, and supply chain constraints.
Cost Allocation Precision Drives Inventory Decisions
In high-cost inventory environments, precision in cost allocation determines whether enterprises can accurately assess inventory profitability. Traditional approaches that allocate costs based on volume or weight may systematically misstate the true economics of different inventory categories.
Normalized freight audit data enables enterprises to assign actual transportation costs to specific inventory movements, revealing which products, lanes, or distribution strategies carry disproportionate expense. This granular visibility supports more informed decisions about which inventory to hold, where to position it, and how aggressively to turn it.
Advanced analytics can quantify the total cost of inventory ownership, incorporating not just purchase price and storage but also inbound transportation, tariffs, handling, and downstream distribution expenses. This comprehensive view prevents false economies that minimize one cost component while inadvertently inflating others.
Navigating the Paradox
December 2025's inventory paradox—record-low volumes coupled with record-high costs—challenges conventional supply chain wisdom that lower inventory automatically reduces expense. The 27.8-point gap between inventory levels and costs demonstrates that in today's tariff-impacted, capacity-constrained environment, volume management and cost management require distinct strategies.
For enterprises managing complex global supply chains, success in 2026 depends on moving beyond simple inventory reduction goals to embrace comprehensive cost visibility. Companies that invest in systems providing granular insight into all inventory cost components—from tariffs to transportation to warehousing—will make more informed strategic decisions about inventory positioning, supplier relationships, and distribution strategies.
Ready to gain comprehensive visibility into your inventory costs and optimize your supply chain strategy for 2026? Contact Trax today to learn how our freight audit and data management solutions provide the detailed cost allocation insights you need to navigate high-cost inventory environments.