Insight & Analysis

Corporates take stock of supply chain issues

Published: May 2022

Despite their best efforts to increase supply chain efficiency, many corporates see no alternative to raising inventory levels as conflict in Ukraine and lockdowns in China continue to bite.

Goods stock warehouse for supply chain

Companies have implemented various initiatives to reduce the impact of the pandemic on the movement of goods, ranging from renegotiating their logistics costs and exploring alternative shipping routes to switching to local suppliers and reducing the product lines or services they offer.

At the end of last year there appeared to be signs that the worst of the disruption was over. However, Russian military aggression and China’s zero-Covid policy have ramped up the pressure on supply chains.

The latest edition of the BNP Paribas global supply chain disruption tracker notes that lockdowns in China are likely to intensify and their effect has started to filter through to logistics data. Truck transportation and logistics park throughputs in China are 27.6% and 36.5% lower than this time last year respectively.

The bank reckons further deterioration is possible and that the ripple effects of these lockdowns will take some time to appear elsewhere in the world, lengthening the duration of global supply chain disruptions.

In the West the impact of the Russia-Ukraine conflict is becoming visible to European companies. As many as 100 ships have reportedly been unable to leave Ukrainian waters since the start of the invasion.

According to BNP Paribas, new orders are outpacing inventories to varying degrees in different countries, while indices of supplier delivery times remain elevated across the board. With supply chain pressures persisting, the bank expects normalisation of delivery times to take longer.

Last week, auto maker Skoda said deliveries were down by more than a quarter in the first three months of 2022 with finance board member Christian Schenk referring to supply chains “being disrupted - in some cases significantly - due to the war in Ukraine.”

In the UK, retailer McColl’s collapsed citing the impact of rising costs as a result of supply chain disruption.

Earlier this week, Adidas CFO Harm Ohlmeyer said his company expected supply chain costs to rise strongly in this financial year with freight costs per unit doubling in 2022 and announced a fall of 1.9% in gross margin due to ‘a significant increase in sourcing and freight costs’.

Meanwhile, a new survey from BDO suggests domestic supply chain disruption is the biggest challenge facing businesses over the next six months, above even the rising cost of living in terms of its impact on business costs and revenues.

Some of the world’s largest corporates have responded by increasing inventory levels, placing a further nail in the coffin of just-in-time procurement.

On its latest earnings call, 3M acknowledged that it was managing extended lead times and elevated inventory levels, while Hershey CEO Michele Buck told analysts that “increasing production, inventory and service levels remain a critical priority”.

Caterpillar’s first quarter report referred to significant changes in dealer inventories, with dealers increasing inventories at a faster rate during the first quarter of 2022 than during the same period last year.

Last month, PepsiCo revealed that it took a US$241m charge in the first quarter related to inventory write-downs due to the Russia-Ukraine crisis.

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