The Supply Chain Matters provides a supplemental commentary related to the implications of rapidly rising inbound costs for industry supply chains.

 

In a Supply Chain Matters commentary published earlier this month, we highlighted for readers that the implications of rapidly rising producer prices and end-product consumer goods inflation on industry supply chains.

We indicated that the implications of unprecedented, elevated levels of inflation levels will vary by specific industry, but taken as a whole, they present a number of complex product management, procurement and supply chain planning challenges that will need to be tackled. While some corporate CFO’s will not resist the inducement to raise product prices like others, there comes a point where higher prices modify buyer behaviors, either in seeking other choices, cheaper product alternatives or deferring buying decisions. That adds to the uncertainties in product demand planning for the remainder of 2022.

We wanted to call reader attention to another reinforcement of such concerns. The Wall Street Journal reported this week (Paid subscription or metered view) that billions of dollars of inventory still residing on ocean container vessels and seaports is compelling procurement buyers and suppliers to have to extend their payment terms or obtain added financing because of the added inventory carrying costs for goods-in-transit.

The report observes that in December 2021, U.S. merchants held a total of nearly $643 billion in inventories, described as being below pre-pandemic level, while the closely watched inventory to sales remained near its lowest point in 30 years.

With the on-time arrival times of container ships down to a level of less than 36 percent, and with ocean transit times from Asia to U.S. West Coast ports currently averaging over 100 days, more inventory is sitting on ships and not able to be sold.

The result s that large businesses, and particularly small and medium businesses are incurring both lost revenues in addition to significantly higher transportation and logistics costs. The report cites data from RapidRatings International indicating that companies with $10 million to $50 million in revenue, average inventory levels grew to 103 days during the second quarter of 2021.

Another recently published survey revealed that middle market companies are struggling to navigate current supply chain disruption. Year-end 2021 data from casualty insurance provider Chubb and the National Center for the Middle Market (NCMM), housed at The Ohio State University Fisher College of Business, reveals that middle market firms’ optimistic economic outlook and continued recovery from the pandemic is tempered by concerns around navigating a complex risk landscape. According to Chubb and NCMM’s 2021 Year-End Middle Market Indicator (MMI), more than a third of middle market firms rank increased risks among the top three most difficult aspects of running their business in the current environment. Further indicated was that supply chain challenges provide a significant hurdle, with reportedly nearly half of middle market firm, and upwards of 59 percent of middle market manufacturers having been directly impacted by supply chain disruptions and constraints in the prior six months.

As Supply Chain Matters stated in our prior commentary, while the challenges are significant, they can be addressed with higher levels of cross-functional and cross-business collaboration under the umbrella of a much more active integrated business planning process that spans operational, tactical and strategic dimensions.

Industry supply chains should not assume that just-in-time inventory management flows are the cure for increased cost efficiencies. Instead, inventory flows have to analyzed and weighted for supply network risk and transportation variability factors. For the remainder of 2022, increased inventory carrying costs and cash management are going to be the subject of integrated business planning team discussions and decision-making.

 

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