In this Supply Chain Matters posting we highlight published September 2022 indices of global supply chain volatility (GSPI) and US Logistics Index (LMI) activity trends along with our view of the implications.
In a prior Supply Chain Matters posting, we highlighted both September and Q3-2022 global and regional PMI indices. The takeaway for September was that global manufacturing activity officially fall below the 50.0 contraction threshold which is noted as the first time this has occurred since the depths of the global pandemic in 2020. Our conclusion from this latest data was that global supply chains have now transitioned away from supply driven contraction to that of product demand driven. This is a significant milestone for ongoing planning and execution strategies.
However, we would be remiss to not highlight some optimistic data related to overall global supply chain pressures and logistics costs.
GSPI Index Continue to Moderate
The Federal Reserve Bank of New York’s Global Supply Chain Pressures Index (GSPI) continued a moderate trending decline and reflected a fifth consecutive easing of monthly pressures. This index compiles 27 different variables to include transportation movement and costs, global PMI sub-indexes reflecting delivery times and order backlog. The index is such that a value of zero indicates pressures of normal value, positive values above zero are an indication of standard deviation above the average.
The reported September value of 1.05 was below the August value of 1.51 and the July value of 1.75. Report authors indicated that the September decline was quite broad-based. Further reported was that this index’s year-to-date movements suggest that global supply chain pressures are beginning to fall back in line with historical levels. They are certainly lower than the peak achieved by the end of last year.
While some multi-industry supply chain teams are likely continuing to experience and mitigate disruptions, particularly shortages related to semiconductor devices, this overall downward trending should be viewed as positive. As noted above, the not so optimistic news now rests with risks for product demand contraction.
U.S. Logistics Managers Index
The Logistics Managers Index Report®, compiled by researchers at Arizona State University, Colorado State University, Rochester Institute of Technology, Rutgers University and the University of Nevada Reno, and in conjunction with the Council of Supply Chain Management Professionals (CSCMP), reported a September value of 61.4, up from an August reading of 59.7.
Indicated in the report summary was:
“The sustained growth in the logistics industry continues to be fueled by high levels of inventory and the associated levels of cost and utilization associated with holding them. On the other hand, transportation metrics continue their slowed pace, reaching the second highest level of capacity growth, and the third fastest rate of price contraction in the history of the index. Interestingly, Transportation Utilization is the outlier here, as both utilization metrics in the index were up significantly in September.”
According to the September report, growth is increasing for inventory levels, inventory and warehousing costs. Contraction trending was noted for warehousing capacity and transportation costs including an observation that inventory is being consumed at a much slower rate than observed over the last two years. Report authors made specific mention of a current glut in available finished goods inventories with the Inventory Cost sub-metric reading of 77.2 for September. The Warehousing Capacity sub-index remained on a contractionary trend while the Warehousing Utilization metric reportedly reached its second highest reading in the history of this specific metric. Thus, there will be a lot of eyes focused on the coming holiday shopping season as multiple retailers increase efforts to clear out inventory and reduce carrying costs.
On the transportation side, the latest report features a graph that compares Transportation Capacity and Prices over a September ending two-year window. The report call attention to the fact that both indices have switched in one year. In September of last year, the spread of Transportation Prices to available capacity reflected a 55.1 percentage point difference favoring pricing power. One year later, there is now a 27.1 percentage point difference reflecting excess capacity and now, contracting prices for transportation.
As Supply Chain Matters noted in our most recent news capsule summary, Bloomberg reported that the global shipping boom has come to an end, while the CFO of A.B. Moeller Maersk observed that the industry’s multi-year windfall profit boom has likely come to an end.
Observations will not just be limited to retailers but to parcel carriers after FedEx’s stunning warning of a revenue and profitability shortfall in the carrier’s latest quarterly financial reporting.
There are some positives to consider in the trending of global supply chain pressures, and perhaps continued moderation of spot or contracted transportation freight rates. As we have noted in our September and Q3 PMI highlights commentary, more manufacturers and retailers will be focused on efforts to offload excess inventories over this final quarter.
The trending would indicate the likelihood of declining global supply chain activity levels extending into 2023 as well. By our lens, the most important metric to be watching are clearer signs of moderating supply chain induced cost inflation. Otherwise, industry supply chains will once again be forced into cost reduction mandates.
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