The Supply Chain Matters blog highlights May 2021 global manufacturing and supply chain activity level reporting and current trending relative global product demand and supply network activity levels. The message remains that global supply chain activity is now at full throttle and warning signs are apparent.

Published indices reflecting May 2021 global and regional purchasing and manufacturing indices (PMI) reinforces that global production remains as it has been for several months, at full throttle. However, they panel descriptors of challenges and warnings have become more direct. A pervasive theme is that multi-tiered capacity constraints and surges in price inflation are becoming rather concerning.

Once again, achieving on-time customer satisfaction needs while meeting budgeted product cost and margin objectives remains a tall order. The thumbs-up of 2020 could well turn into the thumbs-down of 2021 regarding the perceptions on multi-industry supply chains.

 

May Ending Global Production and Supply Network Activity Levels

The J.P. Morgan Global Manufacturing PMI® report, a composite index produced by J.P. Morgan and IHS Markit increased to an eleven-year high level, with a reported value of 56.0 for May, compared to a 55.9 value for April. The report authors summed up the month’s global supply chain activity as in a strong upswing with manufacturers indicating further increases in output in the months to come. Commentary further indicated that average supplier lead times lengthened to the greatest extent in this survey’s history, which is a rather significant statement since that covers times of severe recession.

Reportedly, 24 out of 30 nations registered better business conditions. Bright spots included the Eurozone and the United States. Subdued growth was reported for China, Japan, India and Russia.

The five regions growing at the fastest rates in May were reported as Netherlands, Austria, the United Kingdom, Germany and Ireland. The five regions experiencing the lowest growth rates were reported as Myanmar, Colombia, Mexico, Thailand and Turkey.

Separately both Bloomberg and The Wall Street Journal indicated viewpoints that the May PMI data may reflect tentative signs that Asia’s export burst may be slowing because of rising inbound material costs, material shortages and extended supplier lead times. One exception was South Korea, where exports reportedly surged the most since 1988. That condition may be reflection of ongoing global semiconductor shortage.

As noted in the graph below, global output and activity levels remain at a six-year high and have far exceeded prior COVID-19 period levels:

Supply Chain Matters Global PMI Analysis

 

Highlights

Separately published individual country reports on May PMI indices similarly provided eye-catching bylines.

The IHS Markit Taiwan Manufacturing PMI indicated that production growth expanded at the quickest pace since January 2011. Reportedly, supply chain delays were described as severe, and Taiwanese manufacturers are attempting to build buffer inventories to protect output needs.  The report further noted “a substantial increase in total new work amid reports of greater customer demand both at home and across key export markets.Taiwan is the global epicenter of semiconductor along with high-tech components production.

 

IHS Markit Eurozone Manufacturing PMI® posted a value of 63.1 in May, noted as this index’s highest reading in survey history dating back to 1997.  That compared to 62.9 value reported for April. Improvement was noted in both consumer and intermediate goods categories, both categorized as near survey history highs. Deliveries from suppliers were noted as deteriorating at a “severe and unprecedented rate” and firms were utilizing their existing stocks whenever possible. Input costs continued to rise “substantially” with the rate of inflation reportedly reaching unprecedented levels in line with widescale product shortages. Bloomberg, commenting on this index, reported that European manufacturers ran down inventories of finished goods to the steepest degree recorded since November 2009.

 

The IHS Markit / CIPS UK Manufacturing PMI® May index reportedly surged to a record high as UK based output strengthened and new order volumes rose to a “near three-decade survey history”. Noted were record gains in new business as domestic and export demand continued to revive with the further re-opening of the UK economy. Backlogs of work were noted as rising to the greatest extent in this survey’s history leading to a record rise in manufacturer staffing levels. A further record shattering aspect was a sharp rise in purchasing costs, which led manufacturers to increase selling prices.

The IHS Markit U.S. Manufacturing PMI™ rose to a value of 62.1 in May, up from a 60.5 value in April. Authors noted that the increase in business activity was among the strongest in this 14-year series history, but component shortages and supplier delays reportedly limited operating capacity and stymied the upturn. Further reported was New Orders increasing at the fastest pace on record as both domestic and export demand rose to higher levels. The Manufacturing ISM Report on Business® for May was reported as 61.2, a 0.5 percentage point increase from the April value of 60.7. Authors of this report noted that record long lead times, wide-scale material shortages, rising commodity prices and transportation delays were collectively affecting all manufacturing segments. ISM panelists reportedly continued to cite significant challenges in attracting and retaining labor among internal and supplier facilities was limiting production. A specific statement noted: “The manufacturing recovery has transitioned from first addressing demand headwinds, to now overcoming labor obstacles across the entire value chain.”

 

China again provided mixed signals in terms of production. The Caixin China General Manufacturing PMI®, which is generally weighted toward smaller private manufacturers, rose slightly to a reported value of 52.0 in May, slightly higher than the 51.9 reported for April. The authors noted that expansion was supported by greater product demand both domestically and export related. That stated, panelists again pointed to further increased raw material shortages and logistical delays have drove declines in supplier performance and further deteriorating lead times.  The rate of inflation rose at the quickest rate since December 2016. China’s PMI index produced by the nation’s Bureau of Statistics, which tends to be weighted toward large enterprises and state-owned manufacturers, slipped slightly to a value of 51.0 in May from a value of 51.9 in April. The statistics bureau pointed to surges in prices of raw materials such as crude oil, iron ore and coal as driving the index of input prices to their highest level since November 2016. Total New Orders reportedly declined to their lowest level in a year with fewer export orders. Earlier this week, The Wall Street Journal reported that some Chinese manufacturers are refusing to accept new orders or our considering temporary shutdowns, because of surging raw material prices, ongoing global transportation delays and shortages of qualified workers. Reportedly manufacturers have attempted to pass thru higher costs in higher prices for foreign buyers, but the surge is so high that raising prices cannot make up the difference. The hope is that if manufacturers delay orders and production levels, they can ride out the current wave of surging costs.

Further of mention is the IHS Markit India Manufacturing PMI® which slid to a value of 50.8 in May from a value of 55.5 in April.  The headline of the latest report was that the Indian manufacturing sector was heading towards stagnation and a loss of recent momentum. The ongoing intensification of the COVID-19 virus impacting many regions of India is having an impact on product demand and supply needs.

 

 

Implications of May Data

As Supply Chain Matters opined in our summary of the April PMI data, the warning sirens remain blaring for multi-industry product demand and supply networks. Robust product demand from all three sectors of investment, intermediate and consumer goods continues to fuel existing and new order growth. The May data now more clearly reflects increased headwinds in commodity and components shortages. Those shortages have now resulted in signs of a lack of flexibilities in production and transportation capacity because of either increased labor shortages or ongoing disruptions.   Regarding labor shortages, think back to the period prior to the pandemic, when many manufacturing, supply chain, supplier and IT support teams were already indicating that talent gaps were hindering efforts. More talent was impacted by the initial demand and supply shocks of the pandemic, causing layoffs and furloughs. Now, as the post-COVID demand cycle continues to explode, the shortfalls in talent are more telling.

More dynamic and flexible production capacity management processes have now become more apparent, and some manufacturers may not have such capabilities available, especially those still dependent on legacy software applications or spreadsheets.

Supply chain disruptions continue to reverberate across senior business management levels as manufacturers, retailers and other businesses report their financial and operational performance. CEO’s and CFOs explicitly mention supply chain related challenges in the context of shortfalls or risks to revenue performance. In the May PMI data, and in recent business media reporting, price inflationary conditions are mentioned more prominently.

We further sense that in certain industry sectors, particularly automotive and high-tech supply networks, the bullwhip effect is in play as direct material procurement teams exercise every available channel to secure needed supply. Already, semiconductor device manufacturers are pushing back on automotive industry buyers in their multiple orders and are instead demanding firm longer-term supply commitments for needed devices.  There will surely be other such responses from key suppliers of in-demand materials and components.

For the remainder of this year, and perhaps into the first half of next year, planning will have to be more scenario-based, comparing lots of ongoing variables and uncertainties into what plans can meet expected business results.

The themes of the May global production and supply chain indices would imply that manufacturers, retailers and businesses and their sales and operations planning teams could benefit by a temporary breather in activity, allowing needed time to realign planning, processes, capabilities and longer-term planning. That luxury does not appear on the immediate horizon.

 

Bob Ferrari

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