Without a healthy supply chain to support the production and delivery of products, companies lose sales.  How often should investors think about supply chains in the companies they own?  Delivering the right things in the right place at the right time is the uncelebrated practice of logistics or supply chain management.  The pandemic threw a wrench in the plans of many industries.  As businesses scramble to meet a rapidly growing demand, supply chain reliability has become a material risk to increasing earnings.  

The June survey from the Institute for Supply Management reported record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices, and difficulties transporting products across industries.  In the fabricated metal products industries, customers are placing orders out as far as spring 2022 to get into the queue.  Chemical businesses report running at record volumes, though they could be running higher, but for raw material limitations.  And labor availability complaints run across all industries. Even having products to sell may not be enough.  According to the National Tank Truck Carriers, 20 – 25% of trucks are parked for lack of drivers, leaving available products sitting on loading docks.  And railroads are restricting shipments through Chicago as bottlenecks from a flood of container imports stretch inland from the West Coast.  

Computer chip shortages initially affected the auto industry, where new cars require more than 100 semiconductors for touch screens, engine controls, driver assistance cameras, and other features.  When the pandemic led to a recession last year, carmakers cut back orders for chips while tech companies claimed as many chips as possible to support work-from-home products and services.   As auto demand ramps up, shortages are now affecting a growing number of non-automotive manufacturers, and the problem will worsen before it improves.  Chip manufacturers have announced plans for more production capacity, but fabrication plants have longer lead times.  Other product shortages include ketchup, in response to which Heinz increased production by 25%, and chicken, raising prices for chains like KFC and Buffalo Wild Wings.  

The National Association of Convenience Stores (NACS) recently conducted two surveys of U.S.-based convenience stores and their supplier partners, which reflected resource problems in multiple areas.  67% reported supply disruptions with beer, 76% say it is difficult to fill available positions, and 79% of retailers experienced delays with store equipment and hardware deliveries this year.  41% said they postponed equipment orders or construction projects altogether as a result.  Those are investments that didn’t get made.  Meanwhile, the direct effects of COVID are still in play.  Nike reported they could run out of shoes from Vietnam, the source of half their imports, where manufacturing at major plants has stopped recently due to coronavirus spreading through factories and communities.       

We see two outcomes unfolding now.  First, prices are increasing across the production process.  As raw material and other input costs rise, companies are raising selling prices to protect margins.  These price increases are sticking.  Second, we are witnessing the demise of the just-in-time globalized supply model and its associated savings.  Designed to reduce costs by sourcing from the least expensive producer and minimizing inventory, just-in-time inventory models left companies with little flexibility to react to events happening around them.  Instead, we expect a growing shift towards a just-in-case model carrying higher inventory and partnering with suppliers operating closer to the final buyer.  These shifts also adjust the dynamics between supplier and buyer.  Leverage will transition toward suppliers, who now have a material impact on input availability, and away from buyers, who want to meet growing demand.  The companies who manage this transition well will position themselves to compete in an increasingly less globalized economy.  

This is for informational purposes only and is not a recommendation to buy or sell a specific company listed..

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