Retailers, manufacturers over-ordering amid supply chain crisis
Shipping containers in the Port of Los Angeles in Los Angeles, California, U.S., on Wednesday, Oct. 13, 2021.
Kyle Grillot | Bloomberg | Getty Images
Retailers and manufacturers are overordering or placing orders too early amid panic over the massive supply chain crisis, and that’s making things much worse, those in the industry told CNBC.
“Suddenly, retailers and manufacturers are overordering because of these supply chain issues, and that’s just leading to essentially an even worse scenario,” Jonathan Savoir, CEO of supply chain technology firm Quincus told CNBC’s “Squawk Box Asia” on Monday.
Supply chains everywhere have been hit by massive disruptions this year, from container shortages to floods and Covid infections setting off port closures.
That’s gotten worse because demand is rocketing, as economies reopen after the worst of the pandemic.
The energy crises in mainland China and Europe are the latest to roil the shipping industry.
China’s power crunch caused widespread disruptions as local authorities ordered power cuts at many factories. Europe is also grappling with a massive gas shortage.
However, Savoir said the situation of retailers overstocking is causing a bigger crunch on capacity, and leading to what he called a “bullwhip effect.” That’s a term describing how small changes in demand at the retail level can progressively cause larger movements in demand to impact wholesalers, distributors and manufacturers. The supplier of raw materials will feel the biggest impact.
Because the problems are well known, orders for raw materials, component parts, and finished goods are now being placed earlier than normal, which is lengthening the queue, creating a vicious cycle.
The end result of this effect could include distorted demand forecasts and unfulfilled orders.
RBC Wealth Management also flagged a similar issue in an Oct. 15 note.
“Because the problems are well known, orders for raw materials, component parts, and finished goods are now being placed earlier than normal, which is lengthening the queue, creating a vicious cycle,” the firm said in the note.
As the holiday season approaches, those in the supply chain industry have warned that there’s likely to be a shortage of goods, or prices will rocket due to high demand and low supply.
The supply chain crisis is expected to hit growth worldwide, with the International Monetary Fund cutting its global growth forecast last week. It cited supply chain disruptions in advanced economies as one of the factors.
“The bottlenecks are unlikely to disappear overnight,” RBC Wealth Management wrote.
The firm’s data analytics team, RBC Elements, conducted a study in September which found that 77% of the major ports it monitored were experiencing “abnormally long” turnaround times, and that this overall global supply chain problem was trending “unequivocally worse.”