Increases in stocks due to the crisis in the supply chain and global trade

The Omicron outbreak in China in late 2021 led to lockdown measures in many cities and ports (The Wall Street Journal singles out the port of Tianjin, the cities of Xian, Yanan, and Shenzen, among others), generating supply chain delays that are impacting several sectors and industry giants. This strict containment of the outbreak is also influenced by the start of the Beijing Winter Olympics in February. China isolates entire cities, and with it, the world that depends on its products begins to feel stressed.

Toyota, Volkswagen, and chip factories are experiencing significant delays due to the restrictions, starting to create bottlenecks in product deliveries, and the ports of Shanghai, Ningbo, Shenzhen, and Guangzhou have been experiencing delays since late 2021.

The new strain of COVID-19 is impacting the ports of Los Angeles and Long Beach in the US and the UK, where a shortage of truck drivers is also preventing the flow of goods to market (a unique phenomenon...there are no truck drivers).

Another factor that jeopardized international trade in the last quarter of 2021 was the container crisis, due to the reactivation of demand after the global inactivity of 2020 and the traffic jams and bottlenecks at major ports. These events grounded many containers of goods and, because they could not be cleared from their destination ports, grounded maritime containers on the US East Coast. Even at the beginning of 2022, the shortage of containers is still being felt, along with the rising cost of their supply.

This cocktail impacts the efficiency of the global supply chain, increasing maritime logistics costs and contributing to a certain extent to the rise in inflation that is occurring in the global economy (in addition to other factors, such as the stimulus programs that injected money to sustain the economy during the worst of the pandemic and Biden's $3 trillion plan for infrastructure improvements).

Given this outlook, and seeing that the outlook points to a worsening situation at least in the first half of 2022, companies are increasing their protective or safety stocks to avoid shortages and production line shutdowns (especially in the West). This is a logical reflex, but one that can have negative financial consequences if demand isn't maintained in the short term.

Many companies, accustomed to working with Just-In-Time methodologies or handling critical imported inputs, were forced to hire external warehouses to overcome the contingency. However, with the volatility of delivery times, they are now considering new procurement strategies, from locating nearby sources of supply, contracting storage at origin, or even investing in new warehouses.

This acceleration in demand, due to the buildup of safety stocks and occurring in just a few replenishment cycles, can generate a bullwhip effect on demand, creating a production bubble upstream in the supply chain that could abruptly burst within a few months and generate further distortions in distribution and at the factories of origin. It is very important to identify and coordinate information at all stages of the chain to ensure we can adjust sales projections for the coming months and minimize the financial impact of tying up large amounts of capital or missing demand and starting to generate excess and obsolete inventory.

(sources: WSJ, Nius Diario, Libre Mercado).

Lucas Garcia (SC Tank Editor)