Inventories drop with no signs of softening demand: ISM

Date: Thursday, March 4, 2021
Source: Supply Chain Dive

  • Manufacturing inventory levels declined in February following four months of growth, as supply chain delays and slowing supplier deliveries have dealt a blow to the industry, according to the latest figures from the Institute for Supply Management's manufacturing report.
  • The inventories index dropped to 49.7, down from 50.8 in January. Any figure under 50 represents contracting inventory. And customer inventories were also reported as being too low, an indication purchasing companies are facing continued demand.
  • "On the general comments, 46% were related to supply chain issues and or pricing impacts; no comments at all about demand softening," ISM Manufacturing Business Survey Committee Chair Timothy Fiore said.

Supply chains have been dealing with delays for months now. The manufacturing industry is facing them on multiple fronts, from port congestion to shortages of critical materials such as semiconductors.

"It's definitely having an impact," Fiore said of the supply restrictions. "No doubt about that."

One issue has been schedule reliability in the ocean shipping industry, which dropped to just under 35% globally for January, according to Sea-Intelligence, the lowest level dating back to 2011 when Sea-Intelligence began keeping records. As ships take longer to berth, supplies take longer to get into warehouses, and lead times lengthen.

Labor availability is another issue that manufacturers are facing as a result of the coronavirus pandemic. Multiple panelist companies noted that their suppliers were struggling to get the labor needed to keep up with orders, Fiore said.

"Things are now out of control. Everything is a mess, and we are seeing wide-scale shortages," one panelist company in the electrical equipment and appliances sector told ISM.

The shortages include ocean freight, corrugated boxes, gloves and dozens of other products. These shortages are pushing up the price for most of the commodities that ISM asks its panelist companies about.

Fiore noted that prices hikes on commodities are usually passed along to the customers at a higher rate than they were purchased, so it actually ends up boosting a panelist company's profitability.

"I see it as a good thing," he said of the rising prices. "I think last month I mentioned that, at some point, it could constrain growth. But I don't think that's the issue right now. I think ... in Q2 you're gonna see a lot of companies pushing the price growth through to the customers."

One of the commodities experiencing price increases is lumber, which home improvement retailers have mentioned in recent calls with investors.

"Lumber is at record highs," Home Deport COO Ted Decker said at an investor conference this week. "Right now we're over a thousand dollars [for] a thousand board feet — that's up roughly one and a half times from last year."

Lowe's noted that price increases in the lumber market drove up their inventory values by $240 million.

"Largely, those are passed on ultimately to the consumer at the store," Lowe's CFO David Denton said last month talking about lumber prices.


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