Retailers, producers over-ordering amid provide chain disaster

Shipping of containers at the Port of Los Angeles in Los Angeles, California, USA, on Wednesday, October 13, 2021.

Kyle Grillot | Bloomberg | Getty Images

Retailers and manufacturers are over-ordering or placing orders too early amid panic over the massive supply chain crisis, and that makes things a lot worse, industry officials told CNBC.

“All of a sudden, retailers and manufacturers are over-ordering because of these supply chain issues, and that only leads to an essentially worse scenario,” Jonathan Savoir, CEO of supply chain technology company 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 that led to port closures.

That has gotten worse as demand soars as economies reopen after the worst of the pandemic.

The energy crises in mainland China and Europe are the most recent to shake the shipping industry.

China’s power shortage caused widespread disruption when local authorities ordered power outages in many factories. Europe is also struggling with massive gas shortages.

However, Savoir said the retailer overstock situation is leading to greater capacity constraints, leading to what he termed the “bullwhip effect”. This is a term that describes how small changes in demand at the retail level can cause increasingly larger movements in demand that affect wholesalers, distributors and manufacturers. The raw material supplier will feel the greatest impact.

With the problems known, raw materials, parts and finished goods are now being ordered earlier than usual, adding to the queue and creating a vicious circle.

The end result of this effect can be skewed demand forecasts and unfulfilled orders.

RBC Wealth Management also pointed out a similar problem in a notice dated October 15.

“Because the problems are known, orders for raw materials, components and finished goods are now being placed earlier than usual, which extends the queue and creates a vicious circle,” the statement said.

As the holiday season approaches, supply chain industry officials are warning that there is likely to be a shortage of goods or prices will skyrocket due to high demand and low supply.

The supply chain crisis is expected to affect growth worldwide, with the International Monetary Fund lowering its global growth forecast last week. She cited supply chain disruptions in advanced economies as one of the factors.

“The bottlenecks are unlikely to go away overnight,” wrote RBC Wealth Management.

The company’s data analytics team, RBC Elements, conducted a study in September that found that 77% of the major ports it monitored had “abnormally long” turnaround times and that this general global supply chain problem was “clearly getting worse”.

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