Overview of the Supply Chain

This article is provided by ITR Economics in partnership with Sheet Metal & Roofing.

An Improving Supply Chain

The Global Supply Chain Pressure Index indicates that supply chain conditions were less tight than average for the first time in over three years in February and March. The Index data history goes back to the late 1990s. In the months leading up to the pandemic, conditions were trending at about average. Conditions were tighter than average in the 36 months from early 2020 to early this year. A less-tight supply chain does not mean there are no challenges; many manufacturers are still having difficulty finding one essential component for their products, a “golden screw.”

The Softening Economy

Rise is slowing for both the US economy and many global economies. For the US, we are anticipating a recession across most major sectors, primarily in 2024. Contraction is already occurring in residential construction, and it will arrive by 2024 for retail and business-to-business activity. Nonresidential construction will contract later in 2024 and in 2025. While this period of economic weakness will be milder than the Great Recession, it will hinder demand for consumer-facing goods, capex, and manufacturing inputs. This will result in less stress on supply chains, likely providing some relief from input shortages and extended lead times.

A Turn to Nearshoring

After the particularly harsh supply chain conditions of 2020 and 2021, firms are looking for ways to protect themselves against future supply chain disruptions. Many companies, both domestic and international, are turning toward nearshoring or reshoring their operations to North America in order to be closer to the North American consumer base. The incentives for sourcing inputs closer to the consumer include reduced overall transportation costs, shorter lead times, potentially improved communication, easier enforcement of intellectual property rights, and some degree of insulation from future global supply chain disruptions.

One major nearshoring trend has been the movement of operations from Asia to Mexico. As of February, annual US Imports from Mexico were at a record high and 26.8% above the five-year average, while annual US Imports from China, which recently entered a declining trend, were up just 4.5% above their five-year average.

While nearshoring may not be logistically possible for every company, the trend could benefit your business. Determine whether the inputs you are sourcing from overseas could be sourced from a closer location. On the flip side, could your business gain market share by producing parts that others are currently procuring from abroad? Supply chain concerns are top of mind for many; this is a great time to forge partnerships.

Transportation Costs

Sharply rising transportation costs were a major pain point for companies for much of the pandemic. While freight costs remain elevated, the data shows that costs are slowing in their rise or, in some cases, even beginning to decline as freight volume plateaus. While OPEC+ reduced its production quota, causing some upward movement in oil prices, general decline is likely in the coming quarters as the global economy moves further along the back side of the business cycle. Easing oil prices will likely provide further relief on transportation costs for your margins.

Takeaways

The supply chain still has a long way to go, but conditions are generally better than in 2020 and 2021, and more relief is likely during the upcoming period of economic weakness. As the US economy moves along the back side of the business cycle and input availability improves, pricing power will likely shift.

When placing orders, remember that many markets will contract in 2024 amid the macroeconomic recession. While it may be tempting to place large orders of materials or products that have been challenging to obtain in the past, remember that your inventories may take longer to turn over throughout this time of slowing economic growth and contraction. If you need help determining the trajectories of your markets, reach out to us.

Finally, keep being proactive about your supply chain, even as conditions generally improve. Search for backup suppliers or potential nearshoring opportunities, and keep in constant communication with all parts of your supply chain.