Over-orders by panicked retailers and manufacturers further chokes supply chain

The crisis-riddled supply chain has been choked further by over-orders from retailers and manufacturers across the world. The COVID-19 pandemic continues to bring about massive disruptions to supply chains everywhere.

Jonathan Savoir, CEO of supply chain technology firm Quincus, told Squawk Box Asia that suddenly, retailers and manufacturers are over-ordering because of these supply chain issues. “That’s just leading to essentially an even worse scenario.” Savior said the situation of retailers overstocking is causing a bigger crunch on capacity, and leading to what he called a ‘bullwhip effect’. It means how small changes in demand at the retail level can progressively cause larger movements in demand to impact wholesalers, distributors and manufacturers – with the supplier of raw materials feeling the biggest impact.

RBC Wealth Management believes the end result of this effect could include distorted demand forecasts and unfulfilled orders. “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,” it said. RBC Wealth Management highlighted that bottlenecks are unlikely to disappear overnight. Industry experts warn that as the holiday season approaches, there’s likely to be a shortage of goods, or prices will rocket due to high demand and low supply.

Analysts at Jefferies have said that the supply chain has been stretched remarkably thin. But they also said that they may be already witnessing the worst of it and the impact is likely to ease by the first half of 2022. Jack Janasiewicz, a portfolio strategist at Natixis Investment Managers, told CNN Business that companies such as Toyota, Samsung and Intel are planning to ramp up output during the final few months of the year due to increased availability of key components. And major ports such as Long Beach and Los Angeles are also looking to keep their operations open 24/7 to deal with supply chain bottlenecks.

However, industry experts have not ruled out profits taking a hit due to delays. There are legitimate worries that the problems will lead to higher prices for the foreseeable future, as such, some consumers may delay purchases of non-essential items.

Ngozi Okonjo-Iweala, Director-General, World Trade Organization, believes the global supply chain problems could drag on for several months as shipping companies struggle to bridge a supply-demand mismatch and counter a persistent shortage of containers. “Trillions of dollars of pandemic-related stimulus were feeding into a surge in consumer demand – prompting businesses to hoard hard-to-come-by inventory.”

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The WTO head said shipping companies had not anticipated the strength of the recovery. “They cut down on the availability of containers, which were left in the wrong places, so now there’s a container shortage. As the festive season approached in many parts of the world, these difficulties were likely to persist,” she said. “Differing rates of vaccination were compounding the problems, creating a two-tier global recovery as some economies roared back to life but others were left floundering.”

Okonjo-Iweala said rich countries that have vaccinated more than 50% of their population and have implemented very strong fiscal stimulus of billions of dollars are on a better recovery path than the poor countries who have no fiscal space and who also have a very less access to COVID-19 vaccines. “The fact that 60% or more of people in many rich countries have been vaccinated versus slightly below 2% in poor countries just gives you the rate of divergence.”