Supply lines and the balance sheet balancing act

Bottlenecks complicate inventory management

Lead times have also been an issue. Port bottlenecks driven by labor shortages and ongoing lockdowns in Asia have made it nearly impossible to predict when goods and raw materials will ship. In response, some companies moved from “just-in-time” to “just-in-case” inventory management, raising their inventory target levels to ensure goods and materials are in stock. Some producers that ordered extra inventory in anticipation of delays were unpleasantly surprised when orders shipped much earlier than expected, filling up warehouses and shelves with goods they can’t sell yet.

Both port bottlenecks and inventory bloat create liquidity challenges for producers, as cash is tied up in goods sitting on ships and shelves. In addition, the increased cost to obtain those goods creates inflated inventory valuations on many balance sheets. As the market pressures companies to reduce prices, the value of the inventory is reduced and squeezes margins as the higher-cost inventory moves through, directly impacting income statements and cash flow. Producers’ balance sheets may also be in jeopardy as debt versus collateral value tightens and liquidity is reduced.

Fortunately, some of the supply chain issues we’ve experienced seem to be easing. The cost of shipping from China to the West Coast has dropped significantly since April and continues to slide. Throughput at ports improved, and transportation costs declined slightly, although the price of gas, particularly diesel, remains elevated.

But supply chain challenges still lie ahead. Consumers are choosing to spend more of their dollars on travel and services. Demand for goods is weakening, especially in sectors that were strong during the early days of the pandemic. Rolling power outages and lockdowns continue to create bottlenecks at Asian ports, while port workers on the West Coast are in the midst of labor negotiations that could create additional distribution delays.