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Why the Supply Chain is Setting Up a Buyer’s Market to End 2023

Lower demand for inventory suggests that the supply chain is shifting to a buyers’ market.

For the first time since June 2020, global supply chain capacity is now underutilized, according to the GEP Global Supply Chain Volatility Index.

While the falling cargo demand is a stand-in for the state of the economy, the improving pricing climate will be better for retailers this year.

“After months of companies aggressively destocking, there is now excess capacity in the world’s supply chains, providing buyers with greater leverage to extract favorable prices and terms for the second half of 2023 and into 2024,” said Volker Roelofsen, vice president, supply chain, consulting, GEP, in a statement. “The good news is that companies’ demand for components and raw materials, while subdued, is holding steady, indicating that central banks are, at least for now, successfully engineering a measured slowdown.”

These trends have been percolating for the better part of the year. U.S. containerized ocean freight imports sank 15 percent year over year in April, according to Panjiva data, for nine straight months of declines. Textiles and apparel imports shrank by 27 percent in April, an improvement from March’s 37 percent slide.

GEP developed the Global Supply Chain Volatility Index to monitor demand conditions, material shortages, transportation costs, inventories and backlogs to better gauge volatility.

As retailers clear through overstock amid 10 months of sagging global demand, the index fell below zero in April to -0.04, from 0.32 in March. This a striking contrast from the picture year ago, when the index stood at 4.61, one of the highest levels of volatility in the GEP’s 20 years of data.

GEP Global Supply Chain Volatility Index
The index since January 2020

A value above zero indicates that supply chain capacity is drying up while volatility is increasing, while the opposite is true for values below zero.

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Europe seems to have the lowest volatility, with its -0.37 index coming in well below December 2022 figures of 1.60. The U.K. had a similar drop to -0.21 from five months ago, when the reading was 1.34.

North America’s volatility gap came in at -0.12 from 0.91 in December. In Asia, the index reads 0.06 after closing 2022 at 0.17.

Another gauge, the Logistics Managers’ Index (LMI), recently fell to a new low in its nearly seven-year history. It fell 0.2 points month over month to 50.9 in April, but dipped even further to 48.9 during April 18-30. For context, any reading below 50.0 indicates that the logistics industry is contracting.

Demand and shortages trend in the right direction

While global demand for raw materials, commodities and components stood at -0.14 in April, that’s better than -0.52 in December 2022, indicating stability amid stubbornly high interest rates and a pressured manufacturing sector. The report noted April’s worsening demand conditions across Europe, while Asia’s purchasing activity eased amid China’s fading post-lockdown rebound.

Availability of critical components moved across supply chains, including foodstuff, metals and chemicals, continues to improve. Shortages of these items are at their lowest since September 2020, with the index reaching 0.17 in April as reduced demand has eased bottlenecks and helped suppliers restock.

Global transportation costs remain anchored around historically normal levels with an index reading of -0.01, reflecting the normalization of global supply chains and the marked easing of strain on freight capacity. This compares with a year ago when global logistics costs had reached record levels (since data were available in 2005).

For the first time since the start of the Covid-19 pandemic in February 2020, global business reports of stockpiling due to future price and supply concerns are running below typical levels, coming in at an index level of -0.08. Companies are working to offload surplus stock and align their warehouses with the dismal economic outlook, the report said.

Staffing levels, inputs aren’t pressuring capacity

Employment data offered additional clues, with reports of backlogs due to insufficient staffing continuing to keep pace with historically normal levels at 0.03—a far cry from the 0.6 the index showed at the start of 2022. This suggests that suppliers now have enough workers to process their workloads.

In more good news, the recovery in global item supplies reduced pressure on capacity as companies can source the inputs they need to provide their goods and services.

The GEP Global Supply Chain Volatility Index is calculated using a weighted sum of the z-scores of six sub-indices derived from S&P Global’s Purchasing Managers’ Index (PMI) data. Weights are determined by analyzing the impact each component has on suppliers’ delivery times through regression analysis.

Three of the variables used are: the JP Morgan Global Quantity of Purchases Index for materials and components demand; the All Items Supply Shortages Indicator for item shortages; and the Transport Price Pressure Indicator for transport costs. The index also leverages Manufacturing PMI Comments Tracker data to analyze three areas; stockpiling due to supply or price concerns; backlogs rising due to staff shortages; and item shortages.