Though we spend quite a bit of time discussing semi-finished metals and raw materials, we like to keep tabs on what happens further down the supply chain. In a recent article from Chaina Online, (yes, I spelled it correctly), Monica Liau uncovers a growing problem with key part shortages in China particularly for the automotive and graphics processing industries. Liau quotes several individuals who have their own theories as to why the part shortages exist, despite sluggish demand.
The first reason for part shortages relates to, “The deliberate compromise on quality of service and high focus on cost reduction, according to a supply chain director based in India. Capacity cutbacks and staff layoffs made sense in order to keep businesses afloat but this limited the suppliers’ ability to quickly respond to orders. Cost reduction, which often goes hand in hand with restructuring meant less people available to fill fast turnaround orders.
Another main reason for part shortages involves the move toward more “leaner sourcing practices. Buying organizations have shifted their buying from less frequent larger orders to more frequent smaller orders. Though a good practice from the buyer’s perspective, without a means of sharing forecasting and demand data, Lean Sourcing Ã¢â€žÂ¢ can create uncertainty in the supply base. Perhaps the most controversial reason for part shortages accuses the larger companies based in Europe, the US and Japan of squeezing margins so much that overseas suppliers internally debate as to whether or not they want to take the business at all. One CEO of a parts supplier doesn’t even believe there is a part shortage at all but believes Asian suppliers have become much more cautious because of the margin squeeze.
Defining market equilibrium in which just enough capacity comes on stream to meet demand remains challenging in a volatile economic environment. And though many of the economic indicators look quite positive, we think buying organizations will remain cautious with their purchases so as not to create too much inventory. A bumpy economic recovery that moves in fits and starts will likely continue for the next 12-18 months so expect supply constraints along the way. From a metals perspective, we expect producers will continue to watch demand so as to manage capacity coming on stream. The steel industry in particular, has learned that lesson the hard way.