Advertisement

Blog

Shortages & Price Hikes Leave Supply Chain in Disarray

Even with the headwinds of tariffs, component shortages and price hikes, the electronics industry continues to expand. But one respondent to the Institute for Supply Management’s monthly business survey described a supply chain in disarray.

“The market is in a state of chaos with the latest round of tariffs,” a computer and electronic products executive said. “As an electronics original equipment manufacturer, our component prices have been impacted almost across the board. The tariffs have caused a mass rush to buy up inventories of affected products to minimize the long-term financial impact. This, in turn, is causing market constraints, which further drive up the cost and increase lead times.”

Overall, the U.S. factory index cooled slightly in September as the ISM’s PMI declined 1.5 percentage points to 59.8. Any number above 50 indicates manufacturing is expanding.

“Demand remains strong, with the new orders index at 60% or above for the 17th straight month, and the customers’ inventories index remaining low,” said Tim Fiore, chair of the ISM’s Manufacturing Services Business Committee. Order backlog continued to expand, but at lower levels compared to the previous month. 

But respondents to the ISM are again overwhelmingly concerned about tariff-related activity, including how reciprocal tariffs will impact company revenue and current manufacturing. Tariffs are starting to take a bite out of profitability in chemical products, one executive said. “Suppliers are impacted by China tariffs, [which is] delaying or cancelling manufacturing transfer projects,” said another manufacturer. 

Although exports expanded in September by 0.8%, four major industries are no longer contributing to that activity, according to the ISM. “This is becoming a pattern, and it’s not good,” said Fiore. In July four of the ISM’s six largest industries were exporting; by September that number fell to two. 

“Manufacturing contribution to the GDP has fallen from 48% in August to 34% in September,” he added. “We are being priced out of the export market.” There are indications that U.S. factories are taking steps to reduce the impact of tariffs by shifting U.S.-based production to markets where they aren’t subject to tariffs. “I’m hard pressed to think of any upside to tariffs,” Fiore said. 

Price pressure continues for U.S. manufacturers, but the prices index softened for the fourth straight month and dropped below 70 for the first time since December 2017, according to the ISM. “Demand remains robust, but employment resources and supply chains continue to struggle, but to a lesser degree,” Fiore said.

Production and employment expanded at higher levels compared with August, to reach 63.3 and 58.5, respectively, despite shortages in labor and materials. “Inputs — expressed as supplier deliveries, inventories and imports — improved compared to the previous month’s activity,” Fiore said. “But continued supply chain inefficiencies led to an increased consumption of inventory and a slight expansion of imports, which adequately supported production output. Lead-time extensions, steel and aluminum disruptions, supplier labor issues, and transportation difficulties continue to limit potential, but at more manageable levels.”

ISM’s new orders index registered 61.8%, a decrease of 3.3 percentage points from the August reading of 65.1%. The production index registered 63.9%, a 0.6 percentage point increase from 63.3% in August. The employment index registered 58.8%, an increase of 0.3%; and supplier deliveries decreased 3.4% to 61.1. 

“This is the 24th straight month of slowing supplier deliveries and indicates the supply chain’s difficulty in keeping up with new order and production demand,” Fiore said. “Lead times continue to extend, supply chain labor issues continue to restrict performance, and transportation issues are limiting supplier execution.”

Inventories registered 53.3%, a 2.1% decrease; and prices reached 66.9% in September, a 5.2-percentage point decrease from the August. This indicates higher raw materials prices for the 31st consecutive month.

“General demand remains very good at 61.8,” said Fiore. “Backlog remains healthy and production and employment gained. These are relatively stable, good, high numbers. I’d say we are bouncing across the top with the PMI and the fundamentals are telling the story. Even with the softening of several indexes we are maintaining equilibrium.”

Electronics and chemicals were the two leading exports in September, he added “The electronics industry continues to struggle with tariffs and the sucking up of inventory before it was tariffed,” Fiore said. Capacitors and resistors remain in short supply. “We’re having shortages and pricing pressure [in electronics] but it’s a positive that that they are supporting the U.S. manufacturing industry,” he concluded.

0 comments on “Shortages & Price Hikes Leave Supply Chain in Disarray

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.