Inventory management is key to achieve value for companies in the curren scenario of supply chain vulnerability, says Principal Global Investors

 

“The COVID-19 pandemic has highlighted the vulnerabilities of global supply chains, sending many businesses scrambling to reevaluate their inventory management practices. Successfully navigating supply chain challenges may help companies gain market share in the short-term, providing a potential boost to investors.

 

“Global trade has expanded enormously since the early 1990s. Driven by cheap labor and better transport and communication, businesses have shifted focus to creating long and lean supply chains. But the COVID-19 pandemic has laid bare the vulnerabilities of global supply chains and production strategies. Not only did shutdowns bring entire supply chains almost to a standstill last year, the disruptions continue to reverberate across global trade with inventories plummeting to decade lows.

 

“Of course, successful companies will always search for ways to create efficiencies and save costs in the production process. But forced to recognize the fragilities of the long and lean approach, many countries and corporations are looking to ensure the resiliency of their key inputs and the security of the supply chains, likely introducing a bias towards investment in home production, and just in case¹ inventory management.

 

“Such a shift to more localized supply chains will likely have significant economic impact.  Whereas global trade fostered the synchronization of business cycles, localized and regional production could lead to less harmonization. Rising cost pressures, as businesses shift away from low-cost countries and face higher inventory costs, may be an additional offshoot of the post-pandemic world.

 

“Increasingly, understanding the intrinsic value of companies and the vulnerabilities that their supply chains are exposed to will be of paramount importance for investors going forward.”

 

¹Just in case is an inventory strategy where companies keep large inventories on hand. Practicing this strategy implies higher inventory holding costs in exchange for a reduction in sales lost due to sold-out inventory.