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Intense supply chain issues impacting manufacturers

Posted on 02 Dec 2021 and read 367 times
Intense supply chain issues impacting manufacturersUK manufacturers continued to face a challenging operating environment in November, as severely stretched supply chains disrupted production schedules and drove up input prices to the greatest extent in the survey’s 30-year history.

The seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index (PMI) rose to a three-month high of 58.1 in November, up from 57.8 in October. All five of the PMI components had a positive influence, as production, new orders, employment and stocks of purchases rose and supplier lead times lengthened.

Output increased for the 18-month running in November, with the rate of expansion accelerating slightly from October’s eight-month low. Companies reported that improved new work intakes — especially from the domestic market — and efforts to build safety stocks supported increased output.

There remained widespread concern of input and labour shortages affecting efforts to raise production, however. This led to existing stocks being depleted to satisfy customer orders.

The strain on supply chains also led to further substantial lengthening of average vendor lead times. Resulting shortages of components and commodities, combined with input demand outstripping supply, led to a survey record increase in average purchase prices. Around three-quarters of manufacturers reported a rise, compared to less than 1% seeing a fall.

Cost and market pressures also affected selling prices, which rose at a rate close to October’s series-record. November saw inflows of new business increase for the 10th straight month, underpinned by stronger UK market conditions, returning customers and rising client confidence.

The trend in new export orders worsened, however, with intakes dropping for the third month in a row. There were reports of weaker demand from China, disruption to trade with the European Union (in part due to ongoing Brexit complications) and the cancellation of some orders due to extended lead times.

Capacity also remained stretched at UK manufacturers during November, with backlogs of work rising to a near record extent. This supported further job creation in the sector, with employment rising for the eleventh month running and at the quickest pace since August.

Purchasing activity rose for the 10th month running in November. Increased input buying reflected rising production needs, safety stock building and efforts (including over-purchasing) to minimise supply chain delays. Input stock holdings expanded solidly as a result.

Business optimism at three-month high

UK manufacturers maintained a positive outlook during November, with business optimism rising to a three-month high. Over 63% of companies expected output to rise over the coming 12 months, with only 6% forecasting a decline.

Positive sentiment was linked to Covid recovery, economic growth, new product launches, planned marketing campaigns, business expansions, diversification, innovation and reduced supply chain stress.

Rob Dobson, director at IHS Markit, said: “Although November saw rates of expansion in output and new orders gain some traction, growth remains lacklustre compared to the first half of the year. Manufacturers are facing a challenging backdrop, with rising supply chain disruptions, staff shortages and inflationary pressures stifling growth while ongoing difficulties caused by Brexit and logistical headaches restrict opportunities to expand into overseas markets. New export sales fell for the third straight month.

“Firms’ costs meanwhile continue to surge relentlessly higher, rising at the steepest pace in the three decades of survey history. Stretched supply chains, component shortages and a vast mismatch between demand and supply are all exerting massive upwards pressure on input costs. This is also filtering through to prices charged at the factory gate, which rose at a rate close to October's record high.

“For those concerned about the strength of the jobs market as support schemes are withdrawn, positive news is provided by a further solid rise in manufacturing head counts.

“The current mix of supply-side constraints, cost increases, skill shortages and rising demand for labour will add to the expectations of an imminent rate increase by the central bank, but the survey highlights how the subdued rate of manufacturing growth and export decline leaves industry in a vulnerable position to any new headwinds, not least the Omicron variant of Covid-19.”

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply:
“Sluggish global supply chains remained uppermost in the minds of manufacturers this month. Disruption led to a new three-decade high in terms of mounting prices and supplier delivery times increased for the 29th consecutive month holding back further output.

“New orders flows exacerbated the problem in manufacturing capacity with the fastest intake for three months, and it was the domestic market that made up the majority of the new work. Export orders dropped back again as long lead times, port and shipping difficulties caused some clients to lose patience and opt to source elsewhere.

“This didn’t detract from the optimism in the sector as 63% of manufacturers that conditions would continue to improve — if only in fits and starts. With more success in finding skilled labour they are preparing for supply chain issues to even out and for price rises to subside. 74% of supply chain managers paid more for their goods in November, as prices charged also accelerated at a rapid pace raising fears that the UK economy could over inflate if supply chain disruption doesn’t subside in the first quarter of 2022.”