Inflation and interest rates continue to weigh on the global supply chain

The website supply chains have suffered severe blows in recent years. The Covid-19 crisis has been aggravated by the conflict in Ukraine and escalation of inflation in 2022 to take global logistics to the extreme and completely change our perception of it. Several months later, the situation seems to have normalized, but Citi warns that Persistent inflation and sharply rising interest rates around the world will continue to put pressure on the global economy. and adding uncertainty to trade, which accounts for 52% of global GDP.

“I think we agree that the last year, or even the last few years, have been complicated. However, we are here, in a place closer to normal,” he says. Jane FraserCEO of Citigroup. According to Fraser, Citi’s most recent Global Supply Chain Strain Index shows that overall levels of ” have returned to normal before the pandemic, but supply chain strains persist with inflationary pressure and rising interest rates in many countries. ».

“Disruption remains a priority.”He adds, noting that the survey of various corporate suppliers shows that more than 50% believe they will remain in place until 2023. In addition, more than 75% admit to having inventory problems and 42% of those who have mainly small suppliers feel affected by the increase in interest rates.

“The pandemic and then the war in Ukraine demonstrated the fragility of supply chains,” says Fraser. The CEO of Citi recalls that “many companies and customers have suffered the consequences of these disruptions” and, therefore, “are now looking for resilience wherever they can get it”. “Although offshoring and quasi-offshoring may seem like the next steps, both buyers and suppliers indicate that resiliency or redundancy at the heart of the supply chain is the top priority.“, he says.

In this sense, the experts of the New York firm point out that, given the uncertain outlook, both suppliers and buyers are focusing on “ strengthen and expand » their physical supply chains to counter any potential disruption.. “Business ecosystems remain fragmented, and innovative platforms can play an important role in digitizing the physical supply chain and improving the efficiency of the financial supply chain,” they explain.

A stronger financial supply chain, they point out, translates into a stronger physical supply chain. “By strengthening existing relationships with current suppliers and providing incentives for new ones, supply chain finance also plays a key role in building resilience,” they add.

However, they note that supply chain finance can do “even more” to overcome the many challenges that affect both suppliers and companies; for example, “help reduce the pressure resulting from the need for a company to hold high levels of inventoryas well as damage resulting from accelerating inflation and a higher rate environment”.

According to Citi data, 62% of respondents indicate that they are developing their networks of second-tier suppliers to increase chain resilience, while 41% seek funding earlier in the business cycle (at the production stage). , for example) and 34% longer lead times to produce goods. In addition, 70% of them acknowledge having adopted new technologies to track their goods.

Citi experts believe that supply chains will have to go through a a major reconfiguration process in the years to come.. First of all, thanks to the diversification of suppliers of key inputs to avoid shortages and overreliance on a single source. Secondly, in the strengthening of existing relationships, which will require the commitment of more capital upfront. while minimizing the risk of loss. Furthermore, they point out real-time digitization and automation as a key factor in this transformation process.

They also point out that it will take a substantial change in inventory management. “Before the pandemic, companies employed a just-in-time inventory strategy. who sought to keep inventory low to maintain a profitable production process. to maintain a profitable production process. In contrast, just-in-time inventory management focuses on not being out of stock and the occurrence of peaks in demand requires a bit more inventory.“, they explain.

In this sense, they recall that the pandemic demonstrated “the advantages” of this strategy, since “many companies were not prepared for the increase in demand for goods that followed the initial closures”. ” Although it is unlikely to be abandoned completely.companies are likely to hold larger inventories than before for hard-to-source components,” they note.

In parallel, the degree of offshoring in this new model “remains an unknown”. and will, according to Citi, “largely depend on relative production costs” in different parts of the world. ” China and other East Asian economies were a profitable option and many of those realities still hold true. We believe some production will leave Asia, but the region will remain an important source of global manufacturing,” they say, noting that companies “are likely” to “rely more on plans to urgency to have back-up options in case a segment of their supply chain breaks, as well as to hold larger inventories to maintain production in the event of disruptions”.

Overall, they note that this realignment will incur “significant” upfront costs. “Ultimately, the extent to which companies investigate these issues and then make structural changes will depend on how they assess the risks of material disruptions in future supply chains,” they conclude.

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