VMany German industrial companies have stocked up their warehouses to protect themselves against delivery failures in times of crisis. According to a survey by the Ifo Institute published on Wednesday, warehousing is the most common response to the shocks of 2020 and beyond. Companies have also taken numerous other measures to become more independent and resilient.
When asked how companies react to supply chain disruptions, 68 percent named increased warehousing, closely followed by 65 percent who diversify their procurement, i.e. switch to new suppliers. In addition, 54 percent of companies want to better monitor their supply chains in order to identify disruptions more quickly. A further 38 percent named a shift in existing delivery relationships as a measure against disruptions. In addition, 13 percent increase vertical integration, i.e. manufacture preliminary products themselves instead of ordering them from suppliers. Multiple answers were possible in the Ifo survey, as many companies relied on several measures instead of just one.
According to Lisandra Flach, head of the Ifo Center for Foreign Trade, international supply chains have become more complex and more prone to disruption. “Small breaks can often cause a loss of production,” says Flach.
Small and medium-sized companies fill up the warehouses more often
With regard to the crisis measures, the Ifo survey shows some differences between large companies and small and medium-sized companies. At 73 percent, small and medium-sized companies in particular increase their inventories, while corporations in particular do this somewhat less frequently with 64 percent of the answers. At 72 percent, the big ones look for new suppliers much more frequently, which is what only 55 percent of the small ones do. Large companies are also monitoring their supply chains more closely or shifting between existing suppliers. On the other hand, there are hardly any differences when it comes to bringing production back into the company, which 14 percent of the big ones do and, at 12 percent, an almost equal proportion of the small ones.
The construction of warehouses is important to keep production running and thus to secure the existence of a company. However, there is also a downside when the disruptions and traffic jams resolve and the warehouses have to be cleared again. This is shown, for example, by a comment by the analysts Markus Mayer and Konstantin Wiechert from Baader Bank. Some time ago, you warned of a reduction in inventories in the chemical industry, which is now accelerating even faster than many companies feared.
According to Mayer and Wiechert, sales prices for bulk chemicals are likely to continue to fall, and prices for specialty chemicals could also slide. Many companies were therefore threatened with write-downs on their inventories in the final quarter. For the chemical company BASF, for example, there is a risk of high value adjustments on inventories and plants if the plant in Ludwigshafen has to be temporarily closed. Manufacturers of lubricants, which are still in high demand, are not affected.
According to analyst Mayer, inventories are not as high as they were during the 2008 financial crisis, but the value of inventories is significantly higher than it was then. Because the companies would have bought at more expensive prices because the procurement markets had been swept empty after the Corona pandemic. As a precaution, they often ordered double the quantities to protect themselves against supplier failures. This is now increasing the pressure to reduce inventories.
High inventories were seen as old-fashioned and inefficient capital killers during the heyday of rampant globalization. Instead, just-in-time production, tried and tested in Japan, was pushed, in the extreme form of which no stocks were provided at all. According to this paradigm, supplied parts were not kept in stock and were only delivered to the minute at the moment of assembly. This ideal required control of supply chains that is unrealistic in times of global crisis.