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A group of gears with global firms and supply chain shocks written on them, representing the importance of rules, regulations, and compliance in inventory management.

Global Firms Adjust Inventory Management in Response to Supply Chain Shocks

09/01/2024
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Global Firms Adjust Inventory Management in Response to Supply Chain Shocks

by Daisy D.
09/01/2024
in Industry, Supply Chain

The Covid-19 pandemic and global supply chain disruptions have prompted firms to reevaluate their production and inventory management strategies. With significant delivery delays, input shortages, and stockout risks, businesses are shifting from just-in-time to just-in-case production. This transition is particularly evident among importing firms. Japanese firm-level data collected quarterly sheds light on these changes, revealing how companies have adjusted their inventory practices in response to supply chain shocks.

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Inventory management has always played a crucial role in international trade, given the challenges posed by delivery lags and uneven trade patterns. Importing firms have traditionally maintained higher inventory levels compared to those sourcing materials domestically. While this disparity has been previously observed in studies on firms in Chile (Alessandria et al. 2010), the recent disruptions to global supply chains have raised new questions about the role of inventory as a buffer against input shortages.

The Covid-19 pandemic had a substantial impact on manufacturing production, resulting in severe disruptions during 2020. Interestingly, while production declined, inventories increased significantly, outpacing the decrease in production. Even as production began to recover in 2021, inventory levels remained persistently high. Early 2022 saw a further increase in inventories, likely due to the Shanghai lockdown and the Russia-Ukraine war.

To delve deeper into this phenomenon, a recent paper by Zhang and Doan (2023) examined Japanese manufacturing firms from Q1 2015 to Q2 2021. The study focused on firms with global sourcing networks, making Japan an ideal setting for investigating how companies responded to supply chain shocks.

Before the pandemic, importing firms had consistently higher inventory ratios and held more stock in various categories, including materials and supplies, work-in-process goods, and finished products, even after accounting for firm size. This pattern persisted after the pandemic, with importers significantly and consistently increasing their overall inventories. Notably, within each industry, substantial variations were observed in the adjustments to different types of inventories.

The data also revealed that importers who relied more heavily on global sourcing substantially increased their inventories. Firms with a higher ex-ante import share and multinational companies that experienced supply chain disruptions in China were particularly proactive in expanding their inventory holdings. This shift suggests a transition from just-in-time to just-in-case production as a response to the pandemic.

While the increase in inventories serves as a buffer against supply chain shocks and input shortages, it also comes with additional costs. These costs can be a burden for firms with financial constraints. Policymakers should consider measures to alleviate these constraints, especially for companies engaged in international supply chains and reliant on imported inputs. Additionally, post-pandemic policies should support businesses in building robust and resilient supply chains.

It’s important to note that the study’s data only extends to Q2 2021, and it may be premature to conclude that manufacturing firms have completely shifted their inventory practices. Monitoring firm-level adjustments and the macroeconomic inventory cycle will be essential to gaining a comprehensive understanding of these changes.

Discover supply chain news insights on The Supply Chain Report. Enhance your international trade knowledge at ADAMftd.com with free tools.

#SupplyChainResilience #InventoryManagement #GlobalSourcing #JustInCase #ImportingFirms #JapaneseManufacturing #SupplyChainDisruptions #PandemicImpact #ProductionShift #InventoryTrends #SupplyChainPolicy #TradeAndInventory #ManufacturingTrends

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The Supply Chain Report is your essential daily news website, serving as a trusted source for comprehensive coverage of the complex and ever-evolving global supply chain dynamics. Our expert team delves into the intricacies of international trade, manufacturing, logistics, importing, exporting, and supply chain management; providing in-depth analysis and up-to-date news on the latest trends, disruptions, and technological advancements affecting industries worldwide. From detailed reports on international trade through to insights into procurement strategies and inventory management, we offer valuable content that helps professionals stay informed and make knowledgeable decisions in a fast-paced market.

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