Vulnerability in Global Supply Chains, by Principal Global Investors

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Global trade has expanded tremendously since the early 1990s. Driven by cheap labor and improved transportation and communications, companies have shifted their focus to creating long and agile supply chains. But the COVID-19 pandemic has exposed the vulnerability of global supply chains and production strategies.

Last year, shutdowns nearly brought entire supply chains to a standstill, and disruptions continue to affect global trade, with inventories plummeting to a decade-long lows.

Of course, successful companies will always look for ways to generate efficiencies and save costs in the production process. But forced to recognize the weaknesses of a big-box approach, many countries and companies are seeking to ensure the resilience of their key inputs and the security of supply chains, likely introducing a bias towards investment in domestic production, and management of inventories just in case.

This shift towards more localized supply chains is likely to have a significant economic impact. While world trade fostered the synchronization of business cycles, localized and regional production could lead to less harmonization. Increasing cost pressures, as companies move away from low-cost countries and face higher inventory costs, may be an additional consequence of the post-pandemic world.

Graph: Relationship between inventories and sales June 2011-June 2021

Increasingly, understanding the intrinsic value of companies and the vulnerabilities to which their supply chains are exposed will be of vital importance to investors in the future.

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