The dangers of stockpiling – the return of the Millennium Bug?

Published by Rodney Sutton on 12 April 2019

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A recent survey has revealed that manufacturers panic stockpiled in March, as the UK headed towards a possible no-deal Brexit, it was this stockpiling activity that saw a 13-month high for the sector.

Manufacturers’ concerns regarding imports and exports being held up at the UK border led to raw materials and finished goods being purchased at the fastest monthly rate of any G7 country since 1992. This was all designed to create “buffer stocks” in their warehouses.

But, as the UK’s output increased, the eurozone declined with the Purchasing Managers’ Index (PMI) falling to an 80-month low. All this indicates is potential future long-term implications for supply chains and the UK economy as a whole.

Those of us old enough will remember the “Millennium Bug” which was going to destroy IT systems when we hit 1 January 2000. This led to stockpiling in 1999 to ensure UK supply chains were not disrupted. But how many are still around who learnt from those lessons?

Dead money?

Stockpiling can lead to “dead money” clotting up operations and limit any ability to grow. Back in 1999 the average stock increase was estimated to be 12.5% – doing this can lead to an increased chance of business failure.

In addition, as the uncertainty around Brexit rumbles on – with a new deadline of 31 October – how long do you continue to “prepare for the worst”? At some point manufacturers will have to continue as though everything is “normal”.

Stockpiling can also have an even greater impact on the supply chain. Suppliers may struggle to meet demand and therefore will consider increasing their costs. Customer businesses may then consider submitting larger orders to suppliers to avoid continued price increases, and so the supply chain worsens. This situation can lead to a danger of a boom and bust cycle in the supply chain until the distortion works its way out of the system.

Eurozone impact

Manufacturers also need to consider the ‘eurozone impact’. If demand in the eurozone continues to remain low who will the stock then be sold to? Will UK businesses have enough cash to buy? Or will their cash be tied up in their stock as well?

Although there was some increase in China’s PMI in March, which gives cause for optimism, the UK car manufacturing industry has otherwise seen flagging sales to China. Therefore, this optimism should be muted, particularly with Honda announcing in February it would close its plant in Swindon.

Manufacturers should be looking to negotiate with suppliers and customers now to develop strategies for holding stocks across the supply chain. Only in this way will it be possible to construct some semi-certainties, and some more confidence, within supply chains – and make it easier to deal with any potential shocks.

As the Brexit uncertainty continues, it is becoming clear that not only is our own faith in the UK government waning, but so too is the wider world’s. Manufacturers need to hold their nerve and ignore what could be a mirage of UK manufacturing growth….as best they can.

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