Supply chain pressures ease for German companies: Ifo

The supply chain crisis that came to a head during the Covid-19 pandemic has subsided and German firms have started to reduce stockpiling to protect against future crises, according to latest analysis from the highly respected Ifo institute in Berlin.

But the continuing level of piracy and terror attacks on shipping in the Red Sea has underlined how perilous the global supply chain system remains. German companies therefore continue to adjust their sourcing strategies to mitigate the risk of supply chain disruptions, said the institute in its latest analysis.

Diversification of suppliers (58%) and increased stockpiling (45%) are the most popular supply chain measures taken within the last 12 months, finds the research.

But the share of firms increasing their inventories in 2023 was lower than in 2022 – to 45% down from 68%. “Only 12% of firms intend to increase stockpiling in the coming 12 months, suggesting that the process of inventory adjustment may be nearing completion,” said the Ifo.

“In contrast, the share of firms that further diversified their supply chains has remained relatively stable since 2022. Moreover, almost one-third of respondents plans to add new suppliers within a year,” it added.

“At the height of the Covid-19 pandemic, global supply chains of firms came under increased public scrutiny. Pandemic-related production and transportation disruptions had put supply chains under severe pressure worldwide and were often associated with considerable economic costs,” said the institute.

However, it pointed out that as the pandemic has subsided, the extent of supply chain disruptions decreased significantly. The Supply Chain Pressure Index (GSCPI), produced by the Federal Reserve Bank of New York to track the state of global supply chains, fell significantly last year and was even below its historical average in December 2023. Moreover, according to the Ifo shortage indicator, the proportion of German companies affected by shortages of intermediate inputs is also approaching pre-pandemic levels.

“While eight out of ten German manufacturing firms reported material shortages at the height of the pandemic in December 2021, this share had fallen to 18% in October 2023. Nonetheless, the recent attacks by the Yemeni Houthi rebels on container ships in the Red Sea highlight the fact that supply chain risks remain significant,” said the Ifo.

The findings come from the Ifo’s Business Survey carried out in November 2023 with more than 4,000 German companies in the manufacturing sector, as well as wholesale and retail trade sectors.

The Ifo found that there are considerable differences between industries with respect to supply chain adjustments.

“In particular, companies in the computer and electronics industry, as well as in machinery and the automotive industry, were very active in adapting their sourcing strategy. Notable disparities between the sectors are apparent when it comes to supply chain diversification: while almost 80% of manufacturers of computer, electronic and optical products have further diversified their supplier structures, the corresponding share for manufacturers of printed products is below 30%,” it said.

The automotive industry stands out with a notably high proportion of companies opting for increased insourcing. Approximately a third of manufacturers of motor vehicles and parts increased vertical integration in the past 12 months to reduce the risk of supply chain disruptions, found the institute.

The size of companies also plays a significant role in sourcing strategies. Large firms are more likely to invest in increasing supplier diversification and improving supply chain monitoring compared to SMEs. Conversely, SMEs more frequently opted to increase their stockpiles than large companies.

Looking forward, the institute said that politics and trade policy plays an important role in shaping the supply chain risk environment.

“Economic policies can play an important role in promoting further diversification of suppliers in the future and strengthening the resilience of supply chains. From a European perspective, the multilateral, rules-based trading system remains a central reference point for companies to construct more resilient and better diversified supply chains,” it said.

“For this reason, despite various challenges, strengthening the multilateral trade order remains essential. Moreover, by reducing trade costs and uncertainties, new trade agreements can offer companies additional opportunities to diversify their supply chains. However, the use of trade agreements is often accompanied by major bureaucratic hurdles, especially for SMEs. Making trade agreements more SME friendly, for example through greater transparency and simplified customs procedures, would therefore also make a valuable contribution to the robustness of supply chains,” concluded the Ifo.