Why Corporate Execs Have the Supply Chain Blues

How much do supply chain bottlenecks worry the C-suite set? A lot, as seen by a Bank of America (BofA) study of second-quarter earnings calls.

These vexing crimps in the flow of goods from factories (sometimes overseas) to homes have been the bane of the US consumer economy. They surely helped boost prices and frustrate customers unable to get a purchase delivered. A big, big problem in the spring, the supply chain issue eased during the summer, but these woes have come back lately due to the onset of the Delta variant. In China, the world’s third-busiest port was recently closed for two weeks out of pandemic fears, for instance.

A worse-than-expected drop in retail spending of 1.1% in July appears to be linked to the latest COVID-19 reprise, which is a demand problem, not a supply one. But T.J. Thornton, BofA’s head of product marketing and predictive analytics, said this situation should help alleviate some of the newer bottlenecks resulting from suppressed demand. “This should improve the inventory problem,” he told Yahoo Finance in a video interview.

If the issue persists, the supply constraints could hold down the climbing stock market, but thus far logistical predicaments haven’t filtered through to equities.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Although the bottlenecks started to ease in the second quarter, they were very much on executives’ minds during the calls. After all, the supply-induced shortages did arise again. To measure that level of concern, BofA researchers performed key-word searches in earnings transcripts to gauge what company managements said about these themes: supply chain, labor, freight, and price-cost. The pandemic has created snags in all these areas.

After running the searches, in their report, the researchers pronounced the second quarter to be “a game of managing supply chains.” Companies struggled to meet strong demand due to component shortages, cost inflation, and labor constraints. Mentions of “supply chain” on second quarter earnings calls accelerated from the previous period, and more than doubled from the prior year.

Shortages are widespread across a variety of components and have proved to be an annoying constraint for many companies. Said Dover CEO Rich Tobin, “What we underestimated was the total cost impacts of a strained logistics system and tight labor market that show no signs of abating.” Some executives spoke of a need for more automation as labor scarcity is becoming a structural issue. Companies are also suffering from higher freight and expedited shipping costs to deliver products on time.

Higher product prices and operating costs also proved to be a main focus in the second quarter and will continue to be in this year’s second half, BofA said. Most companies highlighted price-cost as an obstacle in the quarter. And managements expect cost inflation to accelerate in the second half of the year. Almost all companies and industries are implementing price increases to counterbalance rising costs. At the same time, the inflationary impact of this is unclear. Reason: Distributors and retailers are willing to absorb price increases to meet high demand, the report stated.