Risk & Economy » Brexit » Dangers of stockpiling

Latest figures suggest UK manufacturers have been stockpiling raw materials at the highest rate since figures were first collected 27 years ago (IHS Markit/CIPS). Numbers hit a new peak in March 2019. We know this is going to be a problem, it’s a recognised phenomenon in the logistics world (‘demand amplification’).

So Brexit anxiety stockpiling – only exacerbated by the extended period of uncertainty over the nature of any deal – will have long-term implications for supply chains and the UK economy as a whole.

Stockpiling was one of our biggest worries in 1999. If the Millennium bug was going to take down IT systems then UK supply chains were going to be ready. Businesses, generally-speaking, were looking at increasing stocks by 12.5%, just in case.

We were brought in by the Department of Trade and Industry specifically to calm business nerves and try to dissuade organisations from stockpiling – it would do nothing but harm, and maybe more harm than anything the phantom of Y2K could do.

Now stockpiling is back and bigger than ever. But this time it’s being seen more as a sensible kind of precaution. In our highly-strung state, any sort of pre-emptive action has started to look like common sense. Back in the late 1990s we carried out some work to find out the plans for stockpiling and to model what that would actually mean in practice.

Based on the 12.5% planned increase in stocks, there was the sudden burden of ‘dead money’ clotting up operations. Finances invested in stock limited any ability to grow. Looking at the real accounts of organisations, the growth prospects of a retailer was reduced in this context by more than 1%, while the wholesaler and manufacturer were pushed back into a ‘minus’ growth situation. Wasteful investment increased the chance of business failures.

Just small variations in demand from a customer result in large variations in demand being transmitted up and down the supply chain. A cycle of over ordering and stockpiling leads to demand distortion and any further over-ordering contributes to the amplification. Typically, a demand increase of 12.5% will be passed to a supplier as an increase of 26%, resulting in that supplier placing an increased order for their own supplier of 55% – meaning big oscillations in inventories and supplies that can occur for many years into the future.

For the economy as a whole there’s the danger of boom and bust cycles until the distortion of needs works its way out of the system. Meanwhile the increased costs put more strain onto the smaller firms – at a time when more businesses choose larger supplier partners.

Lessons lost

How many politicians are still around who remember the stockpiling concerns around Y2K? More pertinently, how many managers who were involved directly with planning and orders 20 years ago? Lessons seemed to have been lost to the mists of time. It’s not that we need to be shrieking about the implications, just that we need to be careful.

Retailers, wholesalers and chains of manufacturers need to be talking more often. They need to be honest about potential problems, do their best to dispel any lingering mistrust about capacity and supplies, talk openly about what necessary looks like and what might be an overreaction.

The implications of stockpiling on organisational agility need to be accounted for in decision-making. Companies should be looking to negotiate with suppliers and customers now to develop strategies for holding stocks across the supply chain. Only 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 shocks if they come.

We also need to keep stockpiling in mind when it comes to the bigger economic picture and how the UK is faring by comparison with the EU. According to the new Purchasing Managers’ Index the UK’s manufacturing sector is growing at a strong rate – in marked contrast to problems for Germany, France, Italy. So the modest growth in the UK’s GDP has been encouraging, suggesting a more robust situation than might actually be the case – as stockpiling may well be the primary source of what might only be a mirage of growth.