Analysis from RapidRatings “State of Supply Chain” Survey and Proprietary Database
Company business operations all over the globe are being disrupted due to COVID-19. Some are closing facilities for the near term while others may never reopen. Which suppliers will be able to continue to provide goods and services to their customers? For how long will they be able to deliver until inventory runs out?
RapidRatings has taken two separate approaches to answer these questions. Firstly, our “State of Supply Chain” survey (March, 2020) included responses from 1300 private companies globally about their inventory levels and ability to bounce back. The survey included industries and countries most impacted by COVID-19 (Italy, China, South Korea Japan, and the U.S. as well as those in Western and Eastern Europe) to gauge frontline insights on supplier business continuity measures and anticipated disruptions to global supply chains. The survey was fielded from March 2nd to March 19th, 2020. Please see the survey and other insights in our COVID-19 Resource Center.
Secondly, we studied the inventory levels of tens of thousands of private and public companies globally in our database. Our findings are derived from the analysis of financial statements obtained directly from private companies as well as publicly published financial statements of listed companies. As RapidRatings is likely to be obtaining private suppliers’ financial statements at an accelerated pace during the COVID-19 crisis, our data is an ever-sharper view of financial health of the private companies making up approximately 75 percent of global supply chains
“State of Supply Chain” Survey Results
The “State of Supply Chain” survey yielded 1300+ private company responses on a range of topics, including the likelihood that facilities would close, and if so, for how long they could continue to make shipments. The insights on inventory levels included:
- So far, 40 percent of companies have had to close in China, while 18 percent of companies globally have already had to close facilities. In Europe, 19 percent of companies (excluding Italy) said they expect to close facilities in the future. While only 11 percent of these European companies have already done so, the number is sure to rise.
- In the U.S., “lean” inventory management—whereby companies maintain the lowest amount of inventory necessary to serve their customers—has amplified concerns: For example, 59 percent of U.S. companies say they don’t have enough inventory reserves on hand to continue shipping more than two weeks after ceasing to manufacture. Globally the figure was 47 percent, with only 33 percent of Chinese companies saying they would no longer deliver after 2 weeks.
- In China, 57 percent of companies who have closed facilities said they would open again in under 2 weeks as compared to the rest of the world, where only 22 percent said they’d be able to re-open in under 2 weeks. Nearly 18 percent said they wouldn’t be able to open for over a month.
RapidRatings Private and Public Company Database Results
RapidRatings is uniquely positioned to provide insights on the state of global supply chains and inventory levels: Our flagship FHR® rating relies on financial statements which we source directly from private companies which make up
more than 70 percent of global supply chains. We included public companies as well, which we compare on an “apples to apples” basis to privates (e.g., accounting for industry variations). Inventory levels were measured by Days Inventory Outstanding (DIO).
We also compared inventory against cash levels as measured by cash/current liabilities ratio to see which is weaker (or stronger) from a liquidity point-of-view. As cash will clearly be needed to maintain current operations or to restart post-closure, it is an important metric. In the context of short-term (one year) debt a company needs to settle (i.e., current liabilities), it will rely on cash reserves or other sources of liquidity. Loans may no longer be an option as the credit environment tightens and massive amounts of corporate debt need to be refinanced.
Figures 1 and 2 below show the median Days Inventory Outstanding by region and industry, respectively. The key findings are:
- The US has the lowest capacity (at just 52 days of inventory for Privates), which again is likely due to “lean” inventory approaches going into the crisis (as corroborated by the “State of Supply Chain” survey results discussed above).
- Private companies have significantly less reserves compared to public companies. On a global basis, these figures are 55 percent vs. 73 percent respectively.
- Notably, while Chinese private companies had the least amount of inventory compared to their public counterparts of all regions measured, China has maintained the highest overall DIO. This finding points to Chinese companies being positioned to bounce back more quickly, especially if Chinese banks continue to be flexible with loan repayments.
- Key industries such as Retail and Wholesale trade, and Food, Drink and Tobacco have low reserves (particularly for private companies), which is especially alarming given weakened supply chains, and ongoing consumer demand.
Figures 3 and 4 below show the median Cash/Current Liability figures by region and industry, respectively. The key findings are:
- Even though US companies lower inventory levels compared to other regions, they have higher cash levels, which indicates relatively healthier financial standpoint and ability to bounce back more quickly post-pandemic
- The industries that have lower inventory levels (Retail Trade, Wholesale Trade, Food Drink and Tobacco) also have the lowest cash levels, which is concerning, given the potential impact on hard-hit consumers.
Figures 5, 6 and 7 show the distribution of Days Inventory Outstanding for public and private companies and industries respectively.
- While China has a relatively low percentage of public companies with either fewer than 15 days (7%) or 30 days (5%) of inventory, the US, on the other hand has a far greater percentage with less than 15 days (13%) and 30 days (10%).
- For private companies, 30 percent globally have fewer than 30 days of inventory. Europe is in a better position with only 20 percent falling into that category. Clearly, the ability of global supply chains to continue to function in a prolonged pandemic is called into question given the dominance of private company suppliers, and the fact that almost one third have less than 30 days and in total 71 percent reporting less than 90 days of inventory.
- There are key industries that have an alarming number of companies with low inventory levels, such as Retail and Wholesale trade as well as Food, Drink and Tobacco.
- As reported in the Wall Street Journal (23rd March, 2020) large retailers are attempting to bypass wholesalers and go direct to the manufacturer because the spike in demand has sucked all the inventory out of already “lean” inventory reserves. So, COVID-19 is exasperating the efficiency that “lean” approaches were trying to achieve during more typical times.
Visit our COVID-19 resource center for more up-to-date analyses and insights on the current state of supply chain risk.