Investors Should Monitor Portfolios for Supply Chain Risk

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Think the pandemic shortages are over?

In August 2021, the famed UK restaurant chain Nando’s had to close over 50 of its locations because they ran out of chicken—literally the one thing it sells. The shortage, representatives say, was due to difficulties involving Brexit paperwork, which has hampered the supply of materials and workers moving into the country.

Meanwhile, drinkers in at least three US states have noticed a shortage of alcohol due to constraints in the supply of glass, paper labels, and aluminum cans. Producers have no trouble producing the liquid itself—they just don’t have anything to put it in.

Lastly, on a much more serious note, the city of Orlando, FL, has asked its residents to conserve water as much as possible. That’s because its overburdened hospital system separates oxygen from tap water to serve critically ill COVID patients—and it needs so much O2 that water supplies are running low, and overall water quality may soon see a drop.

These shortages may involve different products and occur in other parts of the world, but what they have in common is that they’re emergent results of a system that’s grown very hard to predict. If you’re an investor looking to make smart moves and avoid volatility, you need the tools to avoid exposing yourself to global supply chain challenges.

 

Why Has the Supply Chain Become So Complicated?

For the past forty or fifty years, companies have increasingly adopted what’s known as “just in time” inventory (JIT). Broadly speaking, what this means is that manufacturers only keep a small number of components and materials on hand—just enough to create the next batch of products. This helps defray storage costs, increase production efficiency, and eliminate waste.

Just in time is a valid inventory control method, but its utility is being reevaluated due to massive supply chain shocks. Companies that used to only keep a small amount of inventory on hand are now conducting “defensive purchasing”, buying extra inventory to pad their emergency supplies in the case of future shortages. Meanwhile, consumers have begun spending at increased rates as they emerge from lockdown, purchasing at up to 7% above pre-pandemic levels. In short, both consumers and manufacturers are consuming at above normal levels, which means that suppliers are running low on inventory.

When you combine a tightly woven supply chain and rapidly changing variables, you tend to get a nonlinear relationship between causes and effects. In more certain times, your favorite chicken restaurant might run out of chicken because too many people are eating there, an Econ 101 example where demand outstrips supply. However, in the world we currently live in, there are potentially many layers to any shortage. To extend our example, your favorite chicken restaurant may run out because:

  • There aren’t enough workers to prepare all the birds it needs
  • The birds got held up at customs
  • There aren’t enough shipping containers to transport all its supplies
  • Its direct supplier ran out of chickens
  • Its supplier’s supplier ran out of chicken feed
  • The chicken feed vendor ran out of corn

And so on and so on.

The impact of uncertainty and increased consumer spending has resulted in shortages from primary manufacturers and other levels—vendors, vendors’ vendors, etc. This makes supply chain shortages very hard to predict.

Bitvore Helps Model Supply Chain Risks

If you’re an investor, you want to ensure that the companies you’re investing in have sound supply chains. Providing a good product isn’t enough—you need to make sure that the companies you invest in can consistently supply those products.

At Bitvore, our datasets include over 400,000 companies. This consists of a large sampling of major suppliers to every industry. Our machine learning model collects and evaluates every piece of news and public-facing information about these companies, allowing investors to obtain a comprehensive risk assessment.

If you’re interested in investing in a company (or otherwise doing business with them), you can use Bitvore’s datasets to investigate their entire supply chain—or at the very least, you can understand the makeup of suppliers in that organization’s industry. You can then understand whether these suppliers face risks, such as sudden spikes in the price of raw materials, labor shortages, transportation bottlenecks, and more.

Threats to the global supply chain show no sign of slowing down, which means that it’s important to build a future-proof capability to assess supply chain risks.

 

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