Observations 2H2022 – Oct

What we are seeing on the B2B Manufacturing front…

First, let’s begin with the distinction between nominal and real. We live in a nominal world and most data is reported in nominal terms such as PMI manufacturing data. When business owners speak of their outlooks it is in nominal terms. The difference is inflation. REAL accounts for inflation so the higher inflation the greater the disparity between the 2.

Real demand is coming down so there is less need for producing more output so that translates into less need for workers. This can lead to more layoffs raising the unemployment level. Currently there is an imbalance in the work force with the demand exceeding the supply of workers. This is on a national level as many areas have differing situations such as NY. (in a separate note)

Real incomes (money made after accounting for inflation) & spending are growing weaker which means that business sales are getting weaker

Revenues are being held up mostly by higher prices rather than output or volume. Remember that inflation works both ways – in the rise of costs for businesses but also in elevating their revenues from increased sales prices. Margins are compressed still but the revenues are maintained or even slightly higher based on inflation. I call this a dilution of value. We are getting less output per every input.

Inventory issues…

Excess production without continued sales growth results in inventory building. In other words, if we continue producing at the same level with sales growing weaker then it is inevitable that inventories will increase.

Excess inventory without sales growth is unsustainable. Can we keep building and growing our inventory? At some point we run out of room and it negatively affects our cash flows. I stress the importance of remaining liquid during these compressed, tightening liquidity times. Can inventory quickly be turned into cash when sales are diminishing? Doubtful.

Supply chain issues and delays are still present as materials are in short supply. Therefore we are seeing lead time growth in receiving these materials.

Therefore, there is a necessary delicate BALANCE required…

The balance is between maintaining higher inventories to avoid delays for order completion with all these supply chain delays. At same time, we can receive “bulk” discounts and lower pricing with buying in greater bulk. This can also be deemed as an investment against future cost increases. In an inflationary environment with rising costs, that is possible.

Then at same time we are working on keeping accounts payable down and minimizing risk of those inventories building and then selling product at a LOWER price. That is always a possibility as well that needs to be accounted for and considered. This would especially be the case in a deflationary environment or with sales declining and inventory not moving unless we reduce prices. Supply and Demand at work. As demand decreases then supply will increase. Prices should be falling in order to entice people to buy (increase demand) to move that supply. I am not going into advanced economic theory here, just simple economic laws of supply and demand.

There is uncertainty about future orders. Yes there is uncertainty about the sales, costs of parts and supplies and materials, etc. Therefore, less inventory seems to be less risky. Remaining liquid and cost reduction are paramount.

No one wants to keep inventory on hand anymore it seems. And it seems to make sense.

Concern is…

Lower Demand with rising inventory levels. Not a good or profitable scenario.

Turnover rate of inventory into sales is questionable & at what input cost level before conversion.

Importance of remaining liquid to seize opportunities. Cost reduction and liquidity are most important during uncertainty and tightening liquidity.