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Global supply chains under strain as order volumes surge

Following a year of volatile trading activity, research from Tradeshift reveals that suppliers are struggling to keep up the pace with a spike in orders, heightened by cash flow issues.

According to Tradeshift’s latest Index of Global Trade Health, global business-to-business transactions grew by 10.2% in the first quarter of 2021. This is the third consecutive quarter in which worldwide transaction volumes have risen at double-digit rates.

The index offered a positive outlook for the year ahead with trade activity in the eurozone rising by 14.5% in the first quarter driven by a spike in orders across the manufacturing sector. While transaction volumes in the UK trended below the global average at 6.7%, this was still an increase to pre-pandemic levels. Transaction volumes in the US, which were growing at almost double the worldwide average in the last quarter of 2020, fell back into line with global averages at 10.5%.

Following a period of remarkable economic recovery, trade activity in China declined by 21%. This can be attributed to the economy stabilising after a significant growth period as well as Chinese New Year celebrations triggering a predictably quieter quarter for trade.

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China is three months ahead of the US in trade recovery

While growth in transaction volumes may be starting to decrease in China, Tradeshift’s analysis of cumulative volumes shows that it is continuing to build on growth made post-lockdown. China’s first lockdown ended in late February 2020, three months before most Western countries, and its recovery speed can be used as a benchmark for other nations. Global transaction volumes are currently approximately six months behind where China was at an equivalent point in its recovery. In the US, transaction volume recovery is three months behind China in real terms.

In addition, data from Tradeshift suggests that the first quarter of 2021 may be “a tipping point” in the UK’s recovery and that trade activity has stopped losing ground on where it was in 2020, bolstered by a widespread vaccine distribution programme.

Impending bullwhip could threaten supply chain integrity

Transaction volumes in the manufacturing sector grew by 25.6% in the first quarter, and while the surge can be viewed as a positive, it could also prove to be a mixed blessing. The latest spike follows a year of volatile trading activity, with many large buyers reducing their orders at the beginning of the pandemic in fear of recession. The sharp increase in consumer demand that followed has created new challenges after multiple lockdowns and factory closures. This demand has been further intensified by the vaccine roll-out.

Data from Tradeshift shows manufacturing order volumes increased 80% year on year in March compared with 21% for invoice volumes. This not only suggests that suppliers are struggling to keep up the pace fulfilling orders, but also implies that suppliers are not receiving payments quickly enough for them to accelerate production.

In a similar vein, global order volumes grew by 16.9% in the first quarter, but invoice volumes by just 9.5%. In a survey conducted by Tradeshift, one in five suppliers admitted they are struggling to meet increased demand. This has been worsened by long payment terms and a rising number of late payments. About one-third of suppliers state they have seen their cash flow position worsen over the past six months.

Research from Tradeshift proposes that 2021 could lay the foundations for significant economic growth but that this can only be achieved if buyers and suppliers maintain a flexible and collaborative relationship. Suggested measures include better support for suppliers under financial strain and increased supplier diversification. The implementation of digitised processes can also help to reduce manual effort while increasing productivity and efficiency.

Naomi Davies

Naomi Davies

FDI consultant

Naomi Davies is an FDI consultant at Investment Monitor, with expertise in location benchmarking and cross-border investment.