Global Supply Chain Delays Affecting South Africa’s Manufacturing Sector

28 May 2021 – Advisory multinational PwC estimates that about a quarter of under-utilisation in large manufacturing facilities in South Africa during the first quarter of the year was associated with material shortages.

Data by Statistics South Africa (Stats SA) shows that, in the first quarter, large manufacturing facilities were operating at 74% of capacity.

Of the 26% of under-utilisation, some 3.7% was attributed to a shortage of raw materials.

The Stats SA data also shows that, for five out of ten manufacturing subsectors, raw material shortages were a larger constraint on capacity utilisation in the first quarter of this year than during the lockdown-hit second quarter of 2020.

Producers of consumer goods, like clothing, plastic products and furniture, were among those facing greater input pressures compared to last year. Manufacturers of heavy machinery and metal products have the highest underutilisation owing to raw material shortages.

“Factory output contracted by 0.7% year-on-year during the first quarter of this year and this number could have been better, were it not for the shortage of raw materials,” PwC Strategy& Africa chief economist Lullu Krugel, PwC Strategy& economist Dr Christie Viljoen and PwC Connected Supply Chain leader Rheinhardt Schulze say.

This mirrors similar challenges in global supply chains, as the IHS Markit Flash Purchasing Managers’ Index (PMI) reports released on May 20 indicated that, while private sector growth continued at a strong pace in the world’s largest economies, input material shortages and logistics challenges were reported in some major economies during May.

The global supply chain issues have contributed to higher international commodity prices. The London Metals Exchange (LME) Index, which tracks prices of aluminium, copper, zinc, lead, nickel and tin, has increased by 23% in dollar terms over the past year.

“For South Africa, higher commodity prices are a double-edged sword. It is attractive for exporters who earn foreign currency on their goods, while at the same time it increases the cost of inputs used in local manufacturing processes,” Krugel, Viljoen and Schulze say.

“In the near term, the cost of supplies from South Africa’s key trading partners could increase, stemming from overtime and expedited freight costs, as well as from paying premiums to buy up supply and hold capacity.

“Companies are also working through alternative sourcing strategies. It will be critical to identify alternative supply scenarios and evaluate what these mean for operations,” they advise.

PwC is of the view that South African companies with direct exposure to the current global supply chain disruptions can take several actions to mitigate the impact. These include securing capacity and delivery status for Tier 2 and 3 suppliers, and securing allocated supplies and overtime assembly capacity where possible.

Companies should also be buying ahead to procure inventory and raw materials that are in short supply in impacted areas and securing future air transportation capacity as supply and capacity become available, shortening what might otherwise be ocean freight-based lead times.

Additionally, companies must activate pre-approved parts or raw-material substitutions in places where the primary supplier is impacted, but a secondary supplier is not, and activate product redesign or material certification resources where reliable second sources of parts or raw material are not already available, Krugel, Viljoen and Schulze note. Source (Engineering News)