Manufacturers Sit on Unfinished Products Amid Shortages
From Allegion to GM, Supply-Chain Delays Cause Challenges
Allegion (ALLE), CNH Industrial (CNHI), Honeywell International (HON), General Motors (GM), Ford (F), and Illinois Tool Works (ITW) are among the manufacturers sitting on a growing inventory of unfinished goods as they await key components and materials.
For months, shortages of everything from electronic components to semiconductors have been causing supply-chain difficulties across industries. Determined to keep production going and plants open, manufacturers are building up massive inventories of unfinished products like trucks and farm equipment. With demand surging, they are also facing huge backlogs even as they rush to make new products. Inventories of unfinished durable goods increased 3% in June year-over-year and were up close to 12% from June 2019.
A Growing Production Backlog
Manufacturer Allegion has seen its backlog increase to more than three months as the company waits for chips and electronic components for its lock systems. The company has repurposed some production lines to make products that can be completed. CNH Industrial, a maker of farm and construction equipment, is sitting on thousands of earth-moving machines, crop harvesters, and tractors that are not complete due to a lack of parts. If the company ceased production while it awaited the components, it risked falling too far behind in meeting all the customer demand.
Meanwhile Ford and GM are storing thousands of new vehicles that need semiconductors and other components in parking lots while they await shipments to complete the vehicles.
Manufacturers Finances Begin to Take a Hit
The supply-chain problems are beginning to hurt the manufacturers financially even as sales and profits are up. Honeywell said revenue would have been between $100 million and $200 million higher if not for supply-chain constraints in the second quarter. The manufacturer is contending with shortages of plastic resins, semiconductors, and other components, which is hurting its ability to make building systems, safety products, and equipment for warehouses.
Illinois Tool Works is facing a $200 million backlog due to component shortages. The backlog, coupled with supply-chain delays, hurt its organic growth in the second quarter, which would have been around 10 percentage points higher. With supply-chain constraints not expected to end anytime soon, investors should pay close attention to the impact these issues are having on manufacturers’ bottom lines.
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