If anything has been consistent for consumer brands over the past few years, it’s change. Historic economic challenges like inflation, high interest rates, and labor shortages have wreaked havoc on manufacturers worldwide. Weave in the accompanying supply chain disruptions – which were first induced by the pandemic and then worsened by tensions in Ukraine and Taiwan – and it’s not hard to understand why many organizations still find themselves threading incredibly deep waters.
All these challenges have left an indelible mark on almost every business function. But there’s one area in particular that’s skyrocketed in value. That is: supply chain visibility. Indeed, it’s never been more important for organizations to have constant visibility into their supply chain. This includes being able to predict delivery times and transportation costs, and maintain production flow and overall profitability.
Larger companies often have an economist on staff to help them do this by studying the global economy, monitoring supply chain disruptions, and spotting potential backlogs. However, companies without these resources are at a disadvantage as they try to bring predictability to an often unpredictable aspect of their business.
To help provide greater insights, the Federal Reserve Bank of New York began providing a Global Supply Chain Pressure Index (GSCPI) in May 2022. Let’s take a look at what exactly the GSCPI is, and how you can use it to predict and manage supply chain pressures.
What Is the Global Supply Chain Pressure Index (GSCPI)?
The GSCPI is an effort by policymakers at the New York Fed to integrate transportation cost data and manufacturing indicators to provide companies with a more reliable gauge of global supply chain conditions. It is continuously updated and published at 10:00 a.m. Eastern Time (U.S.) on the fourth business day of each month. This index was first introduced by Gianluca Benigno, Julian di Giovanni, Jan J. J. Groen, and Adam I. Noble in Liberty Street Economics in January 2022.
Companies can use the GSCPI to gauge how important supply constraints are with respect to economic conditions and better understand how those constraints evolve over time. It provides an overview of potential supply chain disruptions, as well as regional indicators for analyzing inflation, trade, and globalization trends across the U.S., U.K., Europe, and Asia.
What Indexes Are Used To Create the GSCPI?
The NY Fed integrates 27 variables from commonly used metrics into the GSCPI. This includes data from global transportation costs and regional manufacturing surveys across seven economies, which track shifts in supply chain pressures from 1997 through now. Metrics used to provide a snapshot of potential supply chain disruptions include:
- Baltic Dry Index: The BDI tracks the cost of shipping raw materials, such as coal or steel.
- Harpex Index: The Harpex Index is used to track container shipping rate changes in the charter market. Charter rates are assessed weekly for six- to 12-month periods (on the basis of weekly fixtures reported, and the company’s own market assessment.)
- U.S. Bureau of Labor Statistics: The BLS provides price indices that measure air freight shipping costs for imports and exports from the U.S.
- Purchasing Managers’ Index Surveys: The PMI provides an overview of the prevailing direction of economic trends in manufacturing and service sectors across major global economies. It summarizes the purchasing managers’ experience of whether market conditions for delivery times, purchased stocks, and backlogs are expanding, contracting, or staying the same.
4 Tips for Using the GSCPI
As part of the supply chain management process, companies can use the GSCPI to better understand standard deviations from the average for global supply chain pressures. When the index is high, there is more supply chain pressure; when it is low, there is less pressure. The index goes back to 1997, but there were significant swings throughout the pandemic.
Here are four tips that will help you take advantage of GSCPI insights:
Tip 1: Be Prepared To Respond to Volatility
Use the inputs from the economic research provided by the GSCPI to respond more effectively to supply chain volatility. Although your business can take certain actions to respond to short-term changes in supply chain-related components, global disruptions make it more important than ever to position the supply chain for the long haul, too.
Companies like Ford Motor Company, are investing in digital transformation, to maintain their commitment to environmental sustainability. In fact, Ford will need to rely deeply on supply chain information to be able to achieve its goal of increasing its Electric Vehicle (EV) production from 1% to more than 30% in just four years.
Tip 2: Manage Inventory More Effectively
Inventory costs can be a major drain on profitability, so it’s critical to manage this factor efficiently. In response to certain shortages, some retailers and businesses may have procured too much inventory and may now be exposed to potential declines in buying patterns in the coming months as the global economy continues to fluctuate wildly.
Tip 3: Anticipate Congestion Issues
The pandemic highlighted just how fragile the global shipping infrastructure can be. You can observe limitations in port traffic, driver shortages, and fuel expenses. Container shipping and delivery time information are useful to anticipate congestion issues and determine if an alternate port is needed to avoid backlogs. Recently, the Port of New York and New Jersey began handling more cargo volume than Long Beach and Los Angeles. The ongoing truck driver shortage is also a catalyst for congestion issues.
Tip 4 Update Financial Projections
With its monthly focus on costs, the GSCPI should be used to routinely assess and update financial projections. Be aware of how much shipping costs and transportation delays will impact the ability to sustain profitability, and plan monthly cash flow projections accordingly.
Optimize Your Supply Chain Processes With Anvyl
Anvyl helps reduce the pressure of supply chain disruptions by improving supplier relationship management using state-of-the-art SRM software. Anvyl is an intelligent PO management tool that facilitates real-time collaboration between teams, suppliers, and technology.
Our team has extensive experience in helping companies manage their supply chains better. Contact us today to learn how Anvyl can help your company seamlessly integrate your SCM applications.
