Caution Around Supply Risk is Creeping into Financial Forecasts

It's one thing to read about a supply disruption's impact on a company's earnings or brand reputation after it's happened. But it's something else entirely to see an organization guiding investors to take into account potential risks in the supply chain that have not yet manifest themselves in actual costs. However, this is precisely what one company, Stoneridge, a "designer and manufacturer of highly engineered electrical and electronic components, modules and systems principally for the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets," did in a recent statement to the street.

In their latest financial guidance, a Stoneridge executive is quoted as stating: "We are reiterating our previous guidance. At this point we expect Stoneridge to generate positive operating income in the fourth quarter. However, the possibility of supply chain disruptions could modify our outlook as capacity reductions by our suppliers have not been restored. In addition, our cash position may be affected by potential volume increases which would require a ramp up in working capital and may result in a modest cash use."

What I find most curious about this statement is that Stoneridge is not guiding investors to consider caution when evaluating their prospects based on the impact of potential supplier bankruptcies (the most frequent supply risk concern we've seen of late). Rather, Stoneridge is most concerned with the ability of its supply chain -- and itself, for that matter -- to bring capacity back online during an upswing. It used to be this type of talk was reserved for procurement, supply chain and operational discussions inside a company. But the fact that it's making it into forecasts like this suggests to me that we might have a very real challenge on our hands in the next few quarters if we genuinely begin to pull out of the recession.

Jason Busch

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