Manufacturers ease inventory building after months of disruption
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Global supply chain pressures eased in July after several months of aggressive inventory building, higher transportation costs and shortages of critical manufacturing inputs.
For manufacturers and procurement teams, the improvement offers some breathing room, though the data do not point to a full return to normal operating conditions. Factory purchasing slowed, safety-stock building declined for the first time since January and transportation cost pressure fell to its lowest level since March, according to the GEP Global Supply Chain Volatility Index.
The shift marks a sharp reversal from the second quarter, when companies were buying ahead to protect production against possible shortages, inflation and geopolitical disruption. Yet the more persistent constraints have not disappeared. Critical material shortages improved only marginally during July, while manufacturers continued to report production backlogs linked to unavailable materials and components.
That combination creates a more complicated operating environment than the headline improvement might suggest. Procurement teams are no longer dealing with the same acceleration in pressure seen during the spring, but many of the constraints that drove defensive buying remain present across global manufacturing networks.
Manufacturers are retreating from precautionary buying
The July data are easier to interpret when set against the rapid deterioration in supply conditions earlier in 2026, when manufacturers responded to rising uncertainty by accelerating purchases and building inventory buffers.
The GEP Global Supply Chain Volatility Index rose to 1.64 in April from 0.57 in March, reaching its highest level since October 2022. A reading above zero indicates that supply chain capacity is being stretched, with higher positive readings signaling greater pressure on available capacity.
Manufacturers responded by increasing purchases of raw materials and intermediate goods, particularly where they expected prices to rise or feared that future disruption could restrict availability.
By May, reports of safety stockpiling had reached their highest level since January 2023, while shortages and transportation costs were elevated at the same time. The pattern continued into June, when manufacturers reported further increases in buffer inventories and backlogs caused by shortages of critical inputs reached their highest level since late 2022.
North America and Asia remained major sources of purchasing demand during that period, reinforcing the impression that companies were securing supply ahead of possible disruption rather than simply responding to stronger underlying production requirements.
July marked a change in that behavior. Factory purchasing volumes slowed, with GEP’s demand component recording its weakest reading of 2026 to that point. China accounted for much of the decline, while the US made a smaller contribution.
Manufacturers also reported less accumulation of raw materials and intermediate products in response to price or supply concerns, marking the first decline in precautionary stockpiling since January. Transportation costs moved in the same direction, falling to their lowest level since March.
Taken together, those movements suggest that part of the earlier surge in demand came from companies bringing purchases forward rather than from a lasting acceleration in industrial activity. That matters because an easing supply chain index can reflect stronger supplier performance, weaker demand or some combination of the two, and July’s figures indicate that reduced purchasing activity played a meaningful role.
For supply chain executives, the practical implication is that lower pressure should not automatically be interpreted as evidence that supplier constraints have been resolved. Capacity can appear less strained simply because manufacturers are ordering less, particularly after several months of defensive inventory accumulation.
Material shortages still complicate the recovery
Regional data show that supply pressure declined across every major market tracked by GEP in July, but the readings continued to indicate stretched capacity rather than a return to broad spare capacity.
Asia’s index fell to 1.37 from 1.95, reaching its lowest level since March, although the region still recorded the highest level of supply chain pressure. Much of the slowdown reflected weaker factory purchasing in China.
North America’s index fell to 0.76 from 1.17, while Europe’s declined to 0.68 from 1.13 as manufacturing input demand contracted further. The UK recorded the largest drop, falling to 0.30 from 1.05 as manufacturers reduced procurement activity and drew down inventories.
Despite those declines, every regional reading remained positive, which means suppliers continued to operate under some degree of pressure even as conditions improved from earlier in the year. The difference is significant because lower volatility does not necessarily translate into greater reliability, particularly when shortages of specific inputs continue to affect production.
GEP’s indicator for items in short supply fell only fractionally in July, and the availability of critical manufacturing inputs showed limited improvement compared with the broader easing in purchasing and transport pressure. Shortages therefore remained high by historical standards, leaving manufacturers exposed to delays even as some headline measures moved in a more favorable direction.
Production backlogs offer another indication of how uneven the recovery remains. Manufacturers continued to report delays caused by missing materials and components, while labor availability was less of a constraint. Reports of backlogs linked to staffing shortages were broadly stable, suggesting that the more serious production risks were concentrated in the availability of physical inputs rather than workforce capacity.
For manufacturers, that changes where attention needs to be directed. Additional labor will not solve a production delay caused by a missing specialized component, just as lower freight costs will have limited effect if the real constraint sits further upstream in the supply base.
The more useful response is therefore likely to involve deeper visibility into supplier networks and a clearer understanding of which materials can be substituted, which components have limited sourcing alternatives and where a single unavailable input could interrupt an entire production process.
Broad indicators such as the GEP index are valuable for understanding the direction of global pressure, but they cannot identify the individual components or supplier relationships that create the greatest operational exposure for a specific manufacturer.
Inventory strategy becomes harder as volatility recedes
During periods of acute disruption, the rationale for holding additional safety stock is relatively straightforward because extra inventory can protect production against long lead times, transport delays and inconsistent supplier performance.
The calculation becomes more difficult once those pressures begin to ease. Inventory ties up working capital, requires storage capacity and can increase the risk of obsolescence, particularly when companies continue purchasing at crisis-era levels after underlying demand has weakened.
Reducing buffers too aggressively creates the opposite problem by leaving production more exposed if shortages return or geopolitical disruption affects transportation and energy markets.
July’s data suggest manufacturers had begun recalibrating that balance. The decline in precautionary stockpiling indicates that procurement leaders were becoming more willing to draw on inventories accumulated earlier in the year instead of continuing to add to them at the same pace.
For industrial companies, the next stage of inventory management is likely to require a more selective approach than the broad buffer-building seen during the second quarter. Materials with long replenishment cycles, few qualified suppliers or a disproportionate effect on production continuity may still justify higher stock levels, while inputs available from several reliable sources may allow companies to reduce coverage.
This places more emphasis on the purpose of inventory rather than the absolute amount held on hand. The more useful question for procurement teams is whether each buffer protects against a specific operational risk or simply reflects buying decisions made under conditions that have since changed.
July also provides an important reference point because much of the survey data was collected before the latest escalation in the Middle East and renewed disruption affecting shipping through the Strait of Hormuz. Transportation costs had already moderated before oil prices moved higher toward the end of the month, leaving open the possibility that some of July’s improvement could prove temporary.
Monthly indicators inevitably capture conditions with a lag, and that limitation matters when geopolitical developments can affect energy costs, shipping routes and supplier confidence within days rather than months.
The July figures therefore show global supply chains moving away from the defensive purchasing surge that characterized the second quarter, but they do not support the idea that shortages have disappeared or that manufacturers can return to pre-disruption assumptions about sourcing, inventory and supplier capacity.
For procurement and operations leaders, the period of lower pressure may be most valuable as an opportunity to reassess where inventory is genuinely needed, where sourcing remains fragile and which supplier dependencies could become costly during the next disruption. The strongest position is not simply to carry more stock or less stock, but to use the current easing in pressure to make those decisions with greater precision.
Source:
GEP
