A 30,000 FT VIEW OF THE SUPPLY CHAIN CHALLENGE
An AMI team member's thoughts on the continuing supply chain issues.
Back orders, price increases, substitutions, extended lead times, and “I’m sorry but due to material availability we cannot complete your order as requested” are terms and phrases that we all have become very familiar with. In the past two years we have seen shortages across a vast array of manufacturing and logistic industries. Automobiles, plastics, consumer electronics, furniture, glass, aluminum, and paper goods just to name a few. And when I say paper goods, I am not just talking about toilet paper (Though we all now know the stress and anxiety of walking to that aisle in the store hoping and even praying that there will be something, anything available. It doesn’t even have to be Angel Soft of Charmin, just something) but other paper goods such as corrugated board, paperboard, and even labels. With these supply disruptions across so many categories coupled with the ongoing global transportation challenges it is hard to imagine anybody who has not been both personally and professionally impacted by the current supply chain crunch.
My mother, who is just now learning how to order products off Amazon, recently asked me, “What is going on with all of these companies not delivering on time and why can’t they get it fixed?” And though her question was rhetorical (as she has never thought about supply chain a day in her life), it got me thinking about how many of us ever gave much thought about how products were moved and delivered from around the globe pre-covid? Or did we think about how complex the global supply network really is? So, I looked into it a bit and found a survey that was conducted by Oracle in Sept of 2021. The results showed that prior to covid almost half of all American consumers admit to never thinking about how products were delivered. By September of 2021, 9 in 10 American consumers take the supply chain into consideration when making a purchase (with 8 in 10 saying they would pay a premium for timely deliveries). This seemed oddly familiar to me as it reminded me of my time as the long snapper on the Wingate University football team. If I did my job well nobody would ever know my name or think twice about me. But as soon as something goes wrong every single person at the game would be pointing the finger at me.
To answer my mother’s question, we have to go back to our high school economics class and talk a bit about supply and demand. (My disclaimer here is that people much smarter than me will be studying this situation for years to come and will settle on a much more detailed and in-depth analysis. I’m sure it will even be a case study when my children take economics in school).
To set the stage, March of 2020, the Dow Jones Industrial Average plunged by roughly 26% of its total value in four days. With government shutdowns/lockdowns looming many corporations were forced to take drastic measures to conserve cash and protect against the unknown months ahead. Companies begin to lay off workers, delay or cancel pending orders, and suspend investment in growth and technology. Airlines ground aircraft, freight companies reduce service schedules, and companies across the world began to implement Covid mitigation policies. At the time this all made complete sense. With travel restrictions, government lockdowns, and record high unemployment rates, there will certainly be less spending and therefore less demand for goods and services in the marketplace. But was there?
Circling back to supply and demand. Covid related impacts on supply should not be a surprise to anybody. Factories shutting down for weeks at a time due to Covid surges, governments shutting down companies for periods of time, greatly reduced work forces, reductions in flight, shipping, and trucking schedules have all negatively impacted the supply output across most industries. But this should have been ok because the high unemployment rates and government lockdowns would depress demand. Less supply but also less demand, right? The reality is that Covid did NOT drastically reduce consumer spending as expected. Covid simply shifted how the consumer was spending. Consumers began spending money on physical goods rather than spending money on services. As sectors like restaurants, movie theaters and passenger airlines saw their demand plummet other sectors such as consumer electronics and toys saw an unforecasted skyrocket in demand. Consumers who could no longer go to a gym purchased an at home gym, those who could not take the kids to the park purchased activities for the kids to do at home, and those could not go to work at an office purchased furniture for an at home office. (I am writing this from a home office desk that was purchased during Covid. It also took about 5 months from order to delivery).
In both the manufacturing and logistics industries we have seen a reduction in supply and the ability to produce goods coupled with an unforecasted spike in demand for products. It is easy to see why we have a problem on our hands. But let’s go back to my mother’s original question of why can’t these companies fix these issues faster? We have seen this shift for nearly two years now. What can be done? Here we have to keep in mind that the “systems” that need fixing (manufacturing, ports, shipping, trucking, etc) are all very expensive and have a very high barrier to entry. It is because these systems are so expensive that they have been intentionally designed to run at a very high utilization (lean manufacturing and just in time production). Manufacturers know they are only making money when the machines are running. Airlines are making money when the passengers and planes are flying. Freight forwarders are only making money when the ships and trucks are moving. Therefore, by design these companies do not have a tremendous amount of “extra” available capacity to add to the system. The increase in demand coupled with the reduction in supply (largely impacted by Covid disruptions to the labor force) has created back logs of work/orders. Now, post lockdowns, companies can ramp supply back up, however they still lack the capacity in the system to clear the back logs and satisfy a still increasing demand. Leading to the exponential growth in back logs. Manufacturers, shippers, ports, and truckers are now scrambling to increase the available capacity. This requires time and new investment in new equipment, facilities, and labor. All of which (as we talked about earlier) were put on hold in March of 2020 to protect the companies cash position. Additionally, these companies who are trying to add capacity are sourcing equipment (trucks, ships, machinery) from other manufacturers that are facing the same challenges. So, we are stuck in a bit of a circular reference, and it will take some time to get out of it.
To summarize the Supply Chain Crisis will not last forever and will improve slowly. However, it will take some time. Time for existing companies to make investment to increase capacity and supply, time for new players to enter into the existing markets, and time for the demand spikes to settle down a bit. We can read opinions from 10 different experts on this topic and get 10 different timelines for when this crisis will end. Some projections suggest Q2 of 2022, others suggest the disruption will last through the end of 2024. There are simply too many variables (additional Covid strains leading to more work disruptions, increasing interest rates, the volatile labor market, etc.) in the equation to pinpoint an exact date. Furthermore, we will not simply wake up one day and the supply chain problems will be a thing of the past. Different segments of industry will normalize at different times. With most experts agreeing that the automobile industry will have one of the longest timelines to recovery.
Some good news for consumers is on the horizon, historically following periods of scarcity, the market will subsequently have a period of excess. As manufacturers, freight forwarders, and retailers scramble to add capacity and inventory, the “system” will over correct itself (i.e., the bullwhip effect) and be left with excess inventory to be sold and extra capacity to be filled. This will drive down costs to the end user. So maybe I will be able to purchase that new dishwasher my wife wants at a bargain price, if I can convince her to wait until 2023.
Until then we all will continue working through this together; keeping communications open between suppliers and customers, setting realistic expectations, packing a whole bunch of patience and drinking some good wine.