Supply chain woes are global, local … and personal
Holidays may be less ‘happy’ if gifts fail to arrive, but there are alternatives: make new memories instead
Six months ago if you had mentioned the topic “supply chain” in a conversation with your friends and neighbors, you would probably have been greeted with a blank stare.
Today it has definitely entered the American lexicon – and only because it is broken.
Part of the reason is because some of the most prominent people in our country – including the president – are talking about it.
The other part is that almost every one of us is feeling the effects of it personally in our daily lives.
The broken supply chain is affecting so many things: but it is curious how, for decades, we have taken it for granted and, indeed, would never have noticed it until it broke.
We actually had a warning about how fragile the supply chain was back in March when the mammoth container ship Evergiven got wedged in the Suez Canal for six days, disrupting global shipping in the process. It was a harbinger of things to come.
Barely a minute into his formal remarks after the Federal Reserve’s Open Markets Committee meeting on Nov. 3, the Chairman Jerome Powell brought up the topic.
“The supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors,” Powell said. “In particular, bottlenecks and supply chain disruptions are limiting how quickly production can respond to the rebound in demand in the near term.
“As a result, overall inflation is running well above our 2 percent longer-run goal. Supply constraints have been larger and longer lasting than anticipated.”
Ah, there you have one consequence of the broken supply chain affecting every single one of us: rising prices on almost everything.
Powell was not optimistic that his organization – which has more economic muscle than any other entity in the US – can quickly fix the problem.
“Our tools cannot ease supply constraints,” he said. “We continue to believe that our dynamic economy will adjust to the supply and demand imbalances, and that as it does, inflation will decline to levels much closer to our 2 percent longer-run goal.
“Of course, it is very difficult to predict the persistence of supply constraints or their effects on inflation. Global supply chains are complex; they will return to normal function, but the timing of that is highly uncertain.”
You can view his complete statement at the Federal Reserve site.
In somewhat oversimplified terms, the reason a supply chain exists at all is because in the modern world most consumer goods are produced vast distances away from where they are consumed.
This is not a new phenomenon; in fact it has been true to some extent since colonial times. But in the modern world, the mechanisms to transport these goods from the producer to the consumer have become immensely complex with multiple points of potential failure along the way.
In fact it has given rise to an entirely new industry: logistics!
For those with a more wonkish bent, a more formal definition of a supply chain is found at the Corporate Finance Institute’s article What is a Supply Chain?
“A supply chain is an entire system of producing and delivering a product or service, from the very beginning stage of sourcing the raw materials to the final delivery of the product or service to end-users.
“The supply chain lays out all aspects of the production process, including the activities involved at each stage, information that is being communicated, natural resources that are transformed into useful materials, human resources, and other components that go into the finished product or service.”
You can tell from this, if you didn’t already know, that it is complicated. The key point to remember is that there are many potential points of failure.
Both because of the vast distances and the multiple players involved in producing and transporting each item, failure at one point cascades along the entire chain. All subsequent points in the chain are affected.
The current bottleneck can in part be traced to the severe outbreak of Covid in south Asia during the summer and early fall.
Factories in Vietnam, Thailand and other countries in the region were forced to shut down because of the pandemic.
That interrupted production at one of its most vital sources. But it was not the only problem.
The Chinese ports of Yantian (Shenzhen) and Ningbo-Zhoushan – two of the top five largest ports in the world – each experienced multi-week partial-terminal closures aimed at curbing COVID outbreaks, slowing global supply chains.
On the American side of the Pacific, similar disruptions resulting from the pandemic lead to increasing backlogs at West Coast ports, in particular Los Angeles and Long Beach.
These two giant harbors receive about 40% of all container traffic originating in Asia and destined for US consumers.
As of late October, not only were there 80,000 containers piled high on the docks in the two harbors, but there were more than 80 ships at anchor in the ocean nearby waiting to unload additional containers.
A shortage of truck drivers, warehouse space and tractor trailers to load the containers on compounded the problem.
It was in light of all these cascading supply chain issues that President Joe Biden convened a meeting of business leaders at the White House to address the issue in mid-October.
In a statement released after the meeting Biden Administration Efforts to Address Bottlenecks at Ports of Los Angeles and Long Beach the administration announced: “These leaders are announcing a series of public and private commitments to move more goods faster, and strengthen the resiliency of our supply chains, by moving towards 24/7 operations at the Ports of Los Angeles and Long Beach.”
The Port of Los Angeles would be expanding to 24/7 operation. The Port of Long Beach expanded operations in mid-September. In addition, the International Longshore and Warehouse Union (ILWU) announced its members are willing to work extra shifts and large companies are announcing they will use expanded hours to move more cargo off the docks, so ships can come to shore faster, the White House said.
While that was certainly well intentioned and welcome, it only addressed a small part of the problem. Alone, unclogging the ports – even if successful – could really not change very much at all no matter how loudly it was proclaimed throughout the land.
The problem is much more complicated, extending from Asia to the West Coast and points beyond. Fixing just one broken link in the chain is really not going to make a huge amount of difference immediately.
That was made clear in a survey released by the National Federation of Independent Businesses on Nov. 3. Supply Chain Disruptions, Staffing Shortage Will Negatively Impact Holiday Season
The introduction was not reassuring: “Survey Shows Supply Chain Issues and Staffing Shortage Will Raise Prices, Costs,” it said.
According to the NFIB, “About half of small business owners (48%) reported that supply chain disruptions are having a significant impact on their business, almost unchanged from September’s survey.
“Another 34% of owners reported supply chain disruptions are having a moderate impact on their business and 12% said [they] had a mild impact on their business.”
While the immediate picture was discouraging, the trend over the previous few months was even worse.
“Supply chain disruptions are becoming increasingly challenging for many small business owners, with over half (62%) experiencing disruptions saying that the supply chain disruption is worse now than it was three months ago,” the NFIB reported.
And, the outlook for the future was definitely not optimistic.
“Almost all small business owners (90%) anticipate the supply chain disruption that is impacting their business to continue for five or more months.”
That puts us well beyond Christmas and into, perhaps, the spring of 2022.
On the very same day as the NFIB released it's pessimistic survey findings, the White House had a much more optimistic outlook in a Nov. 3 Briefing Room blogpost Improving and Tracking Supply Chains Link by Link
“While supply chain disruptions remain a challenging side effect of the COVID-19 pandemic, they now also signal the swift return of strong consumer demand in the U.S. after one of the deepest recessions on record,” it said.
It further explained that the Administration’s Supply Chain Disruptions Task Force is measuring and tracking the status of the leading drivers of disruptions in the transportation and logistics supply chain, and the steps being taken “to ensure that goods continue to reach the households and businesses who depend on them.”
The reason for its optimism is based on its faith the Supply Chain Disruptions Task Force will succeed at its main task: “[To] act as an honest broker to encourage companies, workers, and others to stop finger-pointing and start collaborating.
“Many have responded to this call, recognizing that a once-in-a-century pandemic requires us all to do our part to support our nation’s economic recovery. Moving all links in the supply chain simultaneously doesn’t happen overnight, but the actions being taken by every link in the chain are making a difference.
“These actions are starting to clear the backlogs and break down the barriers that have made it hard to move this unprecedented volume of goods.”
The post supports it optimism with a variety of indicators showing that things seem to be improving. But, remember, that is their job – to put the best possible spin on things.
As the old adage advises, the proof will be in the pudding.
While it is most unlikely that we will see panic buying and shortages of toilet paper like we did almost two years ago, undoubtedly some items will remain in short supply.
If those are the particular items on your holiday shopping list, you will think things are pretty bad indeed.
To avoid disappointment, be early and be flexible. Do not wait until the last minute. Make your list now and start your shopping, if you must. If something you want is unavailable, find an alternative. There are usually many.
Perhaps you will fare even better if you make this a season of sharing experiences. We are a lot less constrained than we were just one year ago in spending time with those important to us. It might do us a whole lot of good to forget about the useless and unwanted gifts and trinkets and focus instead on making new memories.
That may help us forget a bit about the nightmare that has caused the supply chain disruptions in the first place.
Most of the stuck container ships mostly contains crap from China! If we had a more business friendly Government (like we had before) more items would be produced and manufactured here in The US instead of abroad.
Many thanks for the article Warren. It is very interesting and certainly explains a lot to a lay person like me.