Supply Chain Shortages

The concept of “Supply Chains” was likely not at the forefront of the minds of everyday consumers when shopping online or at stores. However, that may have changed recently as many desired goods are in short supply as of late, and local and national news platforms brief many consumers about recent shortages of goods and the inner workings of the global economy that have been impacted by the Covid-19 Pandemic.

As we discussed in our piece titled Causes of Inflation, one-way inflation generally manifests within an economy when nominal GDP stays flat or increases even as transactions within an economy fall.

Causes of Inflation

Transactions within the economy can fall even if there is no inflation. This may indicate that demand in the economy is weakening.

However, currently, the growth of transactions within the economy does not appear to be slowing down due to a lack of demand. Instead, the pace of transactions is reportedly slowing down because production and distribution have not kept up with the demand that has been spurred in part by government spending.

This may be a real-world example of Say’s Law, which states that income generated by past production leads to demand by those who earned the income. Say’s Law theorizes that the ultimate source of demand is production. A worker cannot make a purchase without first earning his wages. (Financing one’s future wages with debt is a maneuver around this, but the worker still pledges to pay off their loan with the fruits of their future labor).

Because demand has remained robust and the supply side has not been able to keep up, we have seen shortages in certain sectors where consumer demand has been strong.

Some companies are likely frustrated with their inability to keep up with consumer demand because they are unable to maximize their sales potential when faced with such strong demand for their products.

So, any consumer demand that exceeds the supply will go unfulfilled, at least in the short term.

Yet, another potential effect to these industries experiencing more demand than supply is the ability to have pricing power. Consumers may be faced with pay-up or wait when in the market for an iPhone, a car, or even a house. Some of these items have one input holding up production. Others are playing whack-a-mole to fix a new problem once a prior issue is dealt with.

Source: Investopedia

CNN reported the following back in September 2021:

“The computer chip shortage first hit the auto industry last year. As the pandemic spread and car sales fell suddenly, most automakers cut back on future chip orders, anticipating that demand for new cars would remain depressed for an extended period.

But when car sales bounced back much faster than expected, the automakers found they couldn't restore their chip orders because the tech industry had snatched up the supply to use in everything from laptops and tablets to phones and 5G networks.

Microchip supply had been widely expected to bottom out in the second quarter of this year and then start to improve. But a surge in Covid-19 cases caused a new round of shortages, as chip plants were forced to temporarily shut down in some hard-hit countries, such as Malaysia.”

The Global Chip Shortage,
Future Trends, and
Investment Opportunities

This highlights numerous issues. When the pandemic hit, and shutdowns became inevitable, planning for global demand created challenges for businesses, which were often accounting for worst-case scenarios. But these difficulties were compounded as plans to re-accelerate production across industries have run into obstacles as the virus has caused roadblocks.

This has effects beyond autos.

Source: September 2021, CNN. “Automakers' problems are much worse than we thought”

The Wall Street Journal wrote the following about the homebuilding industry, “More than 90% of builders reported shortages of appliances, framing lumber and a type of engineered wood known as oriented strand board, according to a May survey by the National Association of Home Builders. Another 90% said they faced shortages of plywood, and 87% cited shortages of windows and doors.”

The Journal report sounds eerily similar to CNN’s report on automakers:

“At the start of the pandemic, construction companies laid off employees and tried to work through inventories. Then demand for new homes jumped, and supplies for builders haven’t caught up, in part because of labor constraints in manufacturing as the pandemic drags on,” said Lisa Ellram, a professor of supply chain management at the Miami University Farmer School of Business in Oxford, Ohio.

Of course, one or two examples of data points do not make a trend. Nevertheless, let’s look at a third example to help further understand this concept.

Sources:
October 2021, Wall Street Journal. “Builders Hunt for Alternatives to Materials in Short Supply”
October 2021, Reuters. “Apple likely to cut iPhone 13 production due to chip crunch -Bloomberg News | Reuters”

The global supply chain has moved more and more towards the Just-in-time inventory system popularized by Toyota several decades ago. Ironically, Toyota reportedly avoided issues related to the supply chain earlier this year as it stocked up on components. Bloomberg wrote in February, “Toyota’s stockpile stands in contrast to its renowned production philosophy. In the 1960s and 70s, the Japanese heavyweight invented the art of just-in-time manufacturing — a strategy rooted in keeping a low stock of goods and raw materials, or inventories, on hand to cut costs and boost margins while streamlining production. Waste can manifest as excess inventory.”

While Toyota seemingly managed to sidestep the issues that plagued other auto manufacturers earlier in the year, large parts of the economy ended up producing fewer goods than they needed to make up for the lack of production.

Indeed, many commentators have attributed much of the supply chain deficiencies to industries that employ the Just-in-time inventory system developed by Toyota.

Venture Capitalist Morgan Housel states, “Just-in-time manufacturing – where companies don’t stock the parts they need to build products, relying instead on last-minute shipments of components – was the epitome of efficient operations over the last 20 years. Then Covid hit, and virtually every manufacturer found itself dreadfully short of what it needs.”

This Just-in-time system depended on the efficient shipping of goods. This process was thrown into flux due to the pandemic as well.

The Wall Street Journal reported the following in June, “ship bottlenecks began in late May when a coronavirus outbreak forced authorities to shut down parts of Guangdong province, which is home to Yantian, one of the world’s busiest ports and a major gateway for containerized exports like electronics, furniture, home appliances, and car parts.”

“Officials at Yantian say cargo-hauling operations that normally handle about 36,000 containers a day are back to 70% of capacity, from 30% earlier this month.”

And then, once all these ships finally make it out of China’s clogged ports, instead of finding an easy passage to their destination, they face traffic that didn’t exist before waiting for them.

Unfortunately, California’s Long Beach port was configured for Just-in-time delivery, and the influx of containers being brought to the port is overloading the capacity. This causes more traffic as longshoremen struggle to find room to place all the incoming containers.

Sources:
February 2021, Bloomberg. Toyota Broke Its Just-in-Time Rule Just in Time for the Chip Shortage - Bloomberg
June 2021, Wall Street Journal. “Chinese Port Logjam Threatens Christmas Shipping Rush”
November 2021, CBS News. “Why it's taking so long to get goods off cargo ships and onto store shelves”

While supply chain shortages may be slowing down economic activity in the short term, some analysts are calling for a lot of the issues to be cleared up.

Ryan Petersen, CEO of Flexport, took direct action to clear up issues at the Long Beach port we referenced earlier. The Los Angeles Times wrote, “He learned the docks were too crowded to accept returns of empty containers, which meant that truckers couldn’t pick up a new full container since they were stuck with an empty one on their trailer chassis. The following morning, Petersen tweeted this all out — and his thread became a rare viral sensation about logistics.”

This led to policy changes and direct action to ease the logjam at the port. While the supply chain is not in the clear just yet, steps seem to be taken in the right direction.

Author and Journalist Gregg Easterbrook, formerly of The Atlantic Monthly, predicts that the logjams at the ports will be resolved by the end of next year. While the end of next year may feel far off from now, it is relieving to hear that experts see some end to the supply chain issues. And Easterbrook knows the shipping industry well, as his latest book focused on how the US Navy ensures global trade over the oceans.

Sources:
October 2021, LA Times. “The real story behind a tech founder’s ‘tweetstorm that saves Christmas’”
December 2021, Hidden Forces Podcast. “How the US Navy Creates Prosperity & Why We’ll Miss It”

Amid strong government support, demand in the economy has remained robust. However, after exhausting inventories, consumer demand was not supported by the production of goods.

Just-in-time business models meant that when production stopped due to Covid lockdowns, there was no excess inventory waiting to meet consumer demand when it surged above normal levels.

This has affected people’s ability to buy cars, homes, and cell phones. The producers of these and other items are racing to meet demand.

Beyond slowdowns and stoppages in production, ports have seen significant logjams. So even once suppliers have done their part to meet demand, distribution and logistical hurdles must be addressed. Business executives and policymakers are taking steps to address these issues.

Some are hopeful that by the end of 2022, supply chain shortages will be a thing of the past, but in the meantime, they are causing inflation.