The Supply Chain Challenge
A 30,000 Ft View
By Tony Tofanelli, Director Distribution Management, AMI
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 have become very familiar. 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 or 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 through 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 thought to how products are moved and delivered around the globe prior to Covid-19. 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 were taking 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 grounded aircraft, freight companies reduced 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 would 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 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 un-forecasted 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 unexpected spike in demand for products. It is easy to see why we have a problem on our hands. (continued)
