Those problems are exacerbated by specific problems like the ship that blocked the Suez Canal or the winter storm in Texas. Everything is connected and a hiccup here or there can cause delays and price increases for you and me.
Our conversation, conducted via email and phone, and slightly edited for flow is below.
WHAT MATTERS: What, generally, is the supply chain, and how does it affect the things we buy?
SHEFFI: The supply chain is the process of building products. You can look at it in terms of three basic flows:
- Physical flows. Material is mined and made into, say, iron ore, which is made into metal bars, which are made into a carburetor, which is assembled into a car engine, which is assembled into a car, which is sent to a dealer and bought by a consumer. At the end of life, this car will be disposed (hopefully in a responsible way). Similarly, agricultural products are collected by wholesalers, sent to factories that make soup, sent into warehouses for storage, distributed to retail stores, and bought by consumers. Each operation in this process is executed by a different company, so there is a “chain” of companies involved in transforming stuff mined or grown to finished products. The chain also involves transportation providers (trucks, vessels, trains, airplanes), all kinds of intermediaries (who help, for example, clear customs), warehouse operators where parts or products can be stored until they are used or sold, etc.
- Information flow. To coordinate all these activities, companies involved send a huge amount of information to each other. These include orders, status reports (including sensor data), invoices, many regulatory forms, etc. In addition to coordinating activities, companies use this information to optimize their operations, the inventory they keep on hand, etc.
- Cash flow. While products flow “downstream”, from suppliers to manufacturers, to retailers, money mostly flow in the opposite direction as consumer pay retailers, who pay manufacturers, who pay their suppliers, who pay their own suppliers (some supply chains have a dozen “tiers” of suppliers, and sub suppliers, sub-sub suppliers, etc.)
WHAT MATTERS: When we hear about Ford and GM idling plants, a ketchup shortage or an extreme price jump in lumber, what does the supply chain have to do with that?
SHEFFI: The auto plants are idled because the auto companies need the parts that go into the cars. In the last 100 years or so all companies outsourced a lot of their operations. Thus, auto companies may not build airbags, glass windows, seats, and most other parts of a vehicle. They buy these parts from companies that specialize in these items and assemble them into a complete car. And you need all the parts to make a complete car.
The shortage of chips means that most suppliers cannot build the dashboards, brake pads, safety systems, and many other systems that are part of a modern automobile. As an aside, note that several years ago it was already the case that the value or the electronics in a car is much higher than the value of the metal.
WHAT MATTERS: Which industries are particularly hard hit by supply chain issues?
SHEFFI: The closer the industry is to the consumer, the harder it is hit. But every industry is hit. Even if you are in mining, you need heavy equipment that you cannot get because the chip shortage and if you are in agriculture, you cannot get some of the chemicals you need because of port congestion, lack of containers, lack of maritime capacity, etc.
WHAT MATTERS: It seems like many of the supply chain issues today have to do with the economy beginning to emerge from Covid. Are these temporary blips or will there be permanent changes to the price of lumber, say, or the way we obtain ketchup?
SHEFFI: What we are seeing now is a phenomenon called “bullwhip effect.” During the pandemic many industries reduced their orders and suppliers reduced their orders and capacity even further (because they anticipated that future orders will also be reduced). When the economy came back, there was no capacity to snap right back. On top of it ports got congested and we have transportation problems.
WHAT MATTERS: Is it possible to anticipate where the next hiccups in the global supply chain will occur?
SHEFFI: No. However, Companies can and do prepare, in generic terms.
WHAT MATTERS: One fear related to massive scale of the recent US Covid stimulus is such a large infusion of cash in the economy could lead to inflation. Will supply chain issues lead to inflation?
SHEFFI: It is already happening. Global supply chains are responsible for lower costs, but restrictions on trade will exacerbate the problem and I think we are already seeing inflation rearing its ugly head.
WHAT MATTERS: How will the pandemic change the way businesses build their supply chains?
SHEFFI: A lot less than people think. Politicians and many in the media are calling for companies to build up large inventories just in case something happens. But the insidious thing is not only that it costs money to keep a large inventory, but the quality of products degrade. It’s true in toasters, in refrigerators, in automobiles, in everything.
In addition, it will be difficult to leave China with its vast eco-system of excellent suppliers. Companies may move the last stage of the supply chain or the last few operations in order not to put a “made in China” label on their products but most of the value and all the deep supply tiers will stay in China.
WHAT MATTERS: Should the government have seen this coming and what, if anything, should the US be doing?
SHEFFI: The government should have been much more aware of the lack of PPE and ventilators. Other than that, the supply chain worked exceedingly well.
WHAT MATTERS: What do we know about how long will Covid-related supply chain issues persist?
SHEFFI: It depends.
We have to answer the question of globalization. If we will get into a more bitter trade war and less globalization, there will be less competition in international markets and many of these high prices will stick. In addition, the Biden $2 trillion program will allow people to pay for this and, I think, we are already in the beginning of an inflationary cycle — it is just that the data is behind. If the situation will not get worse than it is today, prices will go down in a few months but my guess is that they will stay high and fuel further inflationary pressures.