Despite the U.S. economy’s partial recovery from last year’s pandemic-induced contraction, supply chain issues continue to dog providers of goods and services worldwide.
Companies are struggling to meet high consumer demand as clogged trading ports and labor shortages, among other factors, hamper their ability to produce finished goods.
What this means for the American people: increased prices and limited access to goods, trends that 80% of businesses expect to continue through 2023.
The global supply chain began to destabilize last year, when the COVID-19 pandemic brought about border closures, travel bans, and lockdowns. This led to product shortages worldwide: companies simply could not, given government restrictions, obtain all the materials or labor necessary to manufacture goods.
A wave of panic-buying worsened the situation: noticing the shortages, people began to hoard goods, flocking to stores before the shelves were empty. Remember the great toilet paper scare?
Businesses thus found themselves in a pinch: their inventories were depleted, but high demand persisted. Furthermore, supply chain disruptions ensured that inventories would stay low for the foreseeable future.
Unsurprisingly, the prices of goods soared. Government stimulus checks further encouraged high levels of consumer spending, adding to the rising inflation levels.
The total cost of lumber for a typical 2,000-square-foot house before the pandemic, for example, was $7,000. As of September, that number had reached $27,000. No wonder housing prices have skyrocketed!
Although the average hourly wage rate increased, rising prices prevent this from making any impact. Thus, the real wage rate, which takes price levels into consideration, has decreased since the pandemic began.
Thanks to this practice, the panic-buying that took place at the beginning of the pandemic quickly drained firms’ inventories—and they’re still trying to catch up.
In other words, the average American citizen is poorer now than before the pandemic. Supply chain disruptions contributed to these negative economic effects.
Several characteristics of the global supply chain leading up to the pandemic left it vulnerable to the problems it currently faces.
For one, many businesses followed the strategy of “just-in-time” (JIT) inventory management. This approach uses data analytics to predict the minimum amount of inventory a business must hold in order to meet demand. Keeping inventory on-hand is costly, after all.
Thanks to this practice, the panic-buying that took place at the beginning of the pandemic quickly drained firms’ inventories—and they’re still trying to catch up.
Another weakness was the lack of transparency between suppliers. Interested in maintaining their competitive advantages, many suppliers were unwilling to share information about how they received their materials. This hampered their ability to find solutions to interruptions in the flow of goods.
Take an auto maker like Volvo. Cars require over 30,000 parts to assemble, supplied by a host of different companies. With the lack of transparency between Volvo and its suppliers, Volvo was hard pressed to solve the problem of part shortages brought on by the pandemic: it could not determine the full flow of its own supply chain.
Even though some countries have eased the COVID-19 related restrictions that led to these shortages of goods, the supply chain is far from fixed. Many believe that long waiting times for both consumers and businesses, as well as high prices, will likely continue for the near future until companies from around the world correct their supply chain models, consumer demand changes, or governments intervene.
In the meantime, saving money might be the best decision to make.
