TW Viewpoint | Supply Chain Crisis: Explained!January 7, 2022 | Michael Heykoop
The economic roller coaster which began in 2020 continues to race from crisis to crisis. Supply chain issues came into the news when a large container ship got stuck in the Suez Canal and startling images of long lines of ships waiting to get through made their rounds online and on the evening news. Supply chains have now retaken the headlines; however, the current crisis is not one that can be resolved by freeing a single ship. What's causing the supply chain shortages and ensuing inflation of 2021 and 2022?
It's common knowledge that our increasingly globalized economy is built on the ability to get materials to manufacturing plants and to get the finished product from factories to warehouses, stores and eventually the consumer with ever tightening time constraints. One electronic product, such as the iPhone, could see its supply chain for production sprawl across more than 40 countries. Raw materials need to be harvested and then refined, in many cases they are then shipped to another country for the production of a component part. These components are then shipped to yet another country where they are assembled before being distributed for sale. And this is just an extremely simplified and condensed overview of the footprint many modern consumer products have. This entire system is built on the ability to get materials, components and final products from one place to another in a timely fashion — disruption to this ability is the ultimate cause of the current shortages.
One of the less publicised effects of the current pandemic and subsequent government regulations is one of that fastest and most pervasive economic shifts in our lifetime. In March of 2020, a significant portion of the population was encouraged to stay at home. Some were able to keep working from the confines of their dwelling, while others subsisted on stimulus funds, other government programs or personal savings. This drastically altered how many received money, but also how they spent it. Going to a restaurant and then the movie theatre was no longer an option. Less and less money was being spent on services. In the early days of the pandemic, many resorted to saving those extra funds as there was a tremendous amount of uncertainty. Now that the situation is stabilizing to a degree, many are increasing their spending. Most of that spending has not returned to the service sector, but to consumer products creating a sudden spike in demand.
This is only one piece of the picture. Virus outbreaks in various areas of the world have led to unpredictable plant closures and essential jobs such as truck driving and dock workers are facing severe labour shortages for a myriad of issues. Combine this with inconsistent pricing and transportation costs due to rising inflation and you have the recipe for a modern supply chain crisis. The result is companies like Toyota slashing their global production by 40%, shelves void of every day products and long wait times for requested goods. In particular the auto industry is being struck with a shortage of semi-conductors, costing billions in lost sales and lost wages for laid off workers.
The total number of ships sitting off the coast of California may not sound very high at first. At the time of this writing, there are between 70 and 85 ships waiting to port. But those ships carry an incredible amount of goods—enough shipping containers to lay them end on end from Los Angeles to Chicago. It was recently announced that the two largest ports on the West Coast would being operating 24 hours a day, however that will not make up for the fact that there is a shortage of workers to offload those containers and then a shortage of both trucks and truckers to bring the contents of the containers inland from the port.
Imbalances have a tendency of coming back into balance over time and economies routinely adjust to sudden shifts in the market as we are seeing today. The current supply chain crisis is one which will shape many decisions made by national leaders, adding fuel to the ongoing argument over the benefits of globalization. If you are seeing shortages and long wait times in your area, please let us know in the comment section — both what the shortage is in, and what region of the world your living in.
And if you'd like to learn more about several strategic chokepoints around the world which serve as vital hubs for the global supply chain, be sure to watch our video on "8 Chokepoints Vital for World Trade."