Supply Chain Resiliency May Be Best Inflation Hedge
Now that the election is over, it’s time to turn attention to solutions for those vexing problems that politicians vigorously highlighted. At the top of the list is grappling with high inflation and one of its main causes – supply chain disruptions.
In a global economy where goods, services and finances are traded across national boundaries, disruptions can occur at multiple points. Foreign producers can face shortages resulting from political events to natural disasters. Shipping channels can be clogged. Ports, warehouses and shippers can be overwhelmed. Something as simple as too few truck drivers can bog down an entire global supply chain.
Supply chain disruptions also can result from demand exceeding supply. Many producers from carmakers to chipmakers underestimated how rapidly the US economy would recover after the pandemic and how much money consumers had saved and were ready to spend. Strong demand outpacing available supply is a recipe for inflation.
Inflation would calm if production could rebound in pace with demand, but that has been hampered by the inability of many industries to find workers for their production and distribution lines. The United States has one of its lowest unemployment rates in history at the same time it faces historic demand for workers.
Worker shortages aren’t just a problem for global industries and shippers. They also have impacted healthcare, hospitality and retail providers.
This is a brutal economic stew that feeds inflation. Raising interest rates may slow homebuying and purchases on credit, but it won’t solve the underlying problems causing inflation.
If you looked for solutions during the 2022 election campaigns, you would be disappointed. Most candidate commentary focused on who to blame, not what to fix. That isn’t so surprising because economic experts believe supply chain problems are here to stay and may worsen.
The most fundamental supply chain vulnerability exposed by the pandemic is the very thing supply chains were designed to deliver – global reach and specialization for increased competitiveness. But as Harvard Business School Professor Willy Shih observes, “Supply chains achieved maximum efficiency by applying the principles of lean manufacturing. As this occurred, historically vertically integrated firms have been increasingly dis-integrated. They have outsourced parts of their supply chain rather than maintain expertise internally and relied on more external specialization.” That can’t be reversed or even modified overnight.
Creating supply chain resiliency is the new goal, as evidenced by congressional approval of the CHIPS Act to bolster domestic production and innovation of computer chips. Most semiconductors today are manufactured in Taiwan, which explains China’s increasingly aggressive posture toward the island it views as theirs.
The pandemic showed global integration of production could be disrupted by local bottlenecks. US ports lack enough capacity to handle container shipping that is growing by nearly 10 percent annually and expected to top $11 billion as early as 2027.
The Port of Coos Bay is pursuing an aggressive plan to build a container shipping terminal capable of loading and unloading three large ships simultaneously. To make it fully functional, the navigation channel needs to be deepened to 45 feet and docks and cranes must be purchased. Nearly $20 million has been provided to upgrade the 134-mile rail line owned by the Port to connect Coos Bay to Eugene, major rail lines and I-5.
Loading and unloading ships is just the beginning of the logistical challenge. During the pandemic, as many as 70 fully loaded ships were anchored offshore in Southern California waiting to unload cargo. Part of the delay was the lack of storage space at the Port for more containers. The piles and piles of containers were waiting for trucks to pick them up. The stacks were so large that more recently unloaded containers were stacked on top of earlier ones. That chaos was due in part to a shortage of truck drivers.
The shortage of truck drivers, according to industry sources, is tied to pay, benefits, working conditions and lifestyle. Drivers virtually live in their trucks. Earlier this year, the US trucking industry said it was short 60,000 truck drivers. Canadian truckers said they needed 25,000 more truck drivers. The popularity of same-day delivery of goods will put a further strain on local logistics.
Delays in shipping add costs. Companies with stranded containers at ports paid rental fees. Higher gas and diesel prices made driving more expensive. Hiring bonuses and higher pay added to the tab for transportation. Factor in fees at various stages of the distribution system and you see how prices for many goods were inflated.
The supply chain problems exposed by the pandemic have less to do with government action than corporate decision-making. The solution will require different corporate decision-making, encouraged and supported by government action.
Corporate decision-making will need to give greater consideration regarding supply chains to potential costs and less to short-term profits. Lean manufacturing must be redefined to give greater weight to supply chain integrity. Logistics technology is needed to anticipate and void disruptions. Government officials can play a role by providing real-time planning and timely investment in infrastructure that supports growing supply chain demands.
The Federal Reserve might take note that a fundamental factor in current inflation rates, not just in the United States but globally, are shortages linked directly to supply chain disruptions – from continuing lockdowns in key Chinese cities, Russia’s invasion of Ukraine, a shortage of docks and truck drivers and other logistical snags. Slowing home sales and credit purchases may tamp demand but not fix the sources of supply chain disruption, the underlying and unrelenting cause of inflation. If higher interest rates nudge the US economy into recession, the resulting belt-tightening could postpone investments in more resilient supply chains.