Supply Chain Disruptions

April, 17, 2020

The Bail-in

As profound changes continue to force worldwide innovations, supply chain disruptions provide an important lens through which to consider our interdependent future.  As you know, reactions to the Covid-19 outbreak by many governments required that most people stay at home, restrict their travel and close non-essential businesses to prevent the spread of the virus.  These actions have resulted in serious disruptions to the global supply chains for manufacturers and distributors, particularly those who sole sourced many of the goods and materials needed. Hospitals and pharmaceutical companies are finding themselves without the health care supplies, reagents and generic drugs they need. Technology companies, like the makers of 5G phones, are delaying planned product introductions because of a shortage of critical parts that cannot be sourced elsewhere.

Looking back over the last decade, there are a number of broad trends that have led manufacturers and distributors to adopt “just in time” inventory systems, which minimized capital outlays, lowered insurance costs, reduced shrinkage and helped mitigate obsolescence of inventories.  Prices of most commodities have declined over the past decade.  Distribution systems have been upgraded to provide one or two-day deliveries of almost everything we use on a daily basis. Cost reduction campaigns to improve corporate profitability have resulted in manufacturing being outsourced to the lowest cost providers, which are often located in China.

In contrast, businesses will now need to focus on redesigning their inventory management plans to include multiple sources for raw materials and critical parts from reliable jurisdictions.  In the meantime, it is anticipated that consumers will be tempted to hoard essential products, especially food, to avoid potential future disruptions. Such a reaction may result in a growing number of shortages because there is not enough manufacturing capacity, in the right locations, to fulfill this additional demand.  Prices, which have been declining, are likely to rise particularly for those products which are in short supply.  This is expected to produce demand pull inflation; last experienced in the 1970s.

More specifically, the food distribution channel has experienced significant disruptions caused by a number of factors.  Migrant harvest workers have not been able to reach their normal fields because of travel restrictions. The restaurant industry, which normally provides one third of the US food to their customers, is operating at a fraction of its capacity. Many growers, who have contracted to deliver their meat and produce to restaurants and hotels, now have no outlet for the product and are forced to leave it in the fields or donate the small amounts that food banks can store.  Finally, climate change is producing an increasing number of floods, droughts and extremes in hot and cold weather that are adversely affecting production.

One Chinese province recommended that its citizens have 3 to 6 months of rice and wheat supplies. It is not hard to imagine how those who have recently been conditioned to a supply disruption would embrace this recommendation; in turn creating more shortages.  Earlier concerns about global food supply have already initiated a number of innovations and solutions, especially in the sustainable agriculture sector. 

In this time of transition, we must all prepare to have what we need and be willing to share resources with those who are less fortunate.  In this way, we will all build community and work together towards common goals of making the world a better and more sustainable place. 

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