We all got a lesson in supply chain management early in the pandemic. Recall the difficulty we had in buying basic items like toilet paper, paper towels and food as people pantry-loaded. Personal protective equipment like face masks, hand sanitizer and disinfecting wipes were in scarce supply, as the demand for these items spiked while COVID-19 infection rates soared. These demand shocks caused stock-outs, long lines and purchase limits for the better part of a year. Fast forward to today, and many of these items are much more readily available, though delivery delays have begun creeping back.
While demand for consumer staples spiked during the pandemic, it plummeted for many consumer discretionary items, causing inventories to rise, then fall precipitously as those inventories were liquidated (see chart above). As we begin to come out of lockdown and return to something that more closely resembles “normal,” many aspects of the economy have recovered and discretionary spending has increased, further exacerbating businesses’ struggle to bring inventories back to pre-pandemic levels.
I don’t have to look very hard to see real-world examples of this. For example, I’ve been looking to buy a nice road bike (bicycle) for the last 18 months. Finding one has been like spotting a unicorn. I mean a “real” one — not a venture one. Bike shops can’t obtain them from the manufacturers — and if shops are lucky enough to get one or two in, the bicycles are often sold before they ever hit the showroom floor. A friend of mine is a rep for a number of major bicycle brands and he’s telling his shop clients that they won’t really begin to see their orders being meaningfully fulfilled until the end of 2022 at the earliest.
To offer another example, my mother decided to go car shopping last week, as she’s looking to replace her SUV with something smaller and new. She visited a number of dealers and found that the lots were largely empty — and it wasn’t clear when vehicles would be available again. In both cases (bikes and cars), manufacturers have not been able to get all of the parts they need to complete the assembly of their products.
Putting aside the impacts of some political and/or business decisions (e.g., stimulus checks, offshoring of manufacturing, just-in-time inventories, etc.) that have eliminated much of the slack in the system, a major reason for the gummed-up supply chain seems to be the fact that we don’t have enough appropriately skilled people in the jobs that require those capabilities. This is largely due to the pandemic and our lack of commitment to the overall health and safety of the global workforce. The sooner we can make returning to work (and staying there) safe, the sooner we will see the supply chain begin to function properly again.
While the global supply chain is broken, it is resilient. Much as it was able to adjust to the spike in demand for toilet paper and hand sanitizer, it will also adjust to shortages in bicycles, cars and just about any other manufactured goods or raw materials. The most important component of the supply chain is people. For better or worse, we are all interconnected in the global economy.
Therefore, the health and well-being of the global workforce are paramount to a smoothly functioning supply chain. The sooner we can get people back to work — free from the threat of COVID-19 or any other global health risk that we may face in the future — the sooner many of the current issues in the global supply chain will correct themselves.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
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