It was all about a shortage in 2021. COVID vaccine shortages at the start of the year have been replaced by fears that we will struggle to buy turkeys, toys or electronic gadgets to put under the Christmas tree. For most of the year, supermarket shelves, car showrooms and even gas stations were more empty than usual. Some shortages were resolved quickly, others persist. So are we facing yet another year of shortage or will the supply chain crisis subside in 2022?
It should be noted that the shortages have occurred for many reasons. During closures in early 2020, a sudden leak of essentials such as toilet paper and pasta left shelves around the world bare. Singapore ran out of eggs because consumers piled them up, for example. Retailers have ordered more eggs, desperate to meet demand. But once the demand was met, suddenly there was an oversupply. In June of the same year, distributors threw away 250,000 eggs.
This is what happens when demand changes temporarily. The effect grows at every level of the supply chain, as each supplier adds an extra buffer to their order to be on the safe side. Small changes in customer demand can therefore lead to huge additional demand for raw materials. This is called the boost effect. As with a whip, a little flick of the wrist can result in a large crack on the other end.
The boost effect can come from sudden falling or rising demand, and during the pandemic these forces sometimes combined. For example, a combination of collapsing demand for new cars and increased demand for devices like laptops and game consoles for locking entertainment has contributed to the semiconductor chip shortage.
With modern cars sometimes containing 3,000 chips, automakers are big customers for chips. But as car sales plummeted in 2020, supplies of chips have been redirected to smaller electronics makers. When demand for cars picked up a few months later, there weren’t enough chips to go around. Automakers were forced to shut down production lines and couldn’t make enough cars to meet demand. They also started to accumulate crisps, which made the shortages worse.
Other imbalances in today’s supply chains are larger than those of competing companies or industries. Sea containers transport some 1.9 billion tonnes per year by sea alone, including virtually all imported fruit, gadgets and devices. Normally, containers are continually loaded, shipped, unloaded and re-loaded, but severe trade disruptions resulting from blockages and border closures have broken that cycle.
Containers were left in the wrong places as trade evolved, shipping capacity was reduced, and ships could not disembark where and when they wanted. Coupled with congested ports and problems with timely unloading and transportation, a typical container now spends 20% more time in transit than before the pandemic.
Shipping rates have skyrocketed in this environment. Prices on major east-west trade routes have increased 80% year over year, which is bad news for the economic recovery. Even a 10% increase in container freight rates can reduce industrial production by around 1%.
The human factor
Advances in technology may have reshaped manufacturing, but production and delivery still depend heavily on people. Waves of layoffs in production due to lockdowns led to labor shortages when demand picked up. To give an example, Vietnam has experienced a massive exodus of workers from industrial centers to rural areas, which could not be easily reversed.
Labor shortages were particularly evident among truck drivers in the UK and other countries. The sector was already struggling to recruit and retain drivers due to the pressures of growing demand, an aging workforce and deteriorating working conditions. Meanwhile, Brexit has made the job of migrant drivers in the UK more difficult.
There were at least early signs of an easing of driver issues as Christmas approached, as more recruits entered the system, which will have been one of the reasons for shortages of goods n were not as bad as they could have been. Likewise, however, we should not expect a quick end to the supply chain crisis in 2022.
The omicron variant leads to more staff shortages as people take sick leave and vendors navigate new restrictions. China’s zero COVID strategy is expected to continue disrupting both production and transportation of goods, possibly throughout the year.
Still, we might also see problems in the opposite direction, via another boost. Backorders across many industries will have been met, but consumer demand may well cool now that the holidays are over and interest rates are starting to rise. As a result, some businesses could end up with an oversupply of goods.
To avoid this, they will have to align their production rates with demand. Yet demand can still be difficult to predict – and not just because of omicron and China. A new variant of concern leading to a new wave of lockdowns could easily cause people to spend money again on things rather than vacations and parties. Supply chains with good visibility of actual demand and clear communication between different levels of the supply chain will be a huge advantage. In summary, it is likely that different industries will experience both shortages and oversupply issues throughout 2022.
A longer-term issue is how much supply chains change. The pandemic has raised new doubts about outsourcing production to distant countries where labor costs are lower. Likewise, the problems have been compounded by strategies to maximize supply chain efficiency, such as just-in-time manufacturing, where companies keep inventory to a bare minimum to keep costs down.
A major theme for 2021 was how to make supply chains more resilient. But building additional capacity, keeping inventory and guarding against disruption doesn’t come cheap. As maritime congestion eases and recruitment increases, discussions on reform may run out of steam. Some companies will likely continue to improve their just-in-time with a sprinkle of just-in-cases. Others will bring the production of certain products closer to national markets while retaining offshore production facilities to serve local markets. It also remains to be seen to what extent COVID is reversing globalization.
Ultimately, supply chains are people-driven, and 2021 has shown the limits of the system. As businesses and consumers adjust, current knots will loosen somewhat. But as the pandemic continues and the realities of corporate profitability come to the fore again, you probably shouldn’t expect a resolution in 2022.