What are the current supply chain issues?
The effects of the COVID-19 pandemic on the global supply chain have reverberated throughout the world in ways that could have never before been predicted, affecting everything from future policy decisions regarding blockchain technology to the booming soybean export markets of Argentina. In March of 2020, it is unlikely that policymakers could have foreseen the eventual future connections between school closures and factory closures, an exemplification of the unprecedented nature of the pandemic. The unprecedented nature of COVID-19 resulted in a total collapse of the world’s supply chain. However, this collapse prompted new ideas regarding ways to manage the supply chain with innovative emerging technologies. While skyrocketing prices at the gas pump are an everpresent reminder of the reeling effects of the pandemic, this unprecedented time has caused new ideas regarding the supply chain to emerge simultaneously solidifying ideas behind founding economic principles.
COVID-19’s disruption of various economic agents
Policies aimed to prevent the spread of COVID-19 have resulted in large economic repercussions that can be felt on levels ranging from individual to national. These policies, such as mandatory quarantines and international travel restrictions, have affected countries’ industry output as well as the demand of many goods (Verschuur et al., 2021, p. 2).
To prevent spread of the virus, schools across the world closed their campuses and instituted remote learning. While it at first would seem that this change would only affect schoolchildren, many working parents were forced to stay home to care for their children, resulting in large forced workforce absenteeism (Verschuur et al., 2021, p. 2). In the United States alone, an 8-week school closure is estimated to create a 3% loss in GDP (Verschuur et al., 2021, p. 2). While parents of schoolchildren have felt the effects of unemployment and workforce absenteeism, the greatest overall effects of unemployment have been felt mainly by younger and lower-skilled workers (Jackson et al., n.d., p. 40). The high rate of unemployment caused by the pandemic in the United States has resulted in an 8% decline in real per capita income (Jackson et al., n.d., p. 40).
Many industries, such as tourism, hospitality, and entertainment have felt economic losses created by the pandemic. However, the manufacturing sector has endured these effects to the greatest extent, experiencing trade losses of 11.8% (Verschuur et al., 2021, p. 1). Many factories were forced to close due to consequential supply chain disruptions, which caused production to completely halt in some industries due to a lack or shortage of necessary supplies. The combination of unemployment coupled with supply chain disruptions has resulted in many factory closures, resulting in a negative supply shock (Pak et al., 2020, p. 1).
Depending on the country, the effects of output losses in the manufacturing industry have become felt differently. With lower and middle income countries becoming hit the hardest in comparison to their higher income counterparts (Verschuur et al., 2021, p. 7). Countries with trade dependencies on other countries with large economies such as Europe, China, and the United States, and that are exporters of copious amounts of raw materials have faced the greatest export losses. Libya, a primarily raw material exporter, has experienced a negative 77.8% trade loss as a result of negative exports and decreased demand within the large economies the country relies on (Verschuur et al., 2021, p. 7).
For example, when demand for raw materials fell in China, a steady importer of raw materials, small trade-dependent countries were hit hardest. However, decreased exports from large economies allowed for other countries, such as India and Myanmar, to increase their exports and build their economies. Booming demand for food supplies, gold, and textiles allowed for industries in smaller economies such as Argentina and Tanzania to grow (Verschuur et al., 2021, p. 8).
Preventing Future Supply Chain Shocks
In order to prevent future supply chain shocks as well as contain current shocks, it is essential to institute a transparent supply chain. If defects within the supply chain are not solved now, these same cycles occurring now will only continue when the next disaster occurs. The vastness of the supply chain is hard to contain and understand, but using new innovative technology can streamline these processes.
Within the past three decades, many firms have adopted the Japanese tiered supply chain approach. This has resulted in the responsibility of monitoring all tiers of the supply chain being shifted from firms to first-tier suppliers (Choi & Linton, 2011). The impact of firms monitoring only one tier has created a lack of transparency within the supply chain, contributing to its collapse in the face of a disaster such as the COVID-19 pandemic. The tiered supply chain structure limits the interactions of firms with supplemental tiers, (second and third tiers, etc) resulting in over-reliance on the first tier, the tier of companies that firms directly interact with in order to supply a good (Yogaananthan, 2020, p. 11).
Firms lack a knowledge of occurrences within the supplementary tiers is dangerous, as without direct interaction with these tiers, firms have less knowledge and therefore control over factors such as costs and ensuring their own supply (Choi & Linton, 2011).
As the economy began to recover after the financial crash of 2008, LG Electronics officials began to question if their first-tier semiconductor supplier, Qualcomm, was falsifying the true prices of microchips they received from second-tier chip supplier, Taiwan Semiconductor Manufacturing Company, or TSMC (Choi & Linton, 2011). Rather than questioning officials at Qualcomm, an LG official chose to investigate the matter by directly speaking to officials at TSMC (Choi & Linton, 2011). Through this interaction, the LG official learned that the greater than expected prices were a result of capacity tightening within the semiconductor industry, as demand was beginning to outpace supply (Choi & Linton, 2011).
In 2009, this increased demand indicated the beginning of economic recovery from the 2008 financial crisis. This knowledge allowed LG to contact numerous other suppliers to “lock in cost savings before prices rose” (Choi & Linton, 2011). Through directly communicating with a supplementary supply tier, LG was able to outpace their competitors and obtain savings while and preventing a future shortage of semiconductors, which are essential to their product.
The presence of blockchain technology has dramatically increased over the past decade, with its use becoming prevalent in diverse industries ranging from agriculture to banking. Blockchain is a digital ledger that can store almost any type of data, and its decentralized nature makes it nearly impossible to forge or change data already within the ledger, making it ideal for supply chain management (Rodeck & Schmidt, 2022). LG’s direct interactions with a supplementary tier supplier allowed for it to save costs while also previewing the future state of the semiconductor supply chain vital to their product. Had LG used blockchain to manage its suppliers, the question of transparency with its first-tier supplier would not have ever been raised, as they would have had a clear and accurate record of every transaction stemming from the creation of the first circuit board.
Supply chain visibility is essential for confident business outlooks. The ability of blockchain to keep clear, untouched records of interactions within the supply chain is vital in the role of decision making for firms. This foresight allows for firms to trace the beginnings of a supply chain crisis, and therefore, prevent it. For example, if a firm foresees a potential interruption within a supplier, they can choose to utilize another supplier in order to continue smooth business operations. This transparency is essential for businesses to continue straightforward operations in the face of economic crises, such as the COVID-19 pandemic (Yogaananthan, 2020, p. 11).
Blockchain can be used to monitor supply chains and operations on levels other than manufacturing. Through keeping records of supplier shipment statuses and potential bottlenecks, firms can adjust and create alternate plans to alleviate the effects of these issues, while also allowing for firms to analyze what events led to these concerns (Yogaananthan, 2020, p. 11).
The pandemic has created a notable labor shortage, with the trucking industry being hit heavily. A shortage of truck drivers has caused copious amounts of cargo to amass within ports throughout the world, as there is no avenue for cargo to be transported to warehouses. Because there is no room within ports to store containers, ships have been sitting at anchor, waiting to
deliver their cargo, causing delays (Martinez & Leon, 2021). While labor shortages across the board are to blame for these bottlenecks, the increase in consumer spending on material goods is also responsible. Because of restrictions, people were not able to buy services such as dining out or concerts with their stimulus money, but rather goods such as electronics and furniture (Burnett, 2021).
In November of 2021, the Biden administration introduced a $1 trillion dollar infrastructure bill with $17 billion portion allocated to supply chain and infrastructure improvements to confront these issues (Macias, 2021). The $17 billion will be allocated to construction to improve ports and inland waterways as well as towards standardizing data-sharing methods for all levels of the supply chain, from truckers to first-tier suppliers (Macias, 2021). With no current standard of communication, ships often arrive at ports to the surprise of terminal operators who may not be ready for their cargo, causing further delays. In the private sector, there has been a historical lack of data-sharing among participants (Macias, 2021).
By allocating money towards standardizing how data is shared throughout the supply chain, regardless of private or public status, delays within cargo transportation can be prevented (Macias, 2021). The Biden administration’s focus towards regulating ways in which data is shared throughout the supply chain is indicative of the importance of technology such as blockchain in creating disaster-resistant supply chains. It is important to institute these technological innovations into the supply chain now to address the fallout still present from the pandemic, as well as to prevent future consequences.
The Collapse of the Oil Supply Chain and Inflation
The price of oil is often used as an indicator of the overall health of the economy, and as COVID-19 cases increased, the price of oil declined, causing many economists to worry. From the beginning of the pandemic in mid-March to the end of April, oil prices declined by more than 65%, eventually falling to less than $0 a barrel in April 2020 (Pak et al., 2020, p. 3). The importance of the price of oil does not only come from fueling jet planes and cars, but from its use in the production of everyday items such as plastic bags, toys, and other common use plastics.
Supply and demand logic can be used to explain the extreme plummet in the price of oil. Travel bans enacted to prevent the spread of COVID-19 resulted in less oil being needed to fuel cars and planes for travel. This decreased demand resulted in an increased supply stores of oil, causing oil storage tanks to become so full, it became impossible to find more places to store oil (Kearney, 2020). When it becomes impossible to store a product, it becomes worthless. This caused the eventual plummet in the price of oil to below $0 a barrel (Kearney, 2020).
The graph above illustrates the rapidity of which the price of crude oil fell in April of 2020. Oil dependent economies, such as those in the Middle East, contracted immense export losses due to low oil prices, resulting in an eventual collapse of the oil market itself (Pak et al., 2020, p. 3). However, in recent months, these low prices have transformed into seven-year record highs as a result of strong economic recovery as well as geopolitical tensions between Russia and Ukraine that have caused rifts within Middle Eastern oil markets (Schultze, 2022).
To stabilize the economy after the recession caused by the pandemic, three rounds of government stimulus were distributed throughout the U.S. economy, resulting in households having more money to spend. Oil is used in the production of everything from toys to plastic bags, and this versatility means it is in everything, therefore making it not the greatest indicator of overall inflation. As restrictions have lifted and people have begun to travel, the rising costs of gas can be felt at the pump as well as when purchasing simple goods such as toys, prompting fears of inflation.
However, these higher prices come as a result of increased consumer spending from the introduction of stimulus cash into the economy (Kemp, 2021). The oil market is a perfect example of demand suddenly outpacing supply, resulting in a price surge, or inflation. As issues within the supply chain are resolved and consumer spending returns to a normal level, supply will catch up with demand, easing current inflationary pressures (Kemp, 2021).
What does the future hold?
As the pandemic begins to morph into an endemic, people across the world will continue to adapt to the changes this unprecedented period has created. Its disruption of multiple economic agents throughout the world has exposed multiple weak links within the supply chain. While these disruptions have contributed to the recent recession, this exposure will only help policymakers and economists begin to know where to strengthen the supply chain. The supply chain will only become more advanced and diversified as technology continues to modernize, making it essential to strengthen these links now in order to prevent future faults.
References
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Oil-crash-means-single-use-plastic-is-back-as-recycling-struggles Choi, T. Y., & Linton, T. (2011, December). Don’t let your supply chain control your business. Harvard Business Review. https://hbr.org/2011/12/ Dont-let-your-supply-chain-control-your-business
Jackson, J. K., Weiss, M. A., Schwarzenberg, A. B., Nelson, R. M., Sutter, K. M., & Sutherland, M. D. (n.d.). Global economic effects of COVID-19. Kearney, L. (2020, April 21). Coronavirus: US oil has dropped to below $0 dollars a barrel. Here’s what it means. World Economic Forum. https://www.weforum.org/agenda/2020/04/
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Leibovici, F., & Dunn, J. (2021). Supply chain bottlenecks and inflation: The role of semiconductors. Economic Research: Federal Bank of St. Louis, (28). Macias, A. (2021, November 9). Biden rolls out multibillion-dollar plan to
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Martinez, A., & Leon, F. P. De (Hosts). (2021, October 14). Port bottlenecks have repercussions for U.S. industries and consumers [Radio broadcast]. NPR.
Rodeck, D., & Schmidt, J. (2022, February 10). What is blockchain? Forbes Advisor. https://www.forbes.com/advisor/investing/what-is-blockchain/ Schultze, G. (2022, January 24). Price of oil fuels inflation, but shows economy is bouncing back. Forbes. https://www.forbes.com/sites/georgeschultze/2022/ 01/24/price-of-oil-fuels-inflation-but-shows-economy-is-bouncing-back/ ?sh=41bb29615864
Verschuur, J., Koks, E. E., & Hall, J. W. (2021). Global economic impacts of COVID-19 lockdown measures stand out in high-frequency shipping data. PLoS ONE. https://doi.org/10.1371/journal.pone.0248818 Yogaananthan. (2020). Building critical supply chain resilience in the wake of COVID-19. S. Rajaratnam School of International Studies.
Written by Simran Cheema
What are the current supply chain issues?
