A supply chain crisis is becoming increasingly evident on a global scale, experts say. Purchases made online are taking longer to arrive and stores are struggling to maintain inventory of their goods. What is the root of this issue?
Daniil Manaenkov, an economic forecaster at the University of Michigan, told The Michigan Daily the main reason for the supply chain crisis is the onset of the COVID-19 pandemic. People with both lower and higher incomes increased their spending on goods, while spending on services decreased.
“We gave a lot of people more income than they used to get in regular jobs … a lot of people on the higher end of income distribution kept their incomes, but they had their limited opportunities to spend them on services,” Manaenkov said. “As a result, people have had tons of money on the sidelines, and they’ve been spending it on goods to the extent possible.”
Manaenkov said consumers have been spending 10% to 20% above pre-pandemic levels on goods since September 2020.
When the COVID-19 pandemic first struck the United States in the spring of 2020, people were expecting a more severe contraction. However, the government’s income support prevented a severe recession and enabled people to spend without as much precautionary behavior. While this behavior was sustainable for a short period of time, a supply chain crisis began to emerge during the fall of 2020, Manaenkov said.
Over one year later, the quickest solution to the crisis, according to Manaenkov, would be to increase the prices of goods. Suppliers have seen labor shortages, expensive material and high production costs before the pandemic, but there is one stark difference now: they are more willing to place the burden of increased costs onto consumers.
“The reason (I think) is that people are more understanding that we are in very unusual, stressful times for everybody,” Manaenkov said.
This rise in prices is paving the way for increasing inflation rates.
“Demand is strong. Supply has issues adjusting up,” Manaenkov said. “What’s basically left — the lever that adjusts things — is prices. And that’s what’s happening, so we’re seeing inflation.”
Additionally, COVID-19 protocols elongate the time necessary for shipments to be sent.For example, truckers must not only drive but also enter warehouses and sign paperwork. These tasks involve interaction with other people. Given distancing and masking guidelines, this work takes significantly longer than it did before, according to Manaenkov.
Truckers are paid by the job, not by the hour, Manaenkov said.
“And if you know your typical job used to take you an hour or two to unload and get out, your next job is going to take you three, four hours due to some COVID protocols,” Manaenkov said. “You are basically going to go somewhere else where you know the times are a lot more predictable.”
This shortage in human labor within the shipping industry is also apparent in the healthcare field. Robert Ernst, the executive director of University Health Service, explained in an interview that in the past year, the healthcare field has mostly struggled with securing human labor rather than medical supplies.
“It’s been really a challenge both recruiting and retaining people throughout the healthcare sector at a wide range of positions,” Ernst said. “We’ve been relatively secure in our supply chains. I know that in the early onset of the pandemic there was considerable concern about — going forward — how we would be with personal protective equipment (including gloves and gowns, face protection), but we’ve been very secure actually in our supply chain for many of those items.”
While COVID-19 was the trigger for this issue, Rackham student Arani Basu, who is earning a master’s in supply chain management in the Ross School of Business and is a former McKinsey & Company senior supply chain manager, said the foundation for such a crisis has long been present.
“The primary factor driving this is adequate risk mitigation and planning,” Basu said. “The issue was always going to be there. It was just a matter of blowing up. And it blew up now primarily because of COVID… Because there is a shortage of supply and increase of demand, you now have congestion.”
While other countries have experienced supply chain disruptions before, they have often been regional after disasters like earthquakes and tsunamis. According to Ravi Anupindi, the program director for the Master of Supply Chain Management program, the pandemic is unique in that it operates on a global scale, making the supply chain crisis a truly global issue.
“Every country has faced this shock,” Anupindi said. “So if we need PPEs (personal protective equipment), well every country needs PPEs. If we need ventilators, well every country needs ventilators… It’s a globally correlated shock, both on the supply side and the demand side.”
Most Western countries are highly vaccinated, but many non-Western countries have large populations of unvaccinated individuals. Consequently, people from Western countries are demanding more from the economy, but many people in non-Western countries — the typical suppliers for the rest of the world’s goods — still cannot go to work at pre-pandemic rates.
“As economies are opening up, demand is ramping up,” Anupindi said. “When demand is ramping up, is supply catching up?”
The issue has been exacerbated by the holiday season — as demonstrated by the recent Los Angeles port crisis.
“The primary reason for (the L.A. port crisis) is that retailers were pre-ordering goods and toys and gifts ahead of time,” Basu said. “And the reason for that was everyone knew — or realized — that demand would rise exponentially once the COVID crisis was over… And that is why they pre-ordered a lot of these materials which were stuck in the port. And because they were stuck in the port, there was congestion.”
As the holiday season approaches, Anupindi said it will be difficult to predict when the crisis will subside.
“I’m not an oracle to forecast for you when this will end,” Anupindi said. “But, it’s not going to end any time quickly because we are in the peak season of shopping.”
Anupindi explained the larger scale of the crisis using a metaphor of throwing pebbles.
“If you go into a still lake and you throw a pebble, you will see some ripples,” Anupindi said. “In some ways, you want to think of this as pre-pandemic — if you could imagine that — the supply chain was in some kind of equilibrium like still water. And now you kind of throw pebbles into the stuff and you keep throwing pebbles into the stuff, there is no room for it to settle down.”
Daily Staff Reporter Kavya Uppalapati can be reached at [email protected].
