We are in the middle of hurricane season. Every time one rolls through the Gulf Coast or Florida on its way up through the Atlantic Seaboard and the Northeast, as was recently seen with Ida, only after the winds and rain stop does the real clean-up work begin. The same observation can be made about our nation’s deeply troubled supply chain.
The global pandemic has created a remarkably long-lasting supply chain crisis. From access to raw materials to keeping manufacturing facilities operating to shipment infrastructure, to last-mile delivery, disruption has permeated every link in the supply chain. Such shortages and delays have spawned upward pressure on prices, pushing inflation to some of its highest levels in nearly a decade.
Will this trend carry on into 2022 or even 2023, as IHS Markit has predicted, or will the easing of pandemic pressures take us back to previous supply chain comforts?
The hyper-globalized economy has enabled money to flow to the most productive corners of the world for every component of the supply chain. Such a laser focus on productivity has facilitated lower prices. It has also made the global supply more fragile, as every ounce of value must be squeezed out to stay competitive.
The global pandemic threw a wrench into this well-oiled system. Although digital transformations have made some systems more pandemic proof, people ultimately drive the supply chain engines. The current product shortages are a response to a disrupted and fractured supply chain. For the supply chain to operate optimally, every component must be at peak performance. With so many of these components scattered around the world, any one broken link can disrupt the supply chain, creating delays and shortages.
A shortage of workers performing preventive checkups at factories has led to a dramatic increase in fire accidents and other disruptions. With the COVID-19 vaccination rates highly uneven across nations, areas experiencing the most challenging infection surges are also experiencing challenged supply chain links.
Human nature responds to any goods and services shortfalls by over-purchasing, creating a network of individual inventories that further exacerbate the supply/demand equilibrium. This, in turn, places upward pressure on prices, as surging money supply chases limited manufacturing and shipping capacity, which then spawns additional self-fulfilling shortages that stoke more inflation pressures.
The question on everyone’s mind is, when will this end?
The answers depend on the remaking of the global supply chain and the expectations of end consumers.
The global supply chain facilitates global competition, which when operating well, benefits everyone. To keep a supply chain operating under pandemic-like conditions requires more resiliency in the system. This means more investment in preventive maintenance, more redundancy, and even more local components, even when global suppliers are available.
The result of such a shift will be higher costs. The transition to more preventive maintenance and a more stable epicenter of supply chain resiliency will have some pains, but the endpoint will provide a more stable supply chain for producers and consumers.
Consumer expectation will also need to shift from the lowest prices to the best value, which means that prices will inevitably rise and stay higher, making what is being seen now with inflation a transition to a new equilibrium state.
The pandemic provides a rare opportunity to redesign supply chains in a manner that makes them more resilient and stronger. As was seen with the levees around New Orleans, which were rebuilt and fortified following Hurricane Katrina, they withstood the winds and rain of Hurricane Ida, preventing widespread damage and carnage.
The same principles can be applied to reshape the global supply chain, so when disruptions akin to a global pandemic strike again, consumers continue to have access to abundant options, and the cleanup after the threat passes will be more manageable and less disruptive.
Sheldon H. Jacobson, Ph.D., is a founder professor of Computer Science at the University of Illinois at Urbana-Champaign, with a background in probability models. He applies his expertise in data-driven risk-based decision-making to evaluate and inform public policy.
Tinglong Dai, Ph.D., is a professor of Operations Management and Business Analytics at the Johns Hopkins University Carey Business School, with joint faculty appointments at the Johns Hopkins School of Nursing and Institute for Data-Intensive Engineering and Science. He is on the core faculty and leadership team of the Hopkins Business of Health Initiative.
This piece has been updated.