Digital Services

Supply Chain Disrupting Business Sectors In Wake Of Covid-19

The COVID-19 pandemic closed down most if not all of the world’s economy. Now that there are vaccinations that can deal with the pandemic, businesses are awakening again. Jobs have been added at a rate of 540,000 per month since January and consumers are reacting with large purchases using money that they saved. New home sales are at their highest level in 14 years and auto sales are reaching numbers not seen in 15 years.

Recovery From Pandemic Lagged

The economy is coming back, which bodes well for businesses and workers. However, not everything looks so rosy. Businesses had to shutter at the height of the pandemic and now that things are rapidly coming back, there has been hiccups in the supply chain that gets manufactured goods and services to consumers.

As businesses awake from hibernation, they’ve been unable to hire workers at a quick enough pace. The rising need for workers have resulted in an all-time record of 8.3 million job openings in April. Compounding the problem, business inventories are depleted and manufacturers are unable to fill the void due to a bottleneck of unfilled manufacturing jobs. Businesses that depend on complex supply chains are suffering the most because production is susceptible to disruptions caused by shortages of products from other businesses.

Tracking Where Everybody Is Could Get Messy

It won’t be easy sorting out who is working at home and who is in the office on a given day. It is evolving that who works at home and who works in the office will depend on the job as well as approval by managers.

The idea of a workforce of remote and office employees have opened up the possibility of companies recruiting employees in cities where they don’t have their office. For example, Calendly, a software company in Atlanta, is hiring workers in Georgia, Florida, and Texas.

Companies that have used remote workers located at other cities where they don’t have an office report that home workers felt left out. On the other hand, employees who worked in the office could meet with their comrades easily and could solve problems through meeting in person.

Such a set up ensures that there will be times when essential people cannot be in the same room at the same time. Employees who work in the office could talk business with colleagues they encounter in hallways or at water fountains assuring that remote workers end up out of the loop.

Supply Chain Hold Ups Due To Low Inventories

While the supply chain challenges are widespread, there are indications that they are temporary. For example, retailers had enough inventory to satisfy initial demand as the pandemic grew. They had 43 days of stock in February 2020. However, as of June 2021, they were down to about 33 days. Inventories are low for cars and homes and are at near record lows for other products. Reports claim that there was enough leftover inventory of only one month for car dealerships and 4.4 months of homes compared to pre-pandemic levels of about two months for cars and 5.5 months for homes.

These depleted inventories have caused the rapid growth of problems in industrial supply chains, according to a U.S. Census Small Business survey conducted from May 31 through June 6. The survey discovered that 36 percent of small businesses admitted to delays with domestic suppliers focused on manufacturing, construction, and the trade sector.

Shortages Have Caused A Cascading Effect Into Other Industries

As a result, the shortages have caused disruptions in business activity. According to the National Association of Homebuilders in a report issued in May, a record share of homebuilders claim that there are shortages of such key materials as framing lumber, wallboard, and roofing. As a result, construction companies are delaying new construction.

The shortages have also caused unexpected price increases between May 2020 and May 2021. Prices of goods monitored by the Producer Price Index rose 19 percent, the largest year-over-year increase since 1974.

Some increases have been especially bad in lumber with homebuilders complaining that prices have risen to $1,711 per thousand board feet in May 2021. This amount of increase signifies a typical 2,000 square-foot house would need more than $27,000 in framing alone as compared to a lumber bill of nearly $7,000 before the pandemic. However, there are signs that there have been recent increases in product causing a decline of prices of 38 percent from their record high.

The hiccup in the supply chain is also causing a rise in consumer prices, specifically in the motor vehicle sector. Almost half of the May increase in inflation measured by the Consumer Price Index is in the automotive sector if prices of new, used, leased, and rental cars are included.

The issues in the automotive sector may be due to automakers underestimating demand for cars at the start of the pandemic. Car manufacturers expected weak demand. So they canceled orders for semiconductors, a product that requires a long lead-time and increased demand from other trades. The problem has been worsening by the breakup of auto supply chains in recent decades. The fragmentations have resulted in difficulties for automakers to monitor causes of bottlenecks. For example, in the semiconductor industry, products are designed by one business, manufactured by another business, placed into a component such as an airbag by a third business, and then delivered to auto manufacturers for assembly. Neither the auto or semiconductor manufacturers can trace what’s happening along the different layers of the supply chain. The price of cars is affected by the price of all the parts that make up a car and that’s why there’s been an increase in prices to consumers.

History In Supply Disruptions Could Assist In Resolving Current Problems

There have been periods in history when industries have been surprised by strong demand during a time of inventory shortages. What we have learned from them has assisted in limiting the affect of supply chain shortages later on.

For example, the coffee industry suffers price increase spikes due to frosts that have harmed coffee harvests. The most recent of such an occurrence took place in 2010. Every time the weather improved, harvests also improved and prices fell back to previous levels. This has occurred in an array of other agricultural products including peanut butter due to a drought in 2011 and eggs because of an outbreak of bird flu in 2015.

The pandemic caused shortages of toilet paper. Because people were forced to stay at home, orders of toilet paper spiked 40 percent. Supply was slow to increase to satisfy the demand because toilet paper is bulky to store. Demand previous to the pandemic was stable causing retailers to keep a two to three week stock. People worried that they would run out of toilet paper rapidly acquired the remaining stock.

Toilet paper manufacturers in the United States couldn’t add production lines or build new plants to expand their capacity because the manufacturing process is highly mechanized and capital intensive. Massive machines that make toilet paper cost billions of dollars and take months to assemble. Moreover, the industry manufactures a scratchier form of toilet paper it sells to commercial end users and they were unable to retool the commercial products for consumer use.

What toilet paper manufacturers did to ultimately satisfy demand was to increase a little bit more their existing capacity. They ran their plants at close to 100 percent capacity and put idled machines back online. Some manufacturers streamlined their product offerings, reduced machine downtime and changed to producing large-roll products that could get more paper to households without making costly changes to the manufacturing process. Other manufactures made changes to their distribution network allowing them to better anticipate and respond to demand.

History In Supply Disruptions Could Assist In Resolving Current Problems

There is evidence that current disruptions will not last for long. Current delivery times are reaching record highs in manufacturers’ surveys performed by three regional Federal Reserve Banks. Current data finds that supply chain problems will subside within the next six months.

The Federal Government has created a Supply Chain Disruptions Task Force to track and deal with short-term supply problems. The group is holding meetings that include stakeholders in industries that have experienced the worst of the supply chain problems to detect bottlenecks as the economy returns.

The feds have also suggested a number of actions to strengthen the industrial base, increase resilience and reduce lead times to respond better to crises.