Three factors influencing global supply chain issues

by Badgley Phelps | Nov 12, 2021

The pandemic has disrupted many aspects of the global supply chain including the supply of labor, the availability of transportation, and the capacity utilization of manufacturing facilities. At the onset of the pandemic in early 2020, some factories were forced to shut down due to lockdowns and sick workers. Shipping companies cut their schedules and manufacturing activity declined in anticipation of a drop in demand; however, Americans ultimately redirected their spending from experiences and services to goods and technology. Today, demand is strong given the recovery in the economy and supply chains are facing enormous challenges. Here is a review of the current factors impacting the global supply chain.

Labor shortages

Companies across many economic sectors are struggling with labor shortages. This dynamic has resulted in higher costs as companies either implement technological solutions to bridge the productivity gap or offer signing bonuses and higher wages to attract employees. Labor shortages may be the result of several factors including:

  • An increase in self-employment during the pandemic
  • An aging population
  • A mismatch between the skills people possess and those companies are seeking
  • Consumer net worth that sits at a record level
  • Elevated health risks related to the Delta variant

These factors have created a disconnect between the jobs workers are seeking and the available positions. As a result, companies have been increasing wages to lure new workers and retain current employees. Lower-wage workers in industries such as transportation, hospitality, healthcare, and education have seen the most significant percentage increases in their compensation over the prior year.

Transportation woes

The transportation of goods has proven to be another bottleneck in the supply chain and shipping ports have been experiencing significant backlogs this year. Containers have been waiting weeks to be unloaded as a backlog of ships are waiting to dock. In the Los Angeles/Long Beach harbor, more than 100 ships were anchored off the ports in mid-October.

Trucking is another area of transportation experiencing issues. Long-distance trucking employment is below 2019 levels, according to the U.S. Bureau of Labor Statistics, reflecting a shortage of drivers. That fact, combined with a forecast for U.S. imports to be up 13 percent over last year, has resulted in shipping costs tripling as retailers struggle to procure inventory ahead of the holiday shopping season.

Constrained manufacturing output

A final constraint in the supply chain resides in the manufacturing of goods. Manufacturing output continues to lag demand. One of the most widely reported shortages is in the semiconductor industry which was not positioned for an acceleration in demand. As a result of shortages in this industry, many sectors including autos, home appliances, and consumer technologies have experienced decreases in output as they wait on components to finish their goods.

Continued forced factory closures due to health concerns have also weighed on manufacturing output particularly in countries with lower vaccination rates and zero-tolerance policies. In China, additional factory closures may persist due to government-sanctioned power cuts.  

Summary of global supply chain issues

Altogether, strong demand coupled with the labor shortage, transportation issues, and lower manufacturing output have led to inventory depletion and inflationary pressures. Input and labor costs have been rising and threaten to lower profit margins for companies that cannot pass on these costs to consumers. One area where costs are increasing rapidly is in commodities. According to the World Bank, the price of natural gas is up +166 percent and crude oil is up almost +80 percent for the twelve-month period ending September 30, 2021.

Industry experts believe demand and supply normalization will gradually occur in the second half of next year. On the demand front, growth in consumer spending is expected to moderate with U.S. consumer spending up 8 percent in 2021 followed by a 3 to 4 percent increase next year. In addition, spending on services is expected to rise, resulting in a more even balance between expenditures on goods and services which should help ease the bottlenecks in transportation and manufacturing. In terms of labor, the reopening of schools and a decline in COVID-19 cases should help to gradually increase supply.

We are currently amid the third quarter earnings season and have been watching these factors closely. Many companies have noted the issues we mentioned above, and they show no signs of easing in the near term. With that in mind, this will be a theme we are watching in 2022. A gradual normalization of the supply chain is expected but it is not certain.  

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Originally published on November 12, 2021


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