To grasp why the global supply chain crisis is happening and what the consequences are, understanding the supply chain is key. It begins with a wide variety of commodity goods such as coal, steel, oil, lumber, corn, and wheat. These commodities must be mined, farmed, and harvested by companies, then transported to factories where they are used to make other products. Finished products need to be transported to storage facilities, distribution centers, or perhaps another factory to be made into a different product. After all of that, they must be distributed to consumers through stores or home delivery. The supply chain is a chain linked by production and distribution. Transportation by trucks, trains, planes, and ships is key to having a healthy supply chain that gets products where they need to be in a timely manner. An international transportation disaster is part of the ongoing supply chain crisis, but more on that later.
The Supply Chain and Aggregate Supply
The supply chain is also closely intertwined with aggregate supply, which is the total amount of goods and services produced at certain prices in a national economy. Both aggregate supply and the supply chain are all about production. When aggregate supply decreases, prices rise, and the availability of goods decreases. Negative supply shocks, which are unexpected events that drastically increase prices, can decrease the aggregate supply
The global COVID-19 pandemic caused a negative supply shock because of its impact on the workforce. Production had to be shut down almost everywhere, people did not want to return to work, and social distancing guidelines negatively affected productivity. Companies and businesses decreased their production of goods and services by necessity. This means that if aggregate supply decreases, the supply chain’s productivity slows down.
As more people stayed at home, consumer demand changed in various ways. Instead of spending money to travel, people bought at-home workout equipment, tennis balls, computers, phones, or other items they might not have wanted or needed before the pandemic. In addition, the uncertainty of the world caused people to stockpile necessities like toilet paper in case they would be unable to buy them in the future. Many suppliers could not increase production fast enough to meet the surge in demand.
This is especially true with the microchip industry. Companies are struggling to produce enough chips to meet the demand, and the price of cars, which have microchips embedded in their processors, have increased as well as wait times for receiving cars. In other words, supply decreased while demand rose. When that occurs, prices and the inflation rate skyrocket in a short period of time, which is exactly what is happening.
Not only are suppliers unable to keep up with the demand, but the transport aspect of the supply chain has faltered--again, because of the pandemic. Ships are waiting outside of ports in the US with full cargoes, unable to dock and unload because of the labor and trucking shortage. In normal circumstances, it takes roughly two days to unload ships, but recently that number has more than quadrupled. There simply are not enough trained workers to unload ships in time, and when they are unloaded, there are not enough trucks and drivers to transport the goods to their destined location. It is unclear how and when the supply chain crisis will subside. Unfortunately, what is for certain is that Christmas gifts this year are almost guaranteed to be more expensive and harder to get.
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