“So many shortages! … Shortages are popping up across the supply chain as the pandemic messes with shipping, demand, supply and all the other levers of the global economy.”— ABC7Chicago
“If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand.”— Milton Friedman
“A shortage is a sign that somebody is keeping the price artificially lower than it would be if supply and demand were allowed to operate freely.”— Thomas Sowell
“”Economists may not know how to run the economy, but they know how to create shortages or gluts simply by regulating prices below the market, or artificially supporting them from above.”— Milton Friedman
“”We economists don’t know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can’t sell tomatoes for more than two cents per pound. Instantly you’ll have a tomato shortage. It’s the same with oil or gas.”— Milton Friedman
“This island is almost made of coal and surrounded by fish. Only an organizing genius could produce a shortage of coal and fish in Great Britain at the same time.”— Aneurin Bevan
Shortages explosion was inevitable
Is it time to panic? Are we being attacked by conspiracy theorists? Or maybe some nasty foreign power is doing its thing? Probably none of the above.
To an old systems guy, the current “shortages” and supply chain chaos are exactly what would be expected as the economy begins to open up again after more than a year of lockdowns, business failures, layoffs, and the usual global weather inconveniences. A bigger surprise would have been no shortages occurring.
What happens when you largely close down a major part of a national economy? Well, businesses cut back on production, inventories, and people. As they have been doing quite aggressively for over a year. Some have had to cut back more than others and too many businesses have simply closed forever.
You will not be surprised to hear that it takes a fair amount of time to ramp back up in many areas of products and related services, including transportation. Only as the lockdowns appear to be lifting widely, probably the result of COVID vaccinations, are the majority of surviving suppliers and retailers moving ahead aggressively with ordering, production, and restocking. Very smart.
The real question is how long might it take for this replenishment effort to complete. It took over a year to unravel the economy so it might take just as long to re-ravel it. Think early-to-mid-2022.
Next question is how to manage successfully through the re-raveling
Shortages seem to be all over the map right now. Again, no surprise but here is where the main action is right now (as of June 2021). From Insider on May 25, 2021: “Can’t find chicken wings, diapers, or a new car? Here’s a list of all the shortages hitting the reopening economy”:
“An ongoing computer-chip shortage has affected cars, iPads, and dog-washing technology alike. Chipmakers like Intel had already seen production issues pre-pandemic, but as with many industries, COVID-19 brought a variety of new supply-chain issues. The chip shortage is a problem for consumers wanting basically anything with a computerized component, which is much of the economy. Take cars as an example.”
“The semiconductor shortage has hit automakers the hardest. In January, the consulting firm Alix Partners estimated the automotive industry would lose $61 billion in revenue from the shortage this year. As Insider’s Katie Canales reported, demand for chips has gone up as consumers scrambled to buy cars and other technologies that use them.”
“But as more cars went into production, chip competition went up. Since then, many carmakers have been forced to shut down plants and prioritize which models they produce, while car prices at dealerships have continued to go up.”
“Last week, Tesla CEO Elon Musk said the semiconductor shortage has caused “insane difficulties” for the electric carmaker. Even Apple — a company that many thought would be able to dodge the shortage after it started making its own high-powered computer chips last year — said it will delay production on its iMac and iPad.”
The semiconductor shortage is a bit puzzling – more on this below. But now for a quick look at where business publications like Insider are seeing major shortages:
- Computer chips
- Used cars and rental cars
- Plastics and palm oil
- Truckers and rideshare drivers
- Homes and vacation houses
- Household products
- Bacon and hot dogs
- Imported foods like cheese, coffee, and olive oil
Kind of a big-mess, hodge-podge situation.
But look at the last shortage item – labor
This one may be at the root of quite a few shortages: production and services labor. Why? Many of these workers have minimal skills and are low paid. Our kindly government has responded to COVID layoffs by very generous extended unemployment benefits and cash supports. Not to mention eviction deferments.
Low-end labor response: stay home and collect more in tax-free cash each month than they could by working full time. These are not dumb folks for the most part. Only when the free stuff runs out will they be forced back into the daily grind with the rest of us.
Meanwhile, many businesses are labor-short and thus production (and delivery) short. Look at the list of shortages above. With a few exceptions like semiconductors, the list has a lot of labor-intensive businesses.
Prognosis: Continued shortages while businesses find ways to replace labor with robots and greater automation, a trend well underway pre-COVID.
When will the kindly government free stuff run out? Well, they seem to be able to print unending amounts of new money, so the free-stuff flow does not appear to be immediately in danger. Except in a few unenlightened States where work is an important part of life.
Definitely not in shortage right now is money
Government printing presses (aka computer keyboards) are running flat out today, still. Money is being created here in trillions of dollars a year. Who needs taxes when you have a friendly computer?
This can go on forever, right?
Ummm … maybe not. Think Venezuela.
The money tsunami is likely to play out in hyperinflation
Just like in Venezuela in recent years. Followed by societal collapse. This is really bad news if it happens here (or anywhere for that matter).
Venezuela was once among the most prosperous nations on earth because of its abundance of low-cost crude oil. Although inflation began as early as 1983, it took off after 2014 – reaching incomprehensible levels of 10,000,000% a year in 2019.
Price inflation as everyone knows is too much money (paper) chasing a limited supply of goods. Since the supply of goods is always limited, an open-ended money-printing operation creates inflation that too often gets completely out of control. Impoverishment and bankruptcy of countries inevitably follow, often in a surprisingly short time.
Wikipedia summarizes hyperinflation in Venezuela as follows:
“Hyperinflation in Venezuela is the currency instability in Venezuela that began in 2016 during the country’s ongoing socioeconomic and political crisis. Venezuela began experiencing continuous and uninterrupted inflation in 1983, with double-digit annual inflation rates. Inflation rates became the highest in the world in 2014 under Nicolás Maduro, and continued to increase in the following years, with inflation exceeding 1,000,000% by 2018. In comparison to previous hyperinflationary episodes, the ongoing hyperinflation crisis is more severe than those of Argentina, Bolivia, Brazil, Nicaragua, and Peru in the 1980s and 1990s, and that of Zimbabwe in the late-2000s.”
“In 2014, the annual inflation rate reached 69%, the highest in the world. In 2015, the inflation rate was 181%, again the highest in the world and the highest in the country’s history at the time. The rate reached 800% in 2016, over 4,000% in 2017, and about 1,700,000% in 2018,and reaching 2,000,000%, with Venezuela spiraling into hyperinflation. While the Venezuelan government “had essentially stopped” producing official inflation estimates as of early 2018, inflation economist Steve Hanke estimated the rate at that time to be 5,220%. In April 2019, the International Monetary Fund estimated that inflation would reach 10,000,000% by the end of 2019. The Central Bank of Venezuela (BCV) officially estimates that the inflation rate increased to 53,798,500% between 2016 and April 2019. Several economic controls were lifted by Maduro administration in 2019, which helped to partially tame inflation until May 2020.”
Is hyperinflation in our near future?
This may well be the big question for businesses (and everyone) if the money supply growth (or, more accurately, tsunami) is not ended. Hyperinflation kills businesses as rising costs exceed pricing responses for an extended period.
Current shortages are mostly a consequence of the lengthy lockdowns and other COVID-mischief. They will disappear within a year if all goes well. Continued money-printing however is not an aspect of all going well.
Government does the money-printing so when it ends is largely a political question. Even economic collapse does not always end hyperinflation as Venezuela among many other examples demonstrates.
In any case, it seems unlikely that the money-printing will end via voluntary political action. It will end when events end it. When is that? Who knows?
Probably wise to plan for an extended period of fairly serious price inflation.
Semiconductor shortage is puzzling
According to the South China Morning Post, the reasons here are somewhat complex:
“The supply of chips cannot be turned on and off with a switch. Multibillion-dollar wafer fabrication plants are finely tuned and run 24/7, 365 days a year. Changing the production line for a new chip product can take weeks, if not months, and adding significant new wafer fabrication capacity can take years and billions of dollars. The Covid-19 pandemic had already put enormous pressure on supply chains, especially for consumer electronics like laptops, video game consoles and smartphones, as it forced people around the world to find new ways to work and play.”
“The car industry’s faster-than-anticipated bounce back after factory shutdowns – when companies cancelled chip orders after incorrectly forecasting lower demand for the rest of the year because of the pandemic – sent semiconductor supply into a downward spiral, creating a shortfall in the tiny electronics across a wide swathe of industries. The scarcity of ICs is not expected to end any time soon. Experts say it could be two more years before the supply-demand balance is restored. [emphasis added]”
“When car sales bounced back faster than expected in the third quarter last year and carmakers tried to ramp up production again, chip factories could not respond fast enough given the long lead times needed to schedule orders. The dearth of semiconductors then quickly spilled over into other industries, such as consumer electronics and home appliances, which saw a spike in sales from the pandemic’s “stay at home” effect, but suddenly found themselves unable to secure adequate supplies to meet the increased demand.”
Managing in a period of serious inflation and widespread shortages
The above notes suggest that the mess we are in today has at least a two-year run (from June 2021) before conditions stabilize. At best. Worst case may be the more likely case.
Inflation is not a catastrophe if you can keep your margins (percentages) stable. This means that you are able to raise prices as fast as your costs increase. The certain part of this is that your costs will increase at roughly the rate of (real) inflation. The tricky part is on the pricing and revenue side of things.
You all know about the price-volume curve in economics that shows sales volume declining as prices increase. Competition also messes with your ability to raise prices enough to match your cost increases. Reduced sales volume can hit your materials cost volume discounts as well. Pricing may become a very tough problem in an inflationary environment. So, what can we do?
Analyze your revenue mix to identify both those sources (markets, customers) with limited ability to raise prices (competition-constrained maybe) and those that are largely discretionary purchases (sharp volume drop if a price increase is unavoidable). You may want to seek out new product areas that have limited competition or are essentials (volume unlikely to decrease much). You may want to check out categories that are driven by innovation and variety – ones where price-sensitivity is lower than for your current product and customer mix.
Focus even more heavily on cost reduction since this is likely where you will have the greatest control and flexibility if major inflation occurs. The time to do this is before any serious inflation kicks in. Yesterday, maybe?
Borrow now while interest rates are very low and primarily for purposes of investing in cost-reducing equipment and processes. Think robotics and automation. Inflation will cause interest rate increases that can make borrowing later much more expensive. Plus you get to pay earlier loans off in cheaper money if inflation is on your side.
There are probably dozens more steps that can be taken ahead of a likely period of serious inflation. You need to know what these are and implement those with the highest potential inflation protection as a top priority.
What if serious inflation doesn’t happen?
If you go full blast preparing for inflation but inflation turns out to be largely a no-show, where would that nasty happening leave you?
Many cost-reducing initiatives are no-brainers in this respect. They should be on your table no matter what the future appears to be messing with. The only difference here is that if inflation does show up, you want to be targeting your highest-cost and most reduction-resistant areas.
A good many, and probably most, revenue mix adjustments will be a good idea no matter what inflation does. This is all about identifying and mitigating or eliminating as many as possible of your greatest vulnerabilities.
The last few posts have emphasized the likelihood of continued major change and limited-to-no predictability for some extended period. How you manage should reflect this virtual certainty. Agility and adaptability are crucial aspects. You also need to monitor your operating environment frequently and widely, feeding whatever you learn back into your management processes on a daily basis.
Another critical need is to identify your points of greatest vulnerability – i.e., degree of fragility – to a range of possible impacts. As noted in these earlier posts, it is your response portfolio that matters here, not the cause of the impacts in general.
Current shortages are mostly the direct consequence of COVID lockdowns. The overall global economic system was highly fragile and vulnerable to a range of disruptions. COVID came along and did the job. Rebuilding and reorganizing supply chains, replenishing deeply-depleted inventories, and ramping up complex manufacturing facilities is going to take at least a year, and probably longer in some cases. Agility and adaptability have become vital for survival and success.
A great deal has been written about managing during inflationary times. Much good advice and many solid ideas are available, such as this short excerpt from Industry Week: “How to Manage Pricing During Inflationary Times”:
“Managing Pricing Activity. Pricing has become a central focus of 2008 in the effort to manage spiraling costs. At the recent CAGNY conference in February, no fewer than fifteen CPG companies reflected recent pricing actions in their presentations, substantially higher than the handful of companies with significant pricing activity in previous years. However, analysts remain skeptical in this volatile environment. Following the CAGNY conference, two leading consumer packaged goods analysts made the following statements: “We maintain our view that these companies lack the pricing power to fully offset rising commodity costs.””
Forbes reiterates the point made earlier about inflation being a problem only when you can’t keep margins up: “Inflation Worries? Here’s What a Business Needs to Do”:
““From a firm’s perspective, why do they care about inflation?” William Branch, a professor of economics and department chair at the University of California, Irvine, told Zenger. “They just would care about it if there’s some mismatch in how their costs are increasing and how their revenue is increasing.” When everything changes at the same rate, the effect is unimportant because margins and profits remain steady.”
“We should all be so fortunate as to have well-behaved costs and prices required for margin stability. Most of us however are likely to face difficulties raising prices fast enough to offset cost increases.”
From Natural News is an interesting view of the current shortage situation: “Extended global supply shortage seen as China’s factories squeezed”:
“A factory of Huizhou Baizhan Glass Co. Ltd., maker of glass lamp shades for companies including Home Depot Inc., is being stretched to its limits with sales doubling their pre-pandemic level. But the company based in the southern Chinese province of Guangdong, which makes about $30 million in annual revenue, doesn’t plan to expand operations.”
“According to Eric Li, the company’s owner, surging prices of raw materials means “margins are compressed.” With the global economic recovery still uneven, “the future is very unclear, so there is not much push to expand capacity,” Li said.””
“Shortages are a worldwide problem. The world is seemingly low on everything these days. “You name it, and we have a shortage on it,” said Tom Linebarger, chairman and chief executive of engine and generator manufacturer Cummins Inc. Girteka Logistics, Europe’s largest fleet of trucks, is struggling to find enough capacity. Monster Beverage Corp. of Corona, California, is dealing with an aluminum can scarcity. Hong Kong’s MOMAX Technology Ltd. is delaying the production of a new product because of a shortage of semiconductors.”
“The semiconductor shortage has already spread from the automotive sector to Asia’s highly complex supply chains for smartphones. “The semiconductor shortage will severely disrupt the supply chain and will constrain the production of many electronic equipment types in 2021,” Kanishka Chauhan, principal research analyst at Gartner said in a mid-May report on the situation. “Foundries are increasing wafer prices, and in turn, chip companies are increasing device prices. The shortage is expected to cost the global automotive industry $110 billion in revenue this year.”