Expert Commentary

Qwick Takes: Supply chain disruptions and inflation

June 23, 2021

Posted by Irina Slav

This week, Talking Biz News Deputy Editor Erica Thompson reached out to Qwoted’s community of experts to inquire about supply chain disruptions that have fueled inflation concern.

Check out some of the top commentary:

Bruce Dahlgren, CEO of MetricStream:

There are several major factors impacting the resiliency of supply chains today, which can affect local markets. This includes supply chain disruptions, increased costs of goods sold, cyber threats that slow business continuity, and an anticipated increase in regularity requirements. When organizations are caught on their back-foot, larger problems arise. Companies need to shift their strategy from reactive to proactive, anticipate risks and adopt solutions that allow them to embrace risks while managing partners more effectively. A more holistic approach to managing third parties as it relates to governance, risk, or compliance issues will help organizations move from a posture of fear to a position on strength. If we change our mindset on risks, we will reduce the potentially negative impact of the supply chain.

Johnathan Foster, principal consultant at Proxima:

Supply chains experienced unprecedented cycles and to this day, remain extremely volatile. The pandemic exposed early on that supply chain infrastructures were not as healthy as many companies originally thought or expected. The disruption of COVID and the e-commerce growth sparked a rapid response from warehouse managers and logistics leaders to meet consumer demand. When demand from consumers continued to improve throughout 2020, suppliers were forced respond with an exceptionally large increase in production to restock empty warehouses and assembly plants. The so-called bullwhip effect continues to ripple across supply chains, generating unusually large orders for suppliers that are far from end customers.

The pandemic should’ve been a wake-up call for managers and prompt them to consider actions that will improve their resiliency to future challenges. Using automation and procurement specialists to help solve capacity issues from supply chain disruptions and responding promptly to the influx of consumer demand can be the “make or break” of keeping businesses afloat.

Tim Isgro, Chief Investment Officer at Reverse Mortgage Investment Trust:

Consumers today face intense competition for single-family homes, often paying above asking price and offering many concessions. Home prices are slower to react than the prices of other market goods, but as the seasonally weaker autumn and winter months come around, supply chain issues continue to be resolved (like those in the lumber market), and we emerge from pandemic living, the hot housing market should tend to cool and confidence should return to more normal levels.

Ross Waetzman, director of corporate recovery at Gavin/Solmonese:

As the United States recovers from pandemic disruptions, expect lingering disruption to supply chains for several reasons:

Pent-up / New Demand: After a year of not spending, naturally some goods/services have seen exploding demand. This has caused shortages in everything from lumber to gaming systems.

Subcomponent Scarcity: A microchip shortage has caused delays in everything from new home construction to automobiles.

Labor: Our labor market is acting tighter than unemployment figures suggest. American Airlines recently canceled hundreds of flights, half of which were due to flight crew shortages. Labor shortages in trucking are another factor causing delays in the supply chain.

Supply Chain Resiliency: While humans may be done with Covid-19, Covid-19 is not done with humans. This past week saw suppliers shutting operations due to new outbreaks in China, Taiwan, Russia, and even on the Mission Impossible movie set.

The above issues will abate over time. Timing will be driven by specifics to each industry, good, and service.

Bruno Slosse, CEO of Vendavo:

Before the pandemic, supply chains were being “sweated” the same way capital intensive businesses push their assets for peak utilization and minimal downtown: working to utilize any spare capacity. For supply chains, that often meant rationalizing suppliers and input alternatives. When everything is fine, running on the razor’s edge works, but it puts more eggs into fewer baskets.

When things aren’t going well – when volatility strikes, and there’s no “spare” left in your supply chain, and there are fewer (if any) options to bring in new suppliers and it becomes a recipe for extreme volatility. Many folks respond to volatility by locking in stability – often paying for that stability with an added premium and with this the inflation fire is fueled.

It’s often noted that a little inflation is a good thing for an economy – making it easier to do things like raising prices (responsibly, with granularity according value and willingness to pay), which helps with profitability, which helps with expansion and growth. Which helps with adding capacities now, that help you have spare capacity to handle things in times of volatility. It sounds good because it is good – the razor’s edge is not a place of long-term operational stability.

Alex Rabens, founder and CEO of Mickey:

Inflation is on lots of peoples’ minds right now. The price of housing has skyrocketed, beef will be up almost 100% year-over-year, and the supply chain disruption caused by e-commerce overload continues to raise the price of a shipping “haul” AKA an American import.

Simply put, the price of a round trip container voyage equals the “haul” (the USA import) plus the backhaul (the export). The haul and backhaul are meant to slide up and down inversely at all times. But now, the price of the haul is so much higher than that of the backhaul, that it’s more efficient for the shipping companies to send the container back immediately than wait for an export order.

The Western governments will need to, at some point, step in with the steamship lines and cut a deal for a more equal approach — but it’s challenging to effect change to a globally distributed for-profit business with historically razor-thin profits.

Sameer Samana, senior global market strategist at Wells Fargo Investment Institute:

There will be some disruptions that will last longer (semiconductors are a good example) where the secular trends (automation, greater use of technology in everyday things, etc.) are outstripping the current manufacturing capacity; others are shorter-term in nature (like lumber) and will be resolved in the coming months.

While these disruptions will put upward pressure on prices, it is worth noting that additional supply will come online in the coming years and the Fed has also recently indicated that they are paying attention to the situation and will act (by tapering/raising rates, if needed)

We think inflation will run at a higher rate than the previous cycle, but don’t believe persistent, runaway inflation is a scenario investors should spend a lot of time worrying about.

Instead, investors should tilt towards stocks (and away from bonds, especially longer maturities) and favor cyclicals (industrials, materials, financials, energy) over defensives (utilities, staples).

Frank Kenney, director of strategy, Cleo:

Disruptions usually occur without warning, although sometimes they can be predicted due to a particular action, such as tariff adjustments and disputes. As we commonly think about them, supply chains are relatively complex and have a long tail of impact. At this point, we’ve had so much turmoil within different parts of the supply chain that additional disruption is just extending the volatility throughout the global chain.

Unfortunately, throw in a hurricane, wildfires, social unrest, and an unprecedented national election in the U.S., and one can start adding months on top of months necessary to get to the point of predictable service. That’s why it feels counterintuitive that demand is decreasing, but we keep forecasting longer and longer times to get to predictability. The inflation issue is what you would expect when you had supply chains that have adjusted to specific economic conditions and now rapidly shift to new ones.

Does that mean that there is inflation, and we’re going to get back to 2008 levels of inflation? We may, but as supply and demand equalize, and they usually do naturally or via legislative/executive manipulation, we will most likely stabilize the inflation rate.

Sam Agyemang, co-founder of HaulerHub:

The effects of the pandemic on global supply chains will absolutely be felt well into the end of the year and possibly into next. From manufacturing, retail, and wholesale trade to specialty food items, cargo congestion is driving up the prices we pay domestically. This will certainly lead to inflation as the foreign products we have come to expect at lower prices are now tied up in this supply chain quagmire. Global trade experts are warning that it may be as late as Christmas until some online orders are fulfilled. These delays, due to high consumer demand, will complicate the holiday season ahead as currently there aren’t enough dock workers to keep up with this surge on ports.

Joe Vernon, Principal, Consulting at EPAM Systems, Inc.:

Supply chains have shown extensive vulnerability from disruption in raw material and finished goods supply, delivery capacity and labor shortages. More backlogs and delays are anticipated as the economy recovers from the pandemic and consumers generate surges in demand. Continued product scarcity will keep upward pressure on prices and inflation may be further exacerbated by macro-economic fiscal policy. The risk horizon for supply chains will extend well into 2022 with marginal abatement in the breadth and depth of shortages. Microchip supply and delays at shipping ports are two key indicators to track and leaders will benefit from enhanced visibility, predictive analytics and risk scenario modeling tools.

Nate Rossier, SVP, consulting group leader at enVista:

Some concern about inflation due to supply chain disruptions in the next year is certainly justified, as there will be whiplash in demand across several industries due to changing consumption patterns. As the labor market remains tight, there will be challenges in creating a supply that matches demand, which will fuel cost increases. Additionally, as suppliers ramp up, they will need to add costs to increase capacity, e.g. hiring more talent, adding equipment and accommodating increased expenses.

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