Nov. 18, 2021Print | PDF
As the holiday season approaches, concerns about global supply chain backlogs are dominating the headlines. For explanations and answers to burning questions like whether or not we should stock up for the holidays, we consulted three supply chain researchers from the Lazaridis School of Business and Economics’ Department of Operations and Decision Sciences:
All three are members of the Centre for Supply Chain Management, which facilitates research and discussion between scholars, practitioners and decisionmakers.
Q: For those who are not experts in this field, why are we facing global supply chain disruptions?
Haughton: “In some ways, it is a simple explanation: demand has exceeded supply.”
Isotupa: “We had manufacturing shutdowns during the pandemic, which drastically reduced supply and then when they re-opened, there was a lot of pent-up demand. This caused huge swings in demand. Predictability and precision are really key to smooth supply chain operations, and both have been somewhat lost during this pandemic.”
Haughton: “We have to consider to what extent is the increased demand real and to what extent is it artificial. We have a concept in supply chain management called the ‘bullwhip effect,’ and the idea is that at the consumer end, there may be a small jump in demand. The parties responsible for supply react to that jump by saying, ‘Demand has gone up 10 per cent. Maybe I need to have my supplies go up 20 per cent because this may be a sign of things to come.’ And then that same signal gets pushed back to the previous party in the supply chain and it goes on and on and on.
“There are also supply issues at various levels. If we go all the way back to manufacturing sites, for example, there have been situations of not enough people on the factory floor, for obvious reasons. On the transportation side, there are not enough people to do the last-mile transportation.”
Ravi: “Prior to the pandemic, the people who designed supply chains were probably not as risk averse as they should have been. Global supply chains are geared toward low prices and product variety. We have varieties of the same brand of painkillers which are identical in terms of the active ingredient, but they are labelled differently. That makes it a lot harder to forecast because it increases the amount of inventory you need. And this was supported by an agile global supply chain, which is incredibly interconnected. There are firms doing a very small slice of the work and depending on 20 other firms, each of which is dependent on 20 others. This was designed without factoring in not just a pandemic but many other issues, like trade wars.
“Now, consumer preferences are going back to pre-pandemic levels, but supply chains are not able to react to that extent because they've been damaged. They need repair. And because of their interconnectedness, all you need is for something to go wrong in one link. If the pandemic is still continuing in one location, it is going to create a problem along the whole chain.”
Q: Do you think the pandemic will result in correcting some of these systemic flaws you have identified?
Ravi: “Technology might make it possible to do a little more onshoring as opposed to offshoring. There is also a greater diversity of suppliers. They used to say that China was the ‘world's factory,’ but increasingly you might see sourcing from Vietnam and many other places.”
Haughton: “There has been a lot of conversation around localization and diversifying supply bases. I don't think we can put the toothpaste back in the tube and say we are no longer going to order from China, but these conversations are not only taking place at the level of industry – they are also taking place at a public policy level as well. I think North American governments are concerned about that dependence. That might lead them to invest in building local manufacturing ecosystems.”
Isotupa: “The supply chain is a very big and unwieldy machine, so changing directions is going to take a long time. For example, when demand for cars decreased in Europe as it was hit hard by the pandemic, car part manufacturers in China pivoted to making semiconductor chips for computers because there was a huge demand as people shifted to gaming and working at home. Then when car manufacturers in Europe ramped up production, the Chinese manufacturers didn’t have the capacity to support them anymore because they had re-tooled and had gotten into a different market. It takes a very long time to build extra manufacturing capacity, especially for specialized products like semiconductor chips. So we are going to see some of these shortages for a while. They are not going to go away in two or three months.”
Q: In addition to semiconductor chips, what are some other products we can expect long-term shortages of?
Isotupa: “Cardboard is another one because there has been a huge increase in online sales. We are already seeing the shortages. But when you compare cardboard and semiconductor chips, cardboard should be relatively easier to ramp up production.”
Q: One of the main concerns we have been hearing is that we may not be able to buy the presents we want for the holidays. Is that anxiety well-founded or overstated?
Ravi: “There are shortages, but they might get amplified by our response to them.”
Haughton: “We hear stories of people having piles and piles of toilet paper, which they bought out of panic. I think there is a risk of over-blowing that fear and causing the same kind of bullwhip effect that I spoke about earlier.”
Isotupa: “Unlike toilet paper or masks, however, the holiday demand has a definite end point. Once the season is done, that demand is going to disappear. People may start buying gifts really early, but they're not going to necessarily buy more because the people to whom they want to give gifts doesn’t increase. That is something we shouldn't lose track of.”
Q: What are some other, less talked about consequences of supply chain backlogs?
Ravi: “One effect could be increasing inflation rates. If interest rates rise in response, there could be all kinds of unintended consequences. For instance, houses are quite unaffordable to begin with right now. If you have high inflation rates for a while and you see an increase in interest rates, that would make them even more unaffordable.”
Haughton: “I recently looked up Statistics Canada’s producer price index for the construction industry. If we were to compare June of this year with June of last year, it has gone up nearly 20 per cent. And that is significant if we compare it to what the year-to-year statistics have been in recent years. This could push housing beyond the reach of even more people.”
Isoptupa: “In certain parts of the world, it has definitely caused an issue in food supply chains and that has been a big problem.”
Ravi: “Also just an overall increase in prices. Given shortages, the rising cost of transport and so on, there are legitimate causes for raising prices. You can actually raise prices and still lose money.”
Q: Supply chains are something that most people never think about until they have to. How does a crisis like this illustrate the importance of research centres like the Centre for Supply Chain Management?
Haughton: “Let me speak from my selfish perspective as the director of the Lazaridis Master of Supply Chain Management program. I think the public has a very strong awareness of supply chains right now, but the conversations tend to be more panicky. Am I going to get this when I need to get this and so on. As scholars, I think we have to shift the conversation to focusing on appropriate solutions and responses, and we have to do it in a number of ways. One of them is through the kind of education that we give to our students, including in our undergraduate program, which already has a supply chain concentration.”
Ravi: “One hopes that there's going to be greater attention paid to the possibility and importance of careers in this field, and that's going to spark conversations with the executives at logistics-related firms in Canada who seem to face a shortage of employees with formal training in logistics."
Isotupa: “I hope that because the supply chain is under a microscope right now that both industry and government will put in more resources toward supply chain research, which would help with future disruptions.”
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