BU Today: In a nutshell, what is the supply chain?

Arzum Akkas: A supply chain is a series of facilities through which a product—like a printer or a can of soda—and all the materials that comprise it—such as a computer chip or high fructose corn syrup—travel through. 
 
It starts with raw materials, and then those are turned into semifinished goods. They finally travel to a manufacturing plant where the finished goods are made. The product then may be stored at a warehouse and later distributed to retail stores, dealers, or directly to our homes, offices, schools, etc. Along this journey, the final product or its components may travel through ports. The number of locations that the product or its materials pass through varies by the product itself and its complexity. For example, the supply chain tends to be shorter for food products and longer for technical products. The entire thing looks like a very complex network.

BU Today: Why do we care about how the supply chain is—or isn’t—working?

Arzum Akkas: If the supply chain is working properly, consumers can easily find the products they are looking for, whether it be furniture, toys, televisions, or food. But when this machinery is broken, we can experience stockouts [being out of goods] or back-ordering, which means we can’t get what we want when we want it. Shortages sometimes can lead to price increases too, which may eventually lead to inflation, which has broader economic implications.

BU Today: Why are we suddenly dealing with so many supply chain problems? When did this all start?

Arzum Akkas: We have been experiencing shortages and price increases on all sorts of products for months. It’s a combination of two reasons: first, demand is exceeding capacity in production and logistics, and second, there is a lack of redundancy in the current supply chain. 

For a long time, the supply chain was operating smoothly and efficiently. When you don’t face capacity problems and when demand is predictable—which had been pretty much the case in the past—firms focus on operating with as little inventory as possible and maximizing utilization of production lines. That is what the investors like, as they don’t want cash to be tied to machinery that is not in use or inventory that is just sitting around. So, the supply chain used to be very lean. But when the demand patterns changed altogether with the pandemic, shortages started to pop up everywhere, since the system didn’t have buffer inventory or capacity to deal with unpredictable volatile demand. 
 
It all started when the pandemic hit China. Factories there started to close to contain the spread of the virus, which led to shortages in many materials and products. Pandemic-related labor capacity issues still exist everywhere due to COVID cases and quarantines. For example, in China, port workers quarantine for three weeks for every two weeks they work, out of fear of bringing the virus in from imported goods.

BU Today: We keep seeing stories about the shipping crisis, large containers stacked tall at ports around the world, waiting to be unloaded. What’s this about?

Arzum Akkas: So, currently there are huge backlogs at US ports, vessels anchored around [the world] waiting to be unloaded, and containers waiting to be loaded onto trucks.

Overall, we have capacity issues in manufacturing, in warehousing, and at ports. Beyond COVID-related absences, we have labor issues at these places due to “great resignation” or “great reshuffle.” Line operators that were laid off during the lockdown (due to shut-down production lines from lack of sufficient demand) are now hard to hire back, because they got better jobs at firms who have been hiring aggressively—such as warehouse fulfillment jobs at Amazon. And then there are Eastern European immigrants who had moved to Western Europe for trucking jobs, and who went back to their villages during the pandemic, and are now not coming back to those jobs. A truck driver shortage is also an issue in the United States, which is contributing to congestion at ports. 

In the absence of enough truck drivers, containers are piling up at ports, stretching lead times. Ports are also short on crane operators to unload vessels, causing those vessels to set anchor while waiting their turn, which is also increasing lead times. Storage capacity at warehouses is a problem too. Some firms that ran out of storage space are using the ports as free storage by not picking up their inventory, according to a recent New York Times article. 

In addition, we have capacity issues with containers, which is an interesting one in my opinion. Most containers go back to China empty from US ports, instead of waiting around to be filled, because what we import to them is so little compared to what we export from China. When the pandemic started, there was a demand spike for PPE [personal protective equipment] from all over the world. So, many of the containers were used to send PPE from China to Africa, the Middle East, Europe, South America, etc. Turns out, shipping companies did not bring them back to China immediately, and instead let them wait at those ports. This apparently started the container shortage. Looks like the container inventory in the global trade system was lean, as well.

BU Today: Why can’t factories just produce more?

Arzum Akkas: Many global companies will not be allowed to waste capital like that since investors won’t like it. There needs to be a return on your investment; there needs to be a continuation of elevated demand.

Having said this, the good old days with stable demand seem to be gone, at least for a while. So, an overemphasis on lean operations may not make the most sense these days. Waiting to go back to the old days likely means losing lots of sales. In this messed up, uncertain environment, it may be strategically wise to invest in capacity. There seems to be some momentum on this. Shipping companies are building a larger container fleet. The port of Savannah is expanding its rail yard capacity to deal with the trucking bottleneck. The Korean semiconductor manufacturer TSMC plans to invest $28 billion in new factories next year. So, the rules of the game seem to be changing. Regardless, “just produce/ship more” will come with a time lag, as it takes time to build capacity.

BU Today: Is this why new cars are so hard to find?

Arzum Akkas: It’s due to shortages in chips. During the lockdown there was a surge in demand for things like video game consoles and toys. So, it appears that the semiconductor manufacturing capacity was initially allocated towards these products, while car companies stopped their orders during the lockdown. Many of us saved money during the pandemic, since we weren’t going on vacations, kids were out of daycare, and there wasn’t a need to buy work clothes. Replacing an old car or an appliance now might be a good use of that saved money for many. 

In addition to a possibly true increase in consumer demand, there is lots of over-ordering going on. I suppose the semiconductor industry just doesn’t have the capacity to meet the elevated demand from all these different sources.

BU Today: You mentioned this throughout our talk, but is the pandemic the main reason for all these problems?

Arzum Akkas: I believe yes, mostly. The pandemic brought changes to supply (capacity) and demand, as we discussed. At the same time, if we had some redundancy in the supply chain, the problem probably would not have been this bad. I blame most of this on the pandemic, but not all. I also blame this on firms’ indifference towards risk management. 
 
In addition, another thing that is not new to the pandemic is truck driver shortages. This problem has been talked about for at least 10 to 15 years in the United States. It is not an attractive job for many these days, since you are away from your family for long periods, a reason why the industry has had difficulty in recruiting. Currently, truck driver shortages contribute to congestion at ports, like we talked about before, and cause shipping delays throughout the entire logistics network.

BU Today: What should we expect this holiday season?

Arzum Akkas: We should expect to face shortages. I don’t know how much and what products specifically. Last week, I met a former student of mine who landed at a job at an audio equipment company. He said that their inventory will not last past Black Friday due to shortages in chips. Any product that relies on chips probably will have the most chances of stockouts.

It is probably wise to do our shopping early to minimize our chances of facing stockouts.

BU Today: When can we expect this to stop?

Arzum Akkas: I feel like the current conditions are sort of like driving in fog. I believe in six months to a year, most of this fog will clear out, so it will be easier to make predictions. 

For example, will we see an abundance period in six months due to the over-ordering of today? If that ends up being the case, firms will have an excess inventory problem later on, causing a dip in future orders, which should help clear out congestion at ports. 

Will we have an inflation problem? Followed by deflation, due to the abundance problem? How will it all affect everything else? Inflation impacts interest rates, and thus, firms’ ability to borrow and finance their investments and consumer spending. I expect borrowing capability to impact production capacity and shortages too, because, for instance, some suppliers may go out of business.

I don’t think that we will go back to the old days any time soon. There should be a new equilibrium at some point. I believe it will be clearer in a year. It also depends on our ability to control the spread of the virus and the government stimulus on incentives in the labor market. It is hard to tell how these parameters will change over time.