…the difference between the big crunch of 2021 and past supply disruptions is the sheer magnitude of it, and the fact that there is — as far as anyone can tell — no clear end in sight. Big or small, few businesses are spared. Europe’s largest fleet of trucks, Girteka Logistics, says there’s been a struggle 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 production of a new product because of a dearth of semiconductors.
Further exacerbating the situation is an unusually long and growing list of calamities that have rocked commodities in recent months. A freak accident in the Suez Canal backed up global shipping in March. Drought has wreaked havoc upon agricultural crops. A deep freeze and mass blackout wiped out energy and petrochemicals operations across the central U.S. in February. Less than two weeks ago, hackers brought down the largest fuel pipeline in the U.S., driving gasoline prices above $3 a gallon for the first time since 2014. Now India’s massive Covid-19 outbreak is threatening its biggest ports.
For anyone who thinks it’s all going to end in a few months, consider the somewhat obscure U.S. economic indicator known as the Logistics Managers’ Index. The gauge is built on a monthly survey of corporate supply chiefs that asks where they see inventory, transportation and warehouse expenses — the three key components of managing supply chains — now and in 12 months. The current index is at its second-highest level in records dating back to 2016, and the future gauge shows little respite a year from now. The index has proven unnervingly accurate in the past, matching up with actual costs about 90% of the time.
How the World’s Companies Wound Up in a Deepening Supply Chain Nightmare
Ryan Petersen, the CEO of Flexport, talks about the current mess
By Tracy Alloway
and Joe Weisenthal
May 17, 2021, 4:00 AM EDT
Chicken, lumber, microchips, gas, steel, metals, chlorine and ketchup packets: What do they all have in common? They’re all (nearly) impossible to find.
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.
Here’s what’s hard to get, why and for how long, according to CNN Business’ writers.
While the pandemic continues to boost spending on products like gadgets, cars and comfortable apparel, meeting that demand is a different story. The comments from company leaders underscore the long-term impacts of the Suez Canal blockage, port congestion in the U.S. and the worldwide chip shortage on global trade.
“Our current expectation is we will face a tight supply environment for at least the remainder of 2021,” said Kurt Sievers, chief executive of NXP Semi, a leader in automotive chip production. At the same time, the company has “seen a significant increase in demand for our products.”
‘Most Difficult Challenges’
Tesla Chief Executive Officer Elon Musk said the first quarter presented “some of the most difficult supply-chain challenges that we have ever experienced in the life“ of the company, noting the chip shortage and production challenges in China because of Covid-19 quarantine restrictions.
At Apple, supply constraints will have a revenue impact of $3 billion to $4 billion in the June quarter, Chief Financial Officer Luca Maestri said.
The severity of the global chip shortage has gone up a notch over the last few weeks and it’s now looking as though millions of people will be impacted.
As technology has advanced, semiconductor chips have spread from computers and cars to toothbrushes and tumble dryers — they now lurk beneath the hood of a surprising number of products.
But demand for chips is continuing to outstrip supply, and car makers are no longer the only companies feeling the pinch.
Alan Priestley, an analyst at Gartner, told CNBC that the average person on the street is bound to be impacted by the chip shortage in one form or another.
The demand frenzy is pushing supply chains to the brink of seizing up. Shortages, transportation bottlenecks, and price spikes are nearing the highest levels in recent memory, raising concern that a supercharged global economy will stoke inflation. Ryan Petersen, Flexport founder and CEO, talks with Bloomberg’s Caroline Hyde, Romaine Bostick, and Joe Weisenthal on “What’d You Miss?” about the global supply chain. (Source: Bloomberg
The phrase “bullwhip effect” was coined by Stanford business school professor Hau Lee, who was trying to understand why the supply chain for diapers was experiencing wild swings in order volumes even though consumers buy diapers at a relatively constant rate. He found that even small changes in demand for diapers triggered larger changes in retailers’ wholesale orders. That set off even bigger swings in manufacturers’ demand for the materials to manufacture diapers.
Lee compared what he observed to a cowboy cracking a bullwhip. Although a cowboy’s hand might only move a few inches, the ripple down the length of the whip grows larger until the tip of the whip snaps several feet through the air. This bullwhip effect explains how these small shifts in demand for certain goods ripple up the supply chain, causing bigger and bigger swings in production. Since they can’t predict the future, fetailers introduce errors when they scale up their orders in response to expected demand. Wholesale suppliers magnify that error when they adjust their own orders to manufacturers’. Even more error is introduced when manufacturers order raw materials from their suppliers, and so on. The further up the supply chain, the more demand signals become distorted.
The COVID-19 pandemic has played a large part in bringing about this imbalance. As companies sent their staff back home to work remotely, PC and smartphone sales surged. At the same time, users turned to new, chip-filled forms of entertainment to pass the time during months of lockdown, ranging from gaming to cryptocurrency mining.
Toss in some geopolitical tensions between China and the US, which has led Chinese tech companies to aggressively stockpile chips and chip-making equipment in anticipation of US sanctions, and it’s easy to see why getting your hands on a new smartphone is not a given these days.
PC manufacturers, for example, have suffered from severe supply chain issues for almost a year. Although the PC industry recorded record sales in 2020, analysts estimate that numbers could have been even higher had components been readily available.
Most gamers will be aware that gaming consoles were also in short supply during the past months. Sony acknowledged that it had not been able to keep up with demand for its PS5 and warned that the constraints on the supply of semiconductors will last through the next year.
Shortly after it was released, Apple’s iPhone 12 Pro came with up to three weeks waiting time. Samsung, reports the BBC, has said it might skip the launch of the next Galaxy Note smartphone. Xiaomi has described a “very, very serious” situation with shortages affecting the whole industry.
“At some point, consumers will be affected by the chip crisis,” Ondrej Burkacky, McKinsey lead on semiconductors, tells ZDNet. “The high noon season for consumer electronics are Q3 and Q4, and there might be shortages of several products during this time.”
In some cases, users might even see a price hike: Xiaomi, for example, warned that the company might have to pass costs linked to the chip shortage on to consumers, although it didn’t go into further detail.
h/t Digital mix guy