December 23, 2021
You can’t pick up a paper or view the news online without reading about supply shortages. It is impacting every part of our economy. The blame, of course is being laid on the global pandemic. Like a set of dominoes, one squeeze in the supply chain creates another one down the line.
Demand for products jumped faster than anyone anticipated. Added to the supply shortage is a labor shortage and a transportation shortfall.
While the pandemic is getting the blame, this problem has been percolating for decades.
In the 1970s, Japan originated what was called Just In Time Inventory.” Essentially, a company did not keep large inventories of products (e.g., six months of products) on hand but rather ordered the different components as need. This approach spread globally. It reduced the costs to the company of maintaining inventory which then freed up money to be used elsewhere. It also allowed manufacture of parts to move to lower cost production sites.
As long as the supply chain kept moving, it wasn’t a problem. As supply chains moved from local suppliers to global suppliers, the risk of disruption multiplied.
For example, the top 5 exporters of automotive parts are:
To give you a flavor for the volume we are talking about, according to Toyota, a car has 30,000 parts.
Corporate executives across the country are re-evaluating their supply chains to try and prevent this blockage from happening in the future. One of the possibilities is going back to the “old way” of maintaining some inventory instead of using the Just In Time approach.
Time will tell. Shortages are expected to continue well into 2022 and possibly 2023.