By now, I’m sure you’ve all heard about the supply shortage. It’s all over the news and many of you have likely experienced it firsthand. It’s no secret that wait times and prices for many everyday items have gone through the roof. To make things worse, it looks like things are only getting worse. Take Tesla for example.
The wait time for model 3 is 3 to 6 months. Wait times for the model Y are 6 to 9 months. Wait times for the Model S are 3 to 6 months. Wait times for the Model X are 9 to 12 months. And the Cybertruck is nowhere to be found. Clearly, Tesla has months of backlog for all of its vehicles. Yet, their Q2 production numbers are down nearly 50,000 in comparison to Q1. And this is despite opening two new Gigafactory within the past couple of months. According to Elon, these factories are currently “gigantic money furnaces” because they simply can’t get enough parts to reach the scale that they need to.
It’s not just Tesla that’s facing these issues either. Even Apple is worried that supply chain constraints will affect their top line by several billion dollars. But, why is this still even an issue? Our freight networks, trucking networks, airline networks, and communication networks are all more advanced than ever. So, you would think that such an issue would be solved within a matter of months. But, we’re two years into this problem and things are only getting worse. So, what’s up with the supply shortage?
PANDEMIC:
Starting with the most obvious reason, we have the pandemic. While much of the world has returned to normal life, the effects of the pandemic are still quite evident throughout the supply chain. First of all, China is still regularly implementing lockdowns in even some of its biggest cities like Shanghai. And given that a significant portion of our everyday items is produced in China, it’s not surprising that these lockdowns are taking a toll on the global marketplace. It’s not just lockdowns that we have to worry about either. Covid has brought with it a slew of new safety protocols from regular testing to strict quarantine measures. And this has simply added more friction when it comes to maximizing production and logistics. But, even if lockdowns and covid protocols were left behind, we would face issues regarding labor shortages. You see, when the pandemic hit, many companies scaled back production to prepare for potentially weak demand.
This meant shutting down factories and laying off a significant number of employees. This made sense at the time but demand has recovered faster than anyone expected. Not to mention, in some industries, demand is higher than ever because people have been excited to return to normal life. The problem, however, is that it takes time to scale up production. While you can shut down a factory overnight, you can’t just turn it back on overnight. A great example is Tesla Gigafactories. It generally takes years for these behemoths to reach their strides, and even then, they still have years' worth of optimization left.
Also, it’s not just one or two factories that were shut down. Much of the supply chain as a whole was shut down, so everyone is having to scale back up all over again. To make things worse, it’s been extremely difficult to find enough labor to run these factories and logistics networks. This was already an issue before the pandemic started, but the pandemic just made this problem substantially worse. You see, many of the manufacturing employees that were furloughed or laid off simply didn’t return. Instead, they found new jobs that were more flexible and paid better. By now, I’m sure you’ve all heard about the great resignation, and one of the hardest hit industries in manufacturing. Right now, the US is short 3.5 million manufacturing workers and the worst part is that 2 million of these positions are expected to go unfilled.
This is definitely not a good sign for supply chain issues easing anytime soon. And given that 82% of manufacturing executives feel that labor shortages are one of the key reasons that they’re struggling to meet demand and increase productivity, this supply shortage could easily last for years to come. It’s not just manufacturing workers that are missing either, we’re seeing shortages in the logistics side of things as well. The American Trucking Association estimates that the driver shortage has increased from roughly 60,000 before the pandemic to 80,000 today. So, not only has the pandemic reduced the number of people who are producing goods but also the number of people who are delivering goods.
INFLATION:
Aside from major labor and scaling mess, supply chains have also been challenged by inflation. The price of raw materials has skyrocketed throughout the pandemic, and while they have cooled down from their peaks, there’s still a ways to go. Take Aluminum for example. Before the pandemic started, Aluminum cost roughly $1700 per tonne. At the start of the pandemic, prices briefly cooled down to $1500 before they exploded to nearly $4000 in February of 2022. Since then, prices have come back down to $2400, but that’s still 40% higher than where they started. A similar story can be seen with Lumber.
Before the pandemic, Lumber generally cost $3 to $400 per 1000 board feet. From there, Lumber crashed to $250 before rocketing to an eyewatering $1600. Fortunately, we’ve cooled back down to a little over $600, but that’s still over 60% higher than where we started. This price volatility has made everyone within the supply chain extremely cautious because they don’t want their businesses to become unprofitable.
Here’s the thing, let’s say you own the company that produces chassis for iPhones. You already committed to making X number of chassis at a given price, but since you made this commitment, the price of aluminum has doubled which leaves your business unprofitable. At this point, you have two options. You can either go to Apple and renegotiate a higher price due to rising material costs which will likely take weeks if not months. Or you can wait for aluminum prices to cool down before you ramp up production which will also take weeks if not months. Meanwhile, if you’re about to form a new manufacturing contract with let’s say Samsung, you’re probably going to quote them a higher price to protect yourself from price fluctuations. And when Samsung hears this high price, they’re gonna be inclined to get more quotes before their lock in a manufacturing contract. And all of this just slows down the process of meeting demand.
Also, keep in mind that most of these companies aren’t just dealing with one supplier. Apple, for example, has over 200 suppliers. So, Apple would have to troubleshoot this same issue over 200 times at the same time. I don’t think I need to explain how this quickly turns into a supply chain nightmare. To make things worse, Apple’s issues won’t be solved once they get all of their suppliers on board. Now, they have to worry about actually transporting the finished product to the customer.
Fortunately, gas prices aren’t that bad, wait never mind crude oil floating at over $100 per barrel. I don’t even think I need to explain why this is a problem because most of you have likely dealt with obscene gas prices firsthand. Now, companies could just go ahead and raise prices like many of them have been doing, but with recession fears being rampant, consumers are more price sensitive than ever. Last quarter, Netflix lost nearly a million subscribers, so there’s no doubt that consumers are cutting back on expenses.
So, the last thing companies want to do is raise prices too fast and lose even more customers. As a result, many companies have decided that it's better to have customers wait as they try to source cheaper materials than it is to have customers leave because they raised prices. This mindset is by no means helping the situation.
RUSSIA-UKRAINE WAR:
The pandemic along with inflation were already massive challenges to deal with, but now we also have to deal with the russia-Ukraine war. Neither russia nor Ukraine are massive manufacturing players per se, but this isn’t to say that they don’t have a significant impact on the global supply chain. Ukraine was one of the world’s top sources of neon. Now, neon might seem irrelevant, but it’s actually extremely relevant when you consider that neon plays a crucial role in semiconductor manufacturing. You see, neon is required to run the lasers that are used in the chip-making process.
And given that 90% of the neon that was used to produce US chips came from Ukraine, this is not a great sign. Neon wasn’t the only item that came from Ukraine either. The war has also cut off a significant supply of nickel, aluminum, wheat, and sunflower oil. And all of that is just Ukraine’s side of things. russia is the third largest oil producer and the second-largest oil exporter. Cutting off russian oil is one of the main reasons that gas prices have gone insane over the past few months. And given that these sanctions likely won't be easing anytime soon, transportation networks are gonna have to get used to higher fuel prices.
Aside from oil, russia is also the world’s second-largest natural gas producer and the world’s largest natural gas exporter. Given that the manufacturing industry is heavily dependent on natural gas, they’re gonna have to get used to higher natural gas prices for quite some time. Aside from raw materials, the war has also disputed major transportation networks. Here’s the thing, russia is literally the biggest country in the world by far, so when you cut off all cargo trains, planes, and ships from this region, it becomes a lot harder to transport goods. In China, for example, over a million containers became stuck in the logistics channel when the war started. You see, these containers were supposed to be transported to Europe by a train that travels through russia. But, now all of them have to be transported by sea. So, the russia-Ukraine war is not only taking a massive toll on raw materials but also on international transportation networks.
THE SUPPLY SHORTAGE:
In the end, I think Matthew Rozsa says it best. The global supply chain is like a gigantic spiderweb that was been created through decades of producing, scaling, and delivering. And out of nowhere, three giant baseballs have been thrown at this spiderweb. The first baseball is the pandemic. The lockdowns, layoffs, and factory shutdowns brought on by Covid-19 have been catastrophic. Scaling up production back to full capacity is a time-consuming endeavor and this has been especially challenging due to labor shortages. The second baseball is inflation. The price increases in raw materials, labor, and fuel have led to higher expenses in every step of the supply chain.
Meanwhile, companies are trying to minimize price hikes to maximize customer retention. And this has simply led to companies putting supply chain issues on the back burner instead of addressing them head-on. And finally, the third baseball is the russian-Ukraine
war. Not only has the war cut off several key resources such as neon, natural gas, and oil, but it has blocked off almost all cargo transportation through russia. These three baseballs have left three massive holes within the supply chain spiderweb and this is not something that can be fixed overnight. Given that many millions of manufacturing jobs will remain vacant, the clearest solution is to lean towards automation which will take years to develop.
Similarly, it took a year for inflation to ramp up to where we are right now. And even if this is the peak, it’ll likely take another year for inflation to cool back down. And as for russia's situation, even if the war ended today, it’ll take years if not over a decade to repair relations. So, our best bet is to simply find new sources of natural gas and oil and neon, but this will again take time. So, you should probably buckle in because this crazy ride is far from being over, but that’s just what I think. When do you think supply chain issues will ease? Comment that down below.
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