In this Supply Chain Matters commentary we point out that this week will likely be recognized as a significant milepost. It is when global economists and financial institutions began to coalesce and formally quantify that this year’s continuous global supply chain disruptions and consequent inflationary forces, are doing harm to businesses and the global economy.

Let us dwell on the evidence.

Global Economic Growth

The International Monetary Fund (IMF) has just issued its October World Economic Outlook. This international financial lender now expects this year’s global output growth to be 5.9 percent, compared to a 3.1 percent contraction experienced last year as a result of the pandemic. However, this year’s growth forecast was trimmed by 0.1 percent with the agency indicating that the COVID-19 delta variant, strained supply chains and rising inflation in in food, essentials and fuel have contributed to a downward decline.

The October 2021 report’s headline describes three forces: Health Concerns, Supply Disruption and Price Pressure as driving forces. The report’s introduction refers to growing disparities among developed or developing nations. In the area of coronavirus vaccination rates, the report estimates that about 60 percent of people residing in rich countries are vaccinated but less than 5 percent have been vaccinated among low-income nations.

For developed countries, this year’s economic growth forecast for the United States was trimmed by a full percentage point to 6 percent, principally because of supply constraints. This year forecast for the Eurozone area was heightened to 5 percent, a 0.4 percentage increase from the previous forecast.

China’s economy is now forecasted to grow 8 percent this year, a decline of 0.1 percent from July. Low-income countries are now forecasted to grow a mere 3 percent this year, a 0.9 percent drop from the July forecast.

Keep in mind that the prior 2020 year was one of overall economic contraction globally.

 

Inflation Growth

In the latest forecast, the IMF cautions that inflation risks are skewed to the upside and could materialize if pandemic induced supply and demand mismatches continue longer than expected. That stated, the agency forecasts that inflation rates will decline to 2 percent among advanced economies by the middle of next year. In contrast, emerging and developing countries are now forecasted to experience overall inflation rates of 5.5 percent this year, and 4.9 percent in 2022. Such inflation numbers are quite significant and could lead to social unrest, according to the report.

In the United States, the Bureau of Labor Statistics now indicates that prices rose 0.4 percent in September, slightly higher than August. On an annual basis, product prices have risen at a 5.4 percent clip, and are expected to go higher in this final holiday focused quarter. Concerns are growing among U.S. policy makers whether inflation spikes are “transitory” and whether higher prices for consumer staples and fuel lead to more elongated inflation pressures. When consumers sense higher prices for staples and business continue to encounter higher prices for inbound inventory, buying and pricing behavior becomes far more uncertain. The biggest concern is in more far-ranging price increases across multiple industries.

 

Impact to Businesses

Bloomberg reported this week that executives among S&P 500 companies have mentioned the term “supply chain” upwards of 3,000 times on investor briefings, more so than occurred last year. An analyst at equity analyst firm R5 Capital is cited as indicating that “supply chain is taking center stage on earnings calls as the supply chain is a disaster.” Wow- does that sting!

While companies of all types have been experiencing the ongoing pains of these cascading and now non-stop disruptions, small and medium businesses are especially impacted. Not having the scale and influence of larger global based enterprises, a growing divide among large and small in the ability to navigate existing disruptive and pricing forces is apparent as well as troublesome. While an Amazon, Walmart or Home Depot have the resources and influence to charter their own container vessels or air freighters, that is not the case for many other businesses. There is further a learning in that retailers who elected to maintain or enhance control of their logistics and fulfillment capabilities are faring a lot better.

CNN featured a report this week citing a recently published Moody’s Analytics assessment with the headline: The global supply chain nightmare is about to get worse. If that headline seems familiar, it indeed is. Supply Chain Matters provided that headline in a mid-September blog commentary.

This Moody’s report published earlier this week indicated that:

As the global economic recovery continues to gather steam, what is increasingly apparent is how it will be stymied by supply chain disruptions that are now showing up at every corner.

Moody’s addressed the current weakest supply chain link as being a shortage of truck drivers, which is a significant challenge occurring across the United Kingdom and in some select areas of the U.S. Further looming factors were noted as differences in how certain countries are dealing with COVID from a policy perspective, contrasting China and the U.S. policies. Another challenge is noted as: “the lack of a concerted global effort to ensure the smooth operation of the worldwide logistics and transportation network.”

From our lens, the above observations are more symptomatic to other core issues that include too much dependence on global sourcing, far too much supply chain complexity and logistics movement needs in times of unprecedented demand.

 

Final Takeaway Thoughts

In the world of business there is the notion of the pile-on effect.

When business conditions and performance are not as they should be, CEO’s and CFO’s rally around terms that many customers and investors can readily relate with.

Unquestionably, supply chain disruptions, unprecedented transportation service level erosion and meaningful headcount and skill shortages will be the pile-on terms of 2021. Only in this case, most are pertinent and evident.

Here is another common and effective term: never waste a crisis.

If there were ever a time for rethinking supply network sourcing in a context of balanced risk, enhancing planning and logistics synchronization along with select digital transformation investments, it is now.

This week is the visible milepost where financial markets are now citing the economic harm that existing supply chain, global logistics and transportation industry practices have resulted in.

As soon as control is garnered, this will be the time for businesses and supply chain services providers to formulate new thinking and solutions before more economic harm occurs not only to businesses and economies, but to supply chain management teams themselves.

 

Bob Ferrari

 

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