Axios AM Deep Dive: Fixing the supply chain

National

Closer

Axios Closer

The "everything shortage," born of the COVID calamity, likely will require another huge disruption before we get back to normal.

Why it matters: Product shortages, delays and corresponding price spikes have become a fact of life in America since the pandemic started. To end it, either demand has to go down — which could be rough — or supply has to go up, which means we'd have to wait it out.

The complexity of the crisis means there's no easy answer — and no painless answer, either.

"There's no shortage of reasons why this supply chain crisis is occurring," says Holly Wade, executive director of the National Federation of Independent Business Research Center. "It's all intertwined."

The two most likely scenarios for ending the crisis, according to experts and business leaders, are:

1. People stop buying so much stuff. And they will. At some point.

"Nobody buys a new couch every single year," says Josh Bivens, research director for the Economic Policy Institute.

Americans have been binge-buying since the pandemic started. The rate of growth in spending on consumer goods and residential investment — measured as a percentage of GDP — remains at levels not seen since at least before 1955, according to the Bureau of Economic Analysis. 

The end of the pandemic could restore a healthy mix of spending on services and physical goods. "The shift of consumer demand has created all the tension in the system," says Mohamed Kande, vice chair of PwC U.S.

2. Time passes. It might just take time for the supply chain to ramp up to make enough stuff to keep up with consumer demand.

Case in point: Intel is building $20 billion chip factories in Ohio and Texas. But both will take a few more years to come online. Until then, the U.S. remains desperately reliant on foreign chips.

Therein lies the silver lining in this crisis. Business executives say they're embracing "onshoring" — relocating production from foreign markets back to the U.S.

It makes it a lot easier to guarantee parts are available when they're being made next door.

Between the lines: There's a catch with both scenarios. For example, if people buy less stuff because inflation gets so out of control that they can't afford things anymore, that'll be even worse than our current situation.

Alternatively, if the Federal Reserve gets so frustrated by inflation that it decides to raise interest rates exponentially, that could induce a recession.

A recession would likely slash demand for goods — a development some economists say may be the fastest way to end the supply chain crisis. 

But a recession, of course, would likely involve job losses and could bring an end to the recent trend of wage increases.

And if we just wait it out, there's a serious labor crisis that will have to be solved.

Businesses want to rein in the complexity of their supply chains by making more parts in-house. Call this the Tesla model. CEO Elon Musk set the electric vehicle maker on a path to make its own batteries.

But to make more things in America, you have to have enough workers to do it. Which we don't have — because the pandemic has prompted millions of workers to enter early retirement and kept many away from positions that no longer seem fulfilling or worthwhile.

That's where robots may come in, as automation is expected to play an increasingly consequential role in places like warehouses and factories, according to Citigroup economists. 

Our thought bubble: Solving the labor crisis would go a long way toward solving the supply chain crisis. More workers, more products. More products, fewer shortages and fewer delays.

Some efforts are underway — such as a new federal rule allowing 18-year-olds to become apprentice truck drivers in a bid to ease the nation’s shortage of truck drivers. 

The bottom line: We've come to the point where 18-year-old truck drivers may be one of the things we need to end this crisis.

Go deeper: Russia's invasion of Ukraine puts wheat supplies at risk

1. How the supply chain crisis ends

Either people stop buying so much or we wait it out.

Illustration of a vessel with shipping containers and the earth. 

Deep Dive - Supply Chain

The &quot;<a class="gtmContentClick" data-vars-link-text="everything shortage" data-vars-click-url="https://www.axios.com/shortages-delays-clothing-furtinutre-everything-c52da05c-314c-4a3a-895d-b518a862135c.html" data-vars-content-id="0d4f4479-0f32-459a-95f6-6770478a8e5a" data-vars-headline="How the supply chain crisis ends" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/shortages-delays-clothing-furtinutre-everything-c52da05c-314c-4a3a-895d-b518a862135c.html" target="_self">everything shortage</a>,&quot; born of the COVID calamity, likely will require another huge disruption before we get back to normal.Why it matters: Product shortages, delays and corresponding price spikes have become a fact of life in America since the pandemic started. To end it, either demand has to go down — which could be rough — or supply has to go up, which means we&#x27;d have to wait it out.

After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

Markets

Axios Markets

Advances in technology will make the global supply chain run more smoothly in the future, especially when it comes to information sharing, experts tell Axios.

Yes, but: The new tech won't solve the kinds of big problems that got us into our current mess.

State of play: These days, if you buy something online, you can usually track your package's journey to your house. That's not how the overall supply chain works, though. It's a bit of a black box. 

It's difficult to track goods as they move through their enormously complex journey — from raw material to factory to container to truck to ship and back to truck — before it lands at a warehouse, a store or your home.

"There are dozens of startups now all trying to give shippers the type of visibility you get when you order something via UPS or FedEx," said Willy Shih, a professor at Harvard Business School and sought-after logistics expert.  

Data sharing across all the components of the chain is a key part of the White House's vision for improving the supply chain, John Porcari, the administration's port envoy, told Axios.

"Most of the industry clearly recognizes that data sharing and improved cargo visibility will lead to better and more profitable operations," he said.

He pointed to efforts to improve port community systems, software that lets ocean carriers, terminal operators, truckers and railroads talk to each other and share info.

What's next: Shih also pointed to machine learning as a way to make these chains more efficient.

The goal is to create software that can discern patterns in the flow of goods into ports, so you can load and unload shipping containers more quickly — essentially a monster Jenga puzzle that can slow down the movement of goods.

"There's no such thing as 'the supply chain' — there are only an infinitude of supply chains," said Christopher Mims, the author of "Arriving Today," an in-depth look at how goods are shipped across the globe. "That's what makes fixing it so complicated."

The bottom line: There's no tech miracle coming to save the day, but a lot of people are working to make things more efficient.

2. The future of the supply chain

The new tech won't solve the kinds of big problems that got us into our current mess.

Illustration of a robotic A.I. face layered with computer chips and various shapes and colors.

Advances in technology will make the global supply chain run more smoothly in the future, especially when it comes to information sharing, experts tell Axios.Yes, but: The new tech won&#x27;t solve the kinds of big problems that got us into our current mess.

Note: Total vessels of all types within 25 miles of port, plus those waiting outside specially designated safety and air quality areas; Data: U.S. Bureau of Economic Analysis via FRED, Marine Exchange of Southern California; Chart: Jacque Schrag/Axios

Data: Harpex, IHS Markit Purchasing Managers' Index; Chart: Jacque Schrag/Axios

3. The supply chain crisis in 4 charts

Container shipping prices, delivery times and other trends.

Login

Axios Login

Apple for years has left competitors scrambling for parts — while locking up its own healthy supply.

Why it matters: Apple has used a range of tactics, from investing in suppliers to pre-paying for components.

How it works: This practice dates back 20+ years to the original iPod. Tim Cook, then an operations executive recently hired from Compaq, helped the company corner the market on a new, smaller hard drive from Toshiba.

The hard drive allowed the iPod to be the size of a deck of cards.

When the iPod became a hit, Apple had nearly the entire market cornered, forcing rivals to try to compete using far larger hard drives designed for notebook computers.

As the iPod shifted to using flash memory rather than a hard drive, Apple ensured that it had the lion's share of the type of memory needed for the iPod, allowing its sales to take off and again leaving competitors short of the components needed.

Apple didn't respond to a request for comment.

Between the lines: Apple has used a range of tactics to line up capacity, from investing in suppliers to pre-paying for components. 

Apple hasn't used its massive cash hoard to make huge acquisitions. But it has deployed that pile of money to give it leverage in other ways.

These days, it also benefits from its mammoth scale. It is often its suppliers' biggest customer, meaning that when it comes time to decide who gets more of a scarce product, Apple is usually first in line.

"When you are a supplier, knowing you will get guaranteed scale is essential and one of the main reasons Apple gets priority both in contract locks and pricing," Creative Strategies analyst Ben Bajarin told Axios.

"I think you would be hard-pressed to find a supplier that does not prioritize Apple in some way when it comes to contract orders."

The bottom line: Apple has been able to both head off rivals and fare better than most in times of more general crunches.

During the recent crisis, for example, the iPhone has been in relatively steady supply, with Apple shifting components away from the less critical iPad, which has seen some supply constraints.

4. How Apple uses its supply chain as a weapon

It locks down key parts it needs well ahead of time.

Illustration collage of a punching fist framed by Apple headphones and geometric shapes

Apple for years has left competitors scrambling for parts — while locking up its own healthy supply.Why it matters: Apple has used a range of tactics, from investing in suppliers to pre-paying for components.

From the Valley to D.C., Big Tech players like Facebook, Google and Amazon are under more scrutiny than ever as new technology develops and privacy and antitrust concerns grow in lockstep with companies’ ambitions.

Technology

Data: Matt Phillips; Infographic: Thomas Oide and Allie Carl/Axios

5. Behind the car chip breakdown

The step-by-step delays in the chip supply chain.

Shoppers are worn out as supply chains have disrupted everything — including buying expectations and behaviors. 

The big picture: They largely understand that getting things like cars and appliances takes more time. But they have zero tolerance for delays of smaller purchases, according to retail experts.

State of play: It's been impossible to ignore or avoid global manufacturing and logistics problems, so consumers adjust their expectations on larger purchases that clearly depend on the supply chain.

But for smaller purchases like cat food or personal goods, it's a different story because they've grown accustomed to quick delivery, Iliana Filyanova, a partner at McKinsey, told Axios.

"They're still going to go to Amazon and expect a next-day delivery, or else they're going to switch [sites] or go to the store."

Between the lines: People are having to work harder to get what they need, whether it's shopping earlier, waiting, stocking up, or looking for alternatives.

As a result, they've raised their expectations for businesses to deliver on their end of the bargain — whether it's communicating updates or fixing supply chain issues, according to Katherine Cullen, a senior director at the National Retail Federation. 

A three-week delay that turns into six, or a product listed as available that becomes unavailable, are frustration points — and consumers don't want to keep hearing that it's the supply chain and nothing can be done. 

“We're a year into this. That [blanket] excuse doesn't work anymore,” said Andrew Hogenson, global lead of consumer goods, retail and logistics at Infosys Consulting.

Threat level: Consumer loyalty is on the line.

More than 70% of shoppers either switched brands or switched stores when the products they wanted became unavailable, according to a McKinsey study last fall of 2,095 people in the U.S.

What to watch: There's still a heightened level of demand for physical goods compared to services and experiences, and Filyanova says she doesn't expect that demand to lessen for another few years.

Meanwhile, disruptions are increasing in frequency and severity because supply chains aren't resilient enough, according to McKinsey research.

The bottom line: Fair or not, supply chain fatigue has set in for consumers over the last year, and retailers no longer have that to fall back on, says Hogenson.

6. Consumers are losing patience with the supply chain

They can forgive delays with larger purchases, but not with smaller items.

Illustration of an upside down clock surrounded by freight containers.

Shoppers are worn out as supply chains have disrupted everything — including buying expectations and behaviors. The big picture: They largely understand that getting things like cars and appliances takes more time. But they have zero tolerance for delays of smaller purchases, according to retail experts.

Good afternoon, and welcome to our Axios AM Deep Dive on the supply chain — already stressed by the pandemic, and now likely to get worse because of Russia's invasion of Ukraine. (Read our story about the impact on wheat supplies.)

This edition is led by the Axios business team (subscribe to Axios Markets here and Axios Closer here).

How the crisis might end, the future of the supply chain, and more.