The Christmas shopping experience could be very unique with empty shelves and higher prices because the aggregate supply curve has become unbending, steep, and difficult to adjust in a short period of timeNiagara University economist, Dr. Tenpao Lee, predicts a difficult holiday shopping period.
With experts predicting further shortages of goods and services, especially as holiday buying gets underway, Tenpao Lee, Ph.D., professor emeritus at Niagara University, believes the U.S. global supply chain needs to be overhauled. Without a quick turnaround, which is highly unlikely at this late date, he says the holiday shopping season will be fraught with empty shelves and hard-to-obtain items.
“This will be a very different holiday season in the U.S. and throughout the world,” said Dr. Lee.
Dr. Lee’s ideas for a re-haul include the following advice for companies:
- Reconsider insourcing (the opposite of the major outsourcing that has taken place for decades). U.S. companies should “make rather than buy,” said Dr. Lee. This includes the creation of domestic logistics lines.
- Safely raise inventory levels to minimize the risk of low or no stock, rather than keeping production lean.
- Re-evaluate their roles in their supply chains and determine if they can survive post-pandemic.
- Always have back-up plans in dealing with unexpected situations such as the pandemic.
“Before the pandemic, the expansionary monetary policies, QEs, did not create inflation due to the fact that global supply chains enhanced global productivities,” said Dr. Lee.
“Now, the aggregate supply curve has become inelastic due to the broken supply chains. Without ‘tapering,’ the economy could fall into an era of ‘stagflation,’ like the early 1970’s when there was inflation and a recession. Dr. Lee explains that in the global economy, competition levels have, in recent years, been extremely high. To survive, companies reduced their production costs by outsourcing a huge portion of their production activities to other countries.
As a result, he said, global supply chains were developed with organizations in different countries working together to move products.
For example, Apple’s iPhone had more than 300 suppliers in five different countries. GM’s batteries were produced in one country while tires were produced in another.
In addition, innovations shortened product life cycles (items becoming obsolete quickly), contributing to the need for low inventory levels (JIT-just in time inventory).
“Before the pandemic, global supply chains worked efficiently and reliably,” said Dr. Lee. “Commodities flowed from raw material to final product, as a good highway system should, with little congestion and few delays. Global capacity and productivity were enhanced for a long time with a very low inflation”
Two Phases: The Impact of the Pandemic on the Global Supply Chain
In the first phase, said Dr. Lee, people stayed/worked at home. Consumer spending and aggregate demand declined drastically. Almost all companies lowered their production levels.
Due to the bullwhip effect (The bullwhip effect refers to increasing swings in inventory in response to shifts in consumer demand in the upstream supply chain.), he said, upper stream suppliers cut capacity more than the lower stream suppliers. For example, car manufacturers lowered their production levels by 10%. To minimize inventory, they ordered 20% fewer computer chips. Subsequently, the capacity of the whole supply chain system was reduced to an irreversible level and the shipping industry had a quick and almost immediate recession.
In the second phase, just about one year later, the economy recovered quickly and consumers increased spending at unanticipated rates. The global supply chain, especially logistics/transportation systems, were overwhelmed. Again using the highway analogy, there were back-ups and traffic jams.
“Even though there were no ‘accidents’, the global supply chain was too lean to respond,” said Dr. Lee. “We observed congestion and tremendous delays at the ports. Then, we were short of containers, trucks, and workers with bottlenecks in every part of the system – and few solutions.”
“Trade became imbalanced with shortages and equipment sat idle. Moreover, in the global supply chain, any missing parts would make it impossible for manufacturers to deliver their products to customers.”
Dr. Lee concludes that in the short term, before the end of the year, it is very likely we will not have the supplies to which we are accustomed.
About Niagara University
Founded by the Vincentian community in 1856, Niagara University is a comprehensive institution, blending the best of a liberal arts and professional education, grounded in our values-based Catholic tradition. Its colleges of Arts and Sciences, Business Administration, Education, and Hospitality and Tourism Management offer programs at the baccalaureate, master’s, and doctoral level.
As the first Vincentian university established in the United States, Niagara prepares students for personal and professional success while emphasizing service to the community in honor of St. Vincent de Paul. Niagara’s institutional commitment to service-learning has led to its inclusion on the President’s Honor Roll for Community Service every year since its inception in 2006, and its recognition with the Carnegie Foundation’s Classification for Community Engagement.