There are two basic concepts related to supply chain that are currently all over the news and that should be well apprehended by any student of Business operations:
- Bottlenecks,
- and Bullwhip effects.
The fist one, a bottleneck or limiting factor of any several step process, is the key concept around which the theory of constraint is built (Cox III et al, 2010). In the last months, several hidden bottlenecks have appeared in world supply due to different causes. Two rather obvious and impacting examples being the Suez Canal obstruction in 2021 (Ramos et al. 2021), and the microchip shortage (wikipedia, 2021), suffered by consumer and automotive industries.
The second concept relates to the effect that distorted information can cause in supply chains. Many of our readers will know or even have played the so-called “Beer game” (Lee, 2010). This is a simple game showing how non-integrated supply chains can lead to severe problems in supply; The longer the number of links the chain has (e.g. the deeper it is) and the more complex it is (namely different countries, industries, …), the more devastating the effects of the distortion can be.
Since there shall be no doubt that the world economy before Covid’19 relayed on complex and deep supply chains. It should therefore be no surprise for the reader, with experience in the bullwhip effect, the effects that we are currently observing: from the increase of prices for raw materials, to the lack of finished goods like tablets, mobile phones,….
In a recent paper published in the 48th Bulletin of the Bank of International Settlements, Daniel Rees and Phurichai Rungcharoenkitkul present a thorough analysis of the causes and implications of current bottlenecks in the economy (Rees & Rungcharoenkitkul, 2021).
They conclude that bottlenecks in the supply of commodities, intermediate goods and freight transport have given resisto to volatile prices and delivery delays. Although they started as a pandemic related supply disruption, they have been aggravated by the attempts of supply chain participants to build buffers in already lean production networks (the already mentioned bullwhip effect).
According to these authors, the main factors amplifying the economic severity of the constraints are:
- Shift in the composition of the demand (towards manufactured goods) during Covid recession and recovery. Manufactured goods are typically capital intensive, and therefore the elasticity of their supply in the short run is very low. The increase of demand lead consequently to higher inflation.
- Anticipation of product shortages and precautionary hoarding at different stages of the supply chain have aggravated the initial shortages. This is related to changes in behaviour caused by the pandemic shock.
- Lean structure of the supply chains. Development of the supply chain in recent decades has prioritized efficiency versus resilience. The intricate networks of production and logistics have become a shock propagador during the pandemic.
The big open question is still how this situation, directly related with business operations, will lead to an inflationary cycle, therefore having macroeconomic implications. Many policy makers, specially in Europe (Financial times, 2021), have declared their confidence that the increase in raw materials and energy prices, does not translate into a clear inflationary pressure, is transitory and remains transitory, while returning to a normal situation. Recent data does not seem to grant this expectation (Eurostat, 2021).
The big unsolved question is then up to what point the tensions produced by the bottlenecks in the supply chain will lead to a increase not only of goods, but also of wages, which will definitely contribute to a new inflationary economic cycle (Rees & Rungcharoenkitkul, 2021).
By
Dr. Ramón García Rojo
References
Cox III, J. F., CFPIM, C., & Schleier Jr, J. G. (2010). Theory of constraints handbook. McGraw-Hill Education.
EuroStat (2021), https://ec.europa.eu/eurostat/documents/2995521/11563387/2-30112021-AP-EN.pdf/8072b1c7-4379-7fbe-af36-ec2300c42265, last accessed 30.12.2021
Financial Times (2021), https://www.ft.com/content/e01ce60c-f602-4110-bb64-7fd60689b099, last accessed 30.12.2021
Lee, H. L., Padmanabhan, V., & Whang, S. (1997). The bullwhip effect in supply chains. Sloan management review, 38, 93-102.
Ramos, K. G., Rocha, I. C. N., Cedeño, T. D. D., dos Santos Costa, A. C., Ahmad, S., Essar, M. Y., & Tsagkaris, C. (2021). Suez Canal blockage and its global impact on healthcare amidst the COVID-19 pandemic. International Maritime Health, 72(2), 145-146.
Rees, D., & Rungcharoenkitkul, P. (2021). Bottlenecks: causes and macroeconomic implications. BIS Bulletin, 48. https://www.bis.org/publ/bisbull48.htm, accessed 30 December 2021
Wikipedia,(2021), 2020-2021 global chip shortage, https://en.m.wikipedia.org/wiki/2020%E2%80%932021_global_chip_shortage, Accessed 30.Dec.2021 17:37
