Pandemic: will volatility be 'new normal' for supply chains?

By Sean Ashcroft
The pandemic has inverted the usual supply-demand relationship, and firms' response of inventory 'will make supply chains more volatile', says expert

The pummeling taken by the global economy over the past two years is subverting the laws of demand and supply and could make volatility the new normal for supply chains, a leading business analyst warns.

Writing for the Financial Times (FT), David Bowers of Absolute Strategy Research, says the seismic effect of the pandemic has changed the complexion of global economics. 

“Most policymakers have only known a world where demand has been limited and supply has been elastic,” Bowers says. “Whatever the demand, China was ready and willing to meet it as the world’s supplier of last resort.” 

Lockdown spending sees demand outstrip supply 

#But he says lockdown has led to unprecedented levels of savings and that this has fuelled a surge in global demand that supply has failed to satisfy. He describes the result as being a “bullwhip effect”, whereby it is supply that’s “inelastic”, and not demand, as would normally be the case.

Bowers believes we are witnessing the biggest shock to supply chains since British logistics consultant Keith Oliver first coined the term in 1982, in an interview with the FT. 

“The current level of supply chain stress is on a different scale to the normal, cyclical experiences of the past 20 years,” he writes. “This is as important as it is unusual, because supply constraints at present exceed demand constraints.

Inventory becomes focus after supply chaos  

The result is a “very different policy environment” argues Bowers. “One where restoring global equilibrium in the goods market becomes more difficult.” He adds that ensuring there are sufficient local inventories of goods “takes on greater importance, both for countries and corporates”. 

The numbers would seem to bear him out. Recent data from the European Commission for the eurozone show the highest percentage of companies reporting shortages of equipment, raw materials and labour in 40 years. 

Bowers says the longer the supply chain crisis continues, the more likely it is that businesses will begin to rethink their business models - with inventory build-up being one such change.

This will put cash-flows and balance sheets under pressure, he writes, and adds it could also have “macroeconomic consequences”.

Inventory build-up will affect cash flows

“Inventory build-up and depletion is a key driver of the economic cycle. The longer that inventory levels stay elevated the more volatile they could become, as could the business cycle.” 

Complicating the picture, Bowers points out, is that all this “supply stress” is happening at a time when labour markets “remain exceptionally tight”, and that there’s also a move towards localising supply chains, as countries and businesses seek to meet net zero targets.

He concludes: “The scale and duration of Covid has already begun to challenge the old model. Supply chains have proved to be vulnerable, even if that has been caused by excess demand and under-investment. 

“Supply-chain disruptions and increased inventory volatility may not be just a temporary bug. In which case, if nominal demand continues to grow faster than supply, then inflation is likely to stay elevated and spread to the labour market. The stakes for policymakers could not be greater.”   



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