No quick fix for supply chain, experts say

Brice Wallace 

Whatever kinks that supply chain issues have wrought on the holiday season — product shortages, higher prices, shipping delays — consumers can expect some of those issues to linger, perhaps for years.

That was the consensus during a discussion of supply chain issues and inflation during a recent Newsmaker Breakfast, hosted by the Kem C. Gardner Policy Institute. Supply chain problems have been building for years and now are so structural, complex and systemic that they will not be solved quickly, the speakers said.

“I think it’s a longer-term process,” said Phil Dean, public finance senior research fellow at the Gardner Institute. “I don’t think it’s like we have some silver bullet that we solve this in the next week.”

“I see this persisting for years,” agreed Miles Hansen, president and CEO of World Trade Center Utah. He cited expected growth in aggregate demand for products, prompted in part by increased government spending due to the infrastructure legislation and social spending bills injecting money into the U.S. economy.

“Not many, many years, necessarily, but one, two, three, four years because it’s going to take a while for aggregate supply in these supply chains, in production, to be able to move up to the new equilibrium, where it’s lined up well with an aggregate demand curve that has been shifted upward significantly due to this really historic, unprecedented government spending,” Hansen said.

“Part of is because of supply and part of it is because of demand,” Jason Fowler, president of Air & Sea International, said of supply chain trouble. His Murray-based company is a regional freight forwarder, in essence a middle man between carriers and end customers.

“[With] the federal stimulus, we were all locked down in our homes, we weren’t traveling anywhere, we weren’t going out to eat, so we just bought a lot of goods, and that facilitated this mad dash to get everything here. … But the biggest thing has been capacity issues from the carriers. Their vessels just aren’t big enough.”

The only nations with the infrastructure to handle larger cargo vessels are China, the U.S. and those in Europe, and while larger vessels have been ordered, it will take a while to deliver them “and we should see some capacity relief in 2023,” Fowler said.

The speakers cited several factors leading to today’s problems. One is that consumers have more money to spend, with federal economic stimulus checks and low interest rates leading to refinanced mortgages joining a trend of consumers opting for more goods than services during the pandemic. Shortages of labor in trucking and port warehouses, slower production of goods in China, high demand for available shipping containers and transportation constraints also have contributed. On the demand side, many companies have shifted from having goods available “just in time” to “just in case.”

“This is not just a pandemic-driven issue,” Dean said. “Sometimes people equate this with the pandemic. I think some of this supply chain diversification was starting to take place before. And it’s been several years in the works, but I think the pandemic kind of highlighted the risk.”

People perceived the risk of not having a diversified supply chain but nonetheless lived with it, and the pandemic amplified its problems, he said.

So, how to mitigate disruptions caused by supply chain issues? Hansen said more infrastructure is needed throughout North America, mentioning the Utah Inland Port as an example. He also said improved coordination between Utah exporters and importers could help, as could alliances — rather than individual companies — bargaining with shipping companies.

For some companies, it might be wise to consider sourcing products from places other than China, from reshoring companies back to the U.S. or near-shoring by using companies elsewhere in North America “so you don’t have to worry about the trans-Pacific moving of freight from Asia to the United States,” he said.

Hansen also called for companies to assess their supply chain strategies and retool accordingly. He likened supply chain diversification to insurance — a cost that can mitigate risk of something catastrophic occurring. Many companies built their supply chains with minimizing costs as the only consideration, he said.

“Companies will and should continue to look at their bottom line, but now what I think we’re seeing companies doing, is this idea of resilience is becoming more and more important: ‘How do you diversify your supply chain?’” Hansen said. “And that may increase costs, but the way that companies and the state should be thinking about this is [it is] mitigating risk, which is just like buying insurance.”

Hansen acknowledged it is an imperfect analogy, “but I think it helps underscore the point that there are going to be some long-term additional costs that come with resilience.”

As for costs to the consumer, supply constraints and high consumer demand has led to year-over-year inflation hitting a 30-year high, at 6.2 percent. Supply chain bottlenecks are driving that inflation, Dean said.

“A significant amount of stress is showing up in supply chains,” he said. “We’re hearing a lot about it. We’re seeing it in real life, on store shelves, as things aren’t there that maybe we would expect to be there.”

A recent Federal Reserve survey shows that Americans are expecting “a very significant increase” in inflation during the next year, with moderation in the years thereafter, he said.

“More than any time in many decades, inflation is kitchen-table discussion,” Dean said. “It’s not some vague discussion that wonky people like me talk about. It’s people at home that are seeing inflation, they’re experiencing it. They’re worried about it, I think, in a way that we haven’t seen in many decades.”