Global Supply Chain Problems, Explained

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It’s nearly impossible to keep up with the news right now without hearing about supply shortages, shipping delays, port congestion and a myriad of other supply chain buzzwords.

This year, more than ever, we have witnessed the interdependence of the world trading system. The same system that ships a pair of Jordans from Dongguan, China to rural Pennsylvania with one click, has also pushed up the cost of a 40-foot sea container from $ 2,000 to $ 25,000.

The system, once considered perfectly efficient, is now stretched to its limit.

Endemic sports companies have not been spared:

  • Nike could lose up to 160 million pairs of shoes due to plant closures in Vietnam, which normally supplies about half of its shoes.
  • Puma has advised customers to shop early for Christmas, as bottlenecks and manufacturing disruptions would cause its products to run out until 2022.
  • After a sharp increase in demand and difficulties in supplying customers, Peloton saw its deferred revenue (received before a good or service is actually delivered) increase from $ 99 million in the first quarter of 2020 to $ 611 million. dollars in the second quarter of 2021.
  • Apple has left a potential $ 6 billion on the table due to a limited supply of semiconductor chips that affects everything from iPhones to Apple Watches.
  • Although Titleist parent company Acushnet has announced a 108% increase in sales in the second quarter of 2021, CEO David Maher has raised concerns with shareholders about varying levels of supply chain disruption resulting in a 18-fold increase in wait times for custom orders.
  • Amazon, increasingly focused on fitness and sports media rights, generated $ 110.81 billion in third-quarter revenue, missing Wall Street’s estimate of $ 111.6 billion. Reasons given included disruptions to the global supply chain.

The phrase The “supply chain” was mentioned 3,000 times in investor calls for S&P 500 companies in the third quarter.

How did we get here?

In order to understand the current situation, it is important to understand where we came from. From a macro perspective, there are two competing factors that have increased demand and simultaneously limited supply.

As companies slowed down production in early 2020 – anticipating an overall drop in demand – they instead encountered a global pandemic that shut people indoors and made them spend on physical goods rather than for services.

Manufacturers were slammed with the controls for their products since.

The Golden ratio

Now consider the interaction between business inventory and sales. In economic circles, it is known as the Inventory Sales Ratio and reflects the relationship between manufacturing inventories and trading inventories relative to sales. The ratio is currently hovering around its all-time low.

From an efficiency perspective, the low ratio is technically a good thing, indicating that companies are able to effectively return their product.

In practice, however, it is more indicative of a mismatch between supply and demand with many consumers not having the level of choice they are used to.

Location, location, location

In 2018, when the US-China trade war tariffs were first imposed, some companies moved production out of China to avoid the tariffs and moved their factories to places like Vietnam. .

The result? Not pretty.

Covid, and in particular the Delta variant, hit all major manufacturing centers in Vietnam, leading to plant closures and production stoppages. Consumer products companies have experienced declining revenues and increased headaches as a result.

In a complete reversal of the attempted trade war arbitration – shifting manufacturing out of China to tariff-free countries such as Vietnam and Taiwan – companies now appear willing to shoulder the extra costs to secure delivery of their goods.

In his September earnings call, Nike CEO John Donahoe said 80% of shoe factories and 50% of clothing factories in Vietnam and Taiwan were closed, which at the time was 10 weeks of lost production.

The proposed solution? Return of operations in China.

Home solutions

Some companies take a more domestic approach.

In February, with increasing delays due to orders stuck at the port five times longer than usual, Peloton announced that it had increased its manufacturing supply six-fold. However, the increase in supply was not enough to stem the supply problems.

  • In a February 2021 letter to shareholders, CEO John Foley said Peloton would be invest $ 100 million in air freight and expedited ocean freight to help speed up deliveries.
  • He also spent $ 420 million to acquire Precor, an American exercise equipment company. Precor has two manufacturing plants in the United States, both of which will be used to manufacture Peloton products.
  • The company has invested an additional $ 400 million in a plant in Ohio that it calls “Peloton Output Park.” The factory should, in theory, help Peloton reduce costs in the long run.

While capital spending on logistics infrastructure is commendable, the track record of companies bringing manufactured goods home abroad is mixed at best.

To look forward

So where do we go from here?

In some ways, we are already on the road to recovery. With society creeping into a new normal and companies having new infrastructure in place to handle some of the complexities of the supply chain, there seems to be light at the end of the tunnel.

Nonetheless, the past 18 months have highlighted the need for change, whether it be with Peloton moving some of its production to the United States or companies choosing to change their manufacturing centers overseas – and we can expect to see more adjustments.

  • Steve Lamar, CEO of the American Apparel & Footwear Association, said this month that retailers are looking to shake up the supply chain, with many suppliers in Central America or Africa as part of a “change of ‘generational sourcing to diversify their supply chains “.
  • The near-term solution will likely require a significant capital investment in expedited shipping and moving manufacturing out of areas heavily affected by Covid.

The future may bring an entirely new approach to logistics.

We might see new regions building vast manufacturing and distribution centers and the ubiquitous “Made in China” sticker might even become a thing of the past.


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