For two years, global supply chains have been in disarray, with port congestion being the main reason. Both the International Monetary Fund and the World Trade Organization said last week that supply chain disruption was expected to continue for months. Whether it's falling business revenues, people's hopelessness in buying Christmas presents, and so on, all of this problems are to blame for supply chain disruptions.
But according to some analysts, the cause of the "shortage of everything" problem may not be the supply chain disruption itself, but because people had expected it to happen.
Eric Oak, a supply chain analyst at S&P Global Market Intelligence, pointed out that as the "supply chain crisis" intensifies, companies have begun to oversubscribe raw materials in order to ensure timely supply, and orders are placed much earlier than usual, which in turn exacerbates supply chain disruptions.
Oak said, for example, that if a company was 80 percent confident that it would have access to enough raw materials to keep its plants running, it might not order 100 percent of the raw materials it needed. But if the company expects to receive 80 percent of its raw materials, it may oversubscribe 120 percent of its raw materials, which ensures that at least 96 percent of the raw materials are received. In an interview with Fortune magazine, Oak said that "in order to ensure that factories are functioning properly, manufacturers are likely to increase the volume of raw material orders," triggering the cyclical effect of supply chain disruptions.
Early overbooking can trigger a bullwhip effect, he said, because a company that increases orders or places orders much earlier than usual forces its suppliers to do the same. Suppliers' suppliers also increase their order volumes, causing more supply chain disruptions, triggering a trickle-down effect.
Oak said the market was already tight, with consumers panicking after seeing reports of supply chain disruption, and small fluctuations in demand that could lead to a sharp increase in orders in a given month, which only made the situation worse, known as "transparency issues." ”
Inflation has a similar effect. Companies are worried that the price of raw materials will rise in the future, which will increase the volume of orders, thereby pushing up prices. "If everyone thinks inflation is going to happen, it's likely to happen." Oak said. Inflation and supply chains are equally self-actualizing, he said.
So far, supply chain congestion has not been alleviated. According to Bloomberg, in the past two years, the COVID-19 pandemic has tightened supply and demand, with 77 percent of the world's ports facing unusually long turnaround times, with many ships moored near U.S. and Chinese ports waiting to be loaded and unloaded.
Some argue that just-in-time production (a corporate strategy to keep minimum factory inventories to save space and reduce costs) could be at the heart of the matter.
However, Oak believes that in the supply chain crisis, if there is a winner, it is those companies that can plan ahead. "If companies fail to plan ahead, or fail to adapt to this new supply chain environment with long lead times, they may face supply chain congestion." He said. (Fortune Chinese Network)
Translator: Hao Xiu
Reviewer: Wang Hao
