The new normal: high prices and shortages

Supply chains were supposed to return to normal in early 2021, then late 2021 and now, the end of the chaos is still just around the corner. Supply chain issues are one of the major driving forces behind the highest inflation in 32 years. They are leading to goods that cost more and are in shorter supply. The truth is, there is no easy way out of this supply chain mess, and it is time we admitted it.

Ministry of Transport acting chief executive Bryn Gandy practically said as much when he told the Freight Futures Summit in Auckland last week supply chain disruptions will only get worse.

‘‘The source of disruption, and probably its nature, will change in the future. Disruptive events are only going to increase from here.’’

Similar sentiment was echoed by Texas Christian University supply chain management professor Travis Tokar who told a US audience: ‘‘I’m a bit pessimistic that the worst of things are behind us in terms of shortages and in terms of price increases.’’

Why are people so sceptical about these issues being solved?

One reason is that moving towards ‘‘deglobalisation’’ without sacrificing living standards is proving a lot harder than expected. Some governments tried to solve supply chain issues by ‘‘de-globalising’’. The theory went that global capitalism created a situation where everything was being manufactured everywhere and this led to goods being held hostage by overseas events.

The simple solution was to reverse this situation and manufacture everything at home, or at least in a ‘‘friendly’’ country. But what governments failed to realise was that this is not so easy, even if you are willing to spend a lot. Europe, the US and China are discovering this as they try to re-shore the ability to manufacture electronic chips so that they are not so vulnerable to a disruption in trade with Taiwan.

Manufacturing these chips requires huge investment. China is investing US$221 billion in its efforts, while the US has passed a bill creating US$52b in incentives and grants to do the same.

It is very difficult to build up the capability to create these chips, but the bigger problem is that even if you create all of this chip-manufacturing capacity your factories can still be held up by delays in the supply of the tubes and valves needed.

This makes total self-reliance when it comes to chip manufacturing pretty much impossible.

And this is just one product, what about all the other products we rely on?

Turns out that with globalisation, you face costlier production and greater delays no matter what you do. Globalisation wasn’t holding back the production of semiconductor chips, it was enabling more chips to be created.

Then people turned their attention to the fact supply chains were filled with ‘‘just in time’’ solutions which made them vulnerable to shocks. This is not untrue, but it is also not the full story. Those lean global supply chains were more efficient and used less land and people to move goods.

Fattening these chains up would mean plonking new warehouses on land, hiring more staff, and making sure there were always plenty of empty, unused products in reserve. The costs of this excess stock, labour and warehousing would be passed onto the consumer, further driving up prices.

But all that extra fat in the system only gets you towards coping with one black swan event, not a flock of them, and over the past year we have had Covid-zero lockdowns in China, Delta and Omicron strains of Covid-19, and the war in Ukraine.

The truth is, there is no easy way out of this supply chain mess, and it is time we admitted it.

The prediction that there could be more of these events to come boils down to a more volatile geopolitical situation, along with the unpredictability of climate change events. Supply chains cope best with smooth, predictable flows of goods, and worst in chaos. So what should we do about it? University of Auckland Professor of Operations and Supply Chain Management Tava Olsen suggests identifying the most strategic goods and stocking up on them, or supporting their domestic production. The litmus test for this is what we wouldn’t be able to live without. For other goods we have to hope the firms involved can be ‘‘nimble’’: monitor geopolitical trends, spot problems ahead of time and have options in terms of suppliers.

This requires politicians to create as many options for importers and exporters as possible. But even with all of that we might just have to tolerate higher prices and fewer goods in the years to come. Because the uncomfortable truth is, supply chains may never get back to normal again.