Why are there shortages and what do they mean?

by | 20 Sep 2021

Sudden shortages of consumer goods at the global level can't be blamed on Covid or Brexit - those are only the shocks which revealed the underlying problem

There has been a lot of blame thrown around for the disruption of supply chains that have led to empty shelves, shortages of goods and rapidly-rising prices. In the UK these were initially blamed either Brexit, but this fails to account for the reality of the picture given it is a global phenomenon.

Here the blame has tended to target Covid as a root cause, but even that isn’t sufficient to explain events as many of the problems are long-term and structural. The lessons of what is happening and why must be learned and incorporated into Scottish policy-making.

Structurally, the primary source of the current problems is the global ‘just in time’ supply chain. This replaced the traditional approach of stockpiling and warehousing with a complex system of very fast logistics supply across the globe.

To understand what has happened it is important to understand the implication of ‘just in time’ stock management. Traditionally a company would plan towards a time horizon (for the sake of argument six months) and ensure that it then had sufficient of the inputs it needed to complete its work over that period and that those would be replenished well before the current stock had run out.

The promise of ‘just in time’ is that this would no longer be necessary. Fast and reliable logistics in a globalised world meant that businesses could save themselves the costs of purchasing extra stock upfront and the warehouse and storage costs this requires. Instead they could purchase only the input products they need for the week ahead (say) and repeat that order again next week.

There are two implications of this and both have underpinned the current situation. The first is that the system works so long as every part of the system works, but if any individual part of the system ceases to work the implications are felt along the full length of the supply chain.

Thus an incident at a single port in a country thousands of miles away can create a chain reaction which can be felt right around the world. So for example, one of the causes of the current problems are that during Covid priority was given to the transport of goods but not to the return of the container units in which they were shipped. That means that there are blockages in the system because large numbers of container units are stuck in importing ports and so are not available at exporting ones.

Another example is the situation with silicon chips. These are produced and shipped virtually ‘on demand’ and so manufacturers do not generally keep large stockpiles – but it means there was no buffer in the system when semiconductor manufacturing capacity dropped significantly during the pandemic.

This shows that two things are true at the same time; the global logistics system is truly a marvel of human technology and works remarkably well when it works, but that it is highly vulnerable to any single problem in any of its component parts and this can lead to a ‘cascade’ effect.

Blaming ‘Covid’ or ‘Brexit’ is therefore missing the point. The vulnerability is inherent to the system and the nature of the ‘shock’ which reveals it is therefore interchangeable.

However, even this obscures a fundamental issue which is that this logistical system (which, along with pan-nationally imposed trade rules is really what we call ‘globalisation’) achieves much of its efficiency by pushing the whole system towards monopoly (limited number of producers) and monopsony (limited number of purchasers).

The cost savings come because work has been outsourced to places with low labour costs and that in turn drives towards bigger and more centralised production in much more concentrated geographical areas. This has replaced a system with many more comparatively smaller producers spread over a much wider geographical area.

So while we have gained in consumer price terms we have lost substantially in terms of resilience. The failure of one actor in the system used to be acceptable because many others could fill any gap, but we have created instead ‘too big to fail’ businesses at every stage in the system.

Both these factors combine to create excessive interdependence on a small number of to-big-to-fail enterprises and industrial regions with insufficient resilience in the wider system.

Blaming ‘Covid’ or ‘Brexit’ is therefore missing the point. The vulnerability is inherent to the system and the nature of the ‘shock’ which reveals it is therefore interchangeable. Some readers will remember a few years ago when the UK lost supplies of a number of vegetables for nearly two months. That was because imports at that time of year were almost all supplied by one growing region which suffered adverse weather conditions.

Climate change was going to bring supply chain shocks which would have had the same kind of impact as Covid anyway. That in turn will lead quickly to increased competition between nations and stockpiling which immediately greatly exacerbates the problem (in the same way panic buying can empty a supermarket’s shelves overnight and for weeks).

There are many more component parts to this problem but one other is worth highlighting. Maersk is one of the world’s biggest shipping and port logistics companies. The Chief Executive of one of its major terminals was blunt; demand and consumption is rising faster than the physical space at ports to meet the demand and that can only be addressed over the long term. His warning was stark; if consumption keeps growing faster than the capacity to meet it, shortages will become a way of life.

Scotland must take seriously the fact that the era of globalisation as we know it is coming to an end and must plan accordingly.

Further reading:

On the development of the general problem in supply chains

On the impact of monopoly on the system

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