Business & Economy

The Kinks in Our Supply Chain

In the year 2020, we endured a worldwide pandemic, local lockdowns, and the “Great Toilet Paper Shortage.” The latter foreshadowed an ongoing sequence of shortages: lumber, refrigerators, meat, cars, and most recently, artificial Christmas trees.

“History is being made before our eyes,” says Muge Yayla-Kullu, associate professor of supply-chain management at UCF. “What we’re experiencing is the result of an avalanche of problems.”

In lead-up to holiday shopping, we’re sitting in the middle of an unprecedented lesson in basic economics. Demand is high and supply is low, or more specifically, it’s stuck in factories, ports, and warehouses. The U.S. Department of Labor recently reported that the warehouse industry has a record 490,000 job openings. The American Trucking Association says it’s short 80,000 drivers, which spells trouble when you consider that trucks transport 72% of our freight. Some trucking companies are offering $15,000 bonuses to recruit drivers.

“We’re accustomed to dealing with limited supplies of certain products this time of year, like PlayStations or certain toys,” says UCF Associate Professor of Marketing Axel Stock, who’s researched product scarcity for 20 years. “Businesses will create scarcity as a strategy to drive up demand, which allows them to increase prices. The scarcity today is different. It’s due to external reasons, but for consumers the result is the same.”

Higher prices. Fewer choices. Tests of patience. Stock and Yayla-Kullu emphasize these words: Do not panic. Please.

“Panic buying only make things worse,” says Yayla-Kullu. “We’ve seen enough mistakes already.”

What exactly is going on?

Yayla-Kullu has been teaching about possible crises in the global supply chain every semester for the past 18 years, and prior to that she worked in business and banking.

Yayla-Kullu merged her business experience with a passion for researching supply-chain operations, and now shares her findings with UCF students who will become the next global business leaders. She stresses the need for companies to invest in operational hedging, where a team envisions worst-case scenarios and prepares for disruptions in the supply chain — fires, labor strikes, ships stuck in the Suez Canal. In December 2019, she could sense we were on the cusp of a new lesson.

“When manufacturing stopped in Asia because of COVID-19, I told my students to think a year, two years, five years ahead,” she says. “A major logistics problem is coming. Production will slow. Demand will slow. But then demand will go back up quickly, and the supply of products will be out of balance. Yes, the pandemic is once in a lifetime, but more business leaders should have forecasted the bottlenecks that we’re seeing.”

Stock had his suspicions in June, just as businesses in the U.S. seemed to be getting back on track. A month after ordering a new soccer uniform for his 9-year-old son, the team had to take the field in sponsorless jerseys. The new uniforms still hadn’t arrived by early November.

“Much of my research is an outgrowth from personal experiences,” says Stock. “When we ordered our unforms, people all over the world were ordering products. The countries where most manufacturing takes place were dealing with vaccine shortages and occasional closures. The facilities were overwhelmed. Then everything shipped at the same time. Ports backed up and there weren’t enough workers, but people are spending.”

Computer chips are good examples. They’re the brains in some of the most wished-for holiday presents: laptops. Phones. TVs. Cars.

“If a car is made with 30,000 small parts, but one computer chip is unavailable … you can’t finish the car,” says Yayla-Kullu. The same goes for kitchen appliances and video games. She urges for a second time: “Don’t panic.”

And Stock reassures things aren’t as bad as they might seem.

“We always come up with solutions to problems,” he says.

What should we do?

At the start of the pandemic, Yayla-Kullu saw what Floridians see during a hurricane threat — empty shelves.

“I begged people not to buy too much toilet paper or disinfectant. It’s the same now with pumpkin-pie filling,” Yayla-Kullu says. “Just buy one of whatever you need, and we’ll get back to normal faster.”

Overbuying, as she tells students, causes “the bullwhip effect.” A retailer plans to sell one box of stuffing to each customer. Instead, the customers buy three. The warehouse has to triple its orders. The manufacturer has to triple output and labor. The supply chain is stressed. Prices go up.

“Everyone pays,” says Yayla-Kullu. “When I encourage companies to be more flexible with planning, the same goes for consumers. The entire system works better when we’re all flexible.”

Stock takes the optimistic view that a 30% shortage on a tablet, for instance, means 70% of capacity is available either in person or online.

“The products are out there. You might need to buy a different model or choose a different color,” he says. “Or you can buy from a private party — some of those products are still in the original packaging.”

When will normalcy return?

The key to stability goes back to the basics: a balance between supply and demand. The current surge in demand, on top of holiday buying, will cause more hiccups into the new year. Then, adjustments made to open the pipeline will have to be readjusted.

“It will be the second half of 2022 before prices settle and this all clears up,” says Yayla-Kullu. “But business leaders will become better at risk-planning and the supply chain will be more flexible. Life will be better because we’ll be ready for the next crisis.”

The lessons for all of us: don’t panic, embrace variety, and maybe buy gift cards for the holidays or make a donation to your favorite charity. Or do like Stock and invest in an experience instead of a product.

“We’re taking a vacation for Christmas,” Stock says.

Robert Stephens
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Tags: College of Business economy

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