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The Supply Chain’s 7% Problem

There has also been excess demand. Massive fiscal and monetary stimulus, combined with social distancing, led consumers to binge on goods, from games consoles to tennis shoes. In the summer of 2021 Americans’ spending on physical stuff was 7% above the pre-pandemic trend. In other countries, too, there is only a shortage of goods relative to unusually high demand for them. For the world economy to return to something like normal, consumers need to spend more of their plentiful cash on services, such as restaurant meals and travel.

Unfortunately economies are plagued by shortages of workers needed for service industries to thrive. — Rebound or Rebalance by Henry Curr (The Economist: The World Ahead 2022)

Nothing presents this issue better than the graph. Services like restaurants, shows, movies, and concerts, have yet to see a rise back to pre-pandemic levels. Largely the general public and consumer behavior has changed in a shift to goods vs. services. As such, consumers are flocking to goods to quench their thirst for spending. Spending on goods is further constraining an already tight supply chain. Many key areas of the supply chain are not built for year over year growth of more than 5%. Many raw material suppliers represent very traditional companies that do not over invest in capacity but finely balance demand and supply/capacity. The tightness of the supply chain is due to myriad of macro-issues

  • Continued infection rates
  • Less than desired vaccination rates
  • New variants
  • Lockdowns
  • Energy shortage in China

In summary these and many of the macro-issues of the supply chain represent VUCA — volatility, uncertainty, complexity and ambiguity.

Until services see a resurgence we will continue to see a tightness on goods. As a generalization: today’s large supply chains are not built to absorb a 7% swing in consumer behavior.

The lack of physical goods opens the doors for other outlets of spending/investment like stocks, crypto-currency, and non-fungible tokens.

Just Another Endemic Disease

Increasingly, therefore, people will die from Covid because they are elderly or infirm, or they are unvaccinated or cannot afford medicines. Sometimes people will remain vulnerable because they refuse to have a jab when offered one — a failure of health education. But vaccine doses are also being hoarded by rich countries, and getting needles into arms in poor and remote places is hard. Livelihoods will be ruined and lives lost all for lack of a safe injection that costs just a few dollars.

Covid is not done yet. But by 2023, it will no longer be a life-threatening disease for most people in the developed world. It will still pose a deadly danger to billions in the poor world. But the same is, sadly, true of many other conditions. Covid will be well on the way to becoming just another disease. —Covid-19 Is Likely to Fade Away in 2022 by Edward Carr (The Economist: The World Ahead 2022)

We will still experience supply chain disruptions until both conditions below are met:

  1. The 7% problem (increase in goods consumption) becomes a 0% problem or we have had time to build out the capacity to react to the change in consumer behavior
  2. Covid becomes just another disease

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