Companies Still Grappling with Economic Woes
January 26, 2022 Alex Woodie
We’re nearly 23 months into the pandemic, but COVID-19 continues to wreak havoc on how we work and play. Companies that make and move goods — a core constituency of the IBM i installed base — have been hit particularly hard by the COVID-induced kink in the supply chain, but rising prices and inflation aren’t far behind.
The United States is in the middle of a remarkable economic period that few experts (if any) predicted. For that, you can thank your friendly neighborhood coronavirus, which put into motion a series of events, many with unforeseeable consequences, that continues to ripple around the world today.
Our current supply chain crunch began in February 2020, when the novel coronavirus first began its march around the globe. Many of the factories in China and Southeast Asia that produce goods for the United States and the rest of the world shut down or cut back on hours to prevent the spread of the virus, and also because of a lack of workers.
Among the companies cutting production were semi-conductor fabs, which would have a ripple effect across product categories. Shipping companies followed suit by slashing their schedules. The cost of a trans-oceanic shipping container plummeted So did the price of oil.
When the United States and Europe went into a lockdown in March 2020, millions of businesses, schools, and other organizations closed their doors. Demand for goods and services in the West cratered, helping to send the rest of the world into a steep recession. The unemployment rate in the U.S. went from 3.5 percent in February to 14.7 percent in April 2020 as millions of people were laid off.
The U.S. government stepped in with its first round of stimulus, injecting $1.9 trillion directly into the bank accounts of citizens, companies, and other organizations. European countries also spent €750 billion (about $850 billion) in its first round of stimulus.
As the lockdown continued, a funny thing happened: People adapted. With Zoom school open and work-from-home in full swing, demand for laptops, PCs, and other consumer devices surged. Gyms and movie theaters were still closed, so people bought home exercise equipment and high-end gaming rigs. Remodeling projects surged as people upgraded their living spaces. Demand for building supplies was further bolstered when restaurants built temporary outdoor dining spaces.
By the time the second U.S. stimulus of $2.2 trillion started to hit bank accounts in early 2021, the economy was already on the mend. The unemployment rate dropped to 6.4 percent by January 2021, which is the same month the U.S. economy fully recovered from the drop in gross domestic product (GDP) due to COVID-19.
As demand for certain products rebounded, the supply chain attempted to adapt to the new normal. Factories in Asia reopened, and trans-Pacific shipments resumed in earnest. The cost of shipping a 40-foot container from Asia to California went from about $1,400 in the early days of the pandemic to about $20,000 in September 2021. The price of crude oil, meanwhile, went from $18.38 per barrel in April 2020 to a recent peak of $83.54 in October 2021.
Thanks in part to the stimulus payments, the United States’ GDP was $23.92 trillion in November 2021, a $2.54 trillion increase from November 2020. At this point, the country is making and producing more now than it ever has, a remarkable recovery that few predicted would occur this fast back in the dark days of March and April 2020.
But as empty car lots to empty shelves at the grocery store can demonstrate, the global supply chain has struggled to come to grips with the unprecedented series of events that COVID-19 laid at its feet.
Changing consumer behavior can explain part of the problem. Take beer and soda, for example. With restaurants closed for so months, brewers and soda makers shifted from kegging their products to canning them. A shortage in aluminum cans ensued.
But it doesn’t explain the whole problem. Before Christmas, the twin ports of Long Beach and Los Angeles were inundated with traffic, with more than 100 cargo ships waiting to unload their shipping containers. The specter of a holiday without certain gifts caused consumers to frontload their shopping spree earlier in the fall, leading to a surprised 1.9 percent decline in December retail, according to the US Department of Commerce.
A shortage of workers is part of the problem. According to the American Trucking Associations (ATA), the U.S. faces a shortage of 80,000 truck drivers across the country, as truck tonnage has yet to match its pre-COVID high. The labor force participation rate in December was 61.9 percent, which is 1.5 percent below the pre-pandemic level, according to the Bureau of Labor Statistics. With abundant government support, not everybody is eager to work during the Great Resignation.
As we have covered in IT Jungle, the pandemic has been the best of times for some companies. JORI, the high-end furniture maker based in Belgium, has seen a surge in demand for its wares during the pandemic. Other companies, including some in the PPE and paper products business, have been unable to keep up with demand.
But clearly, not all companies and sectors in the consumers goods supply chain have successfully navigated the COVID waters. Services-based companies, including hotels and resorts, have suffered considerably, as would be expected. But the combination of supply chain disruptions, a fickle workforce, and changing demands has thrown some companies in the consumer goods supply chain for a loop, too.
Companies that had implemented analytics and AI-based solutions for supply chain planning and demand forecasting generally were better prepared to weather the disruptions. But some question whether advanced techniques, including just in time (JIT) logistics techniques, have outlived their usefulness in the new normal.
For example, during a 60 Minutes piece in November, dockworkers at the Los Angeles/Long Beach facility demonstrated how they had to move several containers to get to specific containers that contained the goods that needed to be put on a truck and delivered next. Frustrated with being unable to put goods on shelves or make deliveries, distributors and retailers have also resorted to stockpiling goods that are in high demand, mirroring consumer behavior but throwing a wrench in the carefully balanced dance that is the modern supply chain.
With so much money chasing a limited supply of goods, inflation is starting to become a real factor. According to data released this month by the Bureau of Labor Statistics, the Consumer Price Index increased 7 percent in 2021. That doesn’t increase the cost of fuel, which was up even more during the year. The average cost of gasoline, for example, was $3.31 last week, 39 percent higher than it was a year ago. With surging costs across the supply chain — from raw materials and finished goods to labor and fuel — consumer goods companies are forced to raise prices, which further fuels inflation.
These are some of the unprecedented challenges that manufacturers, distributors, and retailers are facing in 2022. While the potential to make big profits is still there, companies are facing significant hurdles to get there, which is a topic we’ll be covering during the rest of the year.
If you’re an IBM i shop in the consumer goods supply chain and you have a COVID story to tell, IT Jungle would love to hear it. You can reach us via our handy dandy contact page.