Eli5: how have supply chains not recovered over the last two years?


I understand how they got delayed initially, but what factors have prevented things from rebounding? For instance, I work in the medical field an am being told some product is “backordered” multiple times a week. Besides inventing a time machine, what concrete things are preventing a return to 2019 supplys?

In: 93

The sudden drop in shipping demand caused shipping companies which rode the knife’s edge of solvency to fold and sell their ships for scrap. The economic recovery caused shipping demand to increase again. But with less available shipping capacity than before, companies are struggling to compete to get their goods to market.

Increasing shipping capacity means building new ships. Companies will be reticent to make such investments until shipping demands stabilize.

China didn’t really reopen until recently, and there’s a really long backorder.

Further, a lot of the companies necessary for many global supply chains basically curled up and died over the course of the pandemic, and replacement companies don’t just magically pop into existence.

On top of that; the US-China confrontation is expanding, resulting in general supply chain breakdowns.

Put bluntly; the pre-COVID world is not coming back. The entire globalized economic system we enjoyed prior to the pandemic is dead, and will not come back any time this decade.

Supply chains don’t deal very easily to long disruptions.

It isn’t the Apple’s or Intel’s of the world that get into desperate problems. Companies like Foxconn, for example, have millions of employees and deals with hundreds of billions of dollars annually. They’ll suffer but they have pretty deep financial foundations.

It is the smaller, low volume production firms that have the most difficulty. Many companies simply didn’t survive the pandemic. They’re out of business. The problem is that there are many unique components that are made by SMEs (Small and Medium sized Enterprises) with a few tens to a few hundred employees. They are specialized and their products are hard to replicate or design out. So the supply chains that rely on these companies are very vulnerable.

When an SME goes out of business, the larger firms might not be able to or even willing to invest in developing replacement companies. And even if they did, it takes a lot of time to build up essentially brand new companies.

I can tell you what’s going on in my industry, aerospace manufacturing.

Our material suppliers went through significant layoffs in 2020. They lost many skilled laborers to retirement and simply being laid off. Now that demand is back they can’t get the skill back that is needed to produce conforming product. They are hiring unskilled people and having extreme quality issues.

Lead time prior to the pandemic was 3-5 weeks for material. Lead time now is 48-52 weeks. It’s a beyond huge problem for aerospace because this particular material is spec’d into a lot of parts and there is no alternative to it.

Supply chains are designed to be “just in time” and to be as close to capacity as is safe/smart (down time for preventative maintenance, etc, but that’s it). Utilising every last second of production and watt of energy is the way to maximise return on investment in equipment and not be sat on stores of raw materials you could be selling and cash moving.

Now, if you shut down the machine but still have the demand, a backlog builds. When you do restart production and the machines get running, they run at capacity.

Here is the problem, where is the spare capacity to deal with any pent-up backlog of demand on top of the steady state? Answer is it doesn’t exist.

There are some strategies which can be employed. For example, temporarily in the UK, you can now undertake building work on a Sunday. However addressing a 1 year shut down takes 6 years of Sundays even if your builders etc are willing to work 7 days a week especially without adding more builders. BUUUUT this calls on a greater output of raw materials which because of already mentioned reasons there may not be excess production capacity.

It’s all a delicate ballet of materials and resources, which is why operations and logistics roles can fetch a high salary at the moment.