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The Fracturing of Global Supply Chains

November 1, 2021 | Commentary

  • Disrupted supply chains have delayed the production and delivery of many goods globally.  Higher prices and disappointed consumers have been the result.
  • For decades, globalization and cheap transportation encouraged the use of foreign manufacturing to exploit lower costs than those available at home.  While wonderful for consumers when functioning smoothly, geopolitical events and the pandemic have demonstrated risks to the supply chain that are now being addressed.
  • Globalization offered lower cost goods that acted as a natural regulator holding down inflation.  That moderating influence is missing at the moment.  As companies work to find solutions to their supply chain challenges, manufacturing cost structures will be under pressure. 
  • Another trend in globalization has been the splintering of sources of inputs.  Different parts are shipped from all over the world leaving manufacturers vulnerable to a disruption in any part of the network.  The fragility of interdependencies in this process is clearly on display today as a shortage of computer chips from Taiwan has disrupted much of the auto industry.  Some of these problems have national security implications.
  • Many of the supply chain problems stem from too much demand for products, not from too little.  This means business have strong incentives to invest in solutions that will likely be structural rather than cyclical in nature.  More emphasis will be placed on local sourcing of inputs and assembly to protect against supply chain disruptions.  This will likely mean a big step up in demand for both capital and labor as the transition progresses over the next several years.

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