Supply Chains to Nowhere

For decades, manufacturers worked diligently to “right-size” their supply chains. By right-sizing, this meant lean manufacturing, or just-in-time manufacturing, so the inventory costs for raw and semi-finished materials were as close to zero as possible. Entire college degree programs were predicated on supply chain optimization, and for several decades, this approach seemed to be extremely successful.

Until. Until the pandemic caused untold upsets within the carefully crafted supply chains. Now it was not possible to get raw materials just in advance of the need for these materials in the manufacturing process. Now it became worthwhile to invest in inventories, since reducing inventory costs is meaningless when you cannot produce product. Manufacturers are having to take a much more holistic view of inventories in terms of ensuring continuity of operations. See what impact the microprocessor shortage is having in multiple manufacturing supply chains? Vehicle manufacturers have resorted to completing vehicles except for the electronics, and storing those vehicles locally until the computer chips are received and the vehicles can be completed. All of this extra work and extra inventory reduces the profit margins manufacturers have. The price the ultimate consumer pays goes up. And inflation, the dragon we thought had been vanquished, rises from his cavern and lays waste to all he surveys.

We had banished inflation due to several factors. But I believe the most important of these was the opening of the entire world as a potential source for finished products. Now it was possible to source goods from anywhere in the globe, and we had labor cost arbitrage playing out in all of the Fortune 500 companies. It simply cost a lot less to outsource manufacturing operations to other countries, and when you add in the reduced regulatory costs, we outsourced a lot of our pollution as well. American consumers didn’t care. All we cared about was receiving goods at the lowest possible cost. Thus we decided we didn’t need small-scale vendors for all of the items you could get from a big box store. A single store like a WalMart can replace dozens of small retailers, and we saw this happen in many, many towns across the US. Add the convenience of the internet in there, and it is no wonder the growth story of Amazon further drove consolidation of retailing.  Many pathways to the middle class were smashed along the way as Americans voted with their dollars.

The pandemic, though, caused the pool of consumerism to be overwhelmed by tsunamis. Shortages began to appear, and a public unaccustomed to any type of shortage, soon became attuned to things like delivery schedules to stores. Restocking would occur, only to be overwhelmed by those who stocked up in bulk when that was never their habit in the before times. Soon people noticed lengthening delivery times, and those promises often were violated as deliveries fell further behind. Auto dealer lots became dusty vacant parking lots as the effects of these disruptions appeared at the local level.

When the worker at the bottom of the pyramid saw what was happening, they realized the balance of power was shifting between employer and worker. The growth of the warehousing and delivery businesses offered an opportunity to increase an individual’s wages substantially. Once that happened, the restaurant and other service industries found it difficult to rehire a work force once they began to reopen. It was amusing to see the Republicans blame labor shortages on overly generous government benefits. Of course, the actions of the Republican governors were to end pandemic unemployment programs, which had minimal effect on labor shortages. It is good to see so many folks who believe in the intrinsic laziness of the citizenry, where any attempt at using the tax system to foster equality must be quashed in favor of more tax cuts for the wealthy. Some things just don’t change.

So the dragon of inflation once more is circling overhead, threatening to burn everyone and everything in its path. It is surely an unpopular view to say that we are seeing prices creep upward and it is totally justified. Yet if you look at what we’ve bought over the last 40 years, we did buy a lot of low prices. Our behavior demanded low prices. We viewed it as our right to always have everything we wanted, at our beck and call, and to never have to wait for anything. What we didn’t see was that this change in behavior was leading to the development of an underclass of workers who just couldn’t make it on their wages. If you look at a distribution of incomes across the country, you see a bulge around $20-30,000 per year. The largest number of households fall within that class. If you work full time at $15 / hour, you barely reach the $30,000 plateau. Hard working folks just found it impossible to get by on their meager wages. Since the average household income is over $60,000, it means there’s a lot of folks on the extremely high end of the scale to balance out those earning $15 per hour and less.

We have gone through amazing times with this pandemic. Perhaps it is enough to cause us to examine our own habits, and realize that the lowest price sometimes cost a lot more than buying local. You do see some examples of paying more voluntarily. The growth of organic produce and organic food choices is one area where people pay more in order to benefit themselves, and also the environment. But the same people who buy organic, will order items from Amazon, and not think at all about the impact of their ordering on the rest of the world. Maybe it is time for us to realize that low prices are not the most important part of our lives.

Would it be too much to expect people to change their habits to enable money to stay within their community, instead of enriching some global institution? Yeah, I think it is. That is why I expect politics to devolve into further blaming the current administration for all of the rise in prices. Just like we expect instant gratification for all of our purchases, we insist on flawless execution by our government and thus we always take the easy way out.

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