Supply Chain Management

Economic Instability and Supply Chains

A major supply chain challenge is economic instability. We know that supply chain challenges can cause economic instability, but what about the other way around? What impact does economic volatility have on supply chains—especially over an extended period?

Supply chain challenges have been back-to-back and overlapping. Even before COVID-19’s demand surge and constrained supply wreaked havoc, there were serious problems. Specifically, globalization caused concerns such as national security, unequal distribution of benefits, and sovereignty, while tariff fights were ongoing and damaging the economy.

Enter the pandemic and beyond. Shipping containers sat, receipt of chips took forever, Texas froze, and the Ukraine conflict followed. Widespread component and material shortages increased shipping costs. Delays continue, and warehouse space is at a premium. Today’s continued inflation, recession threat, weather-related disasters, and increasingly greater geopolitical unrest continue to cause instability.

The rising cost of living, plus a potential economic downturn, will cause further unrest in the US and Europe. Emerging markets, weakened by COVID-19, face increased instability from high energy and food prices and an emerging debt crisis.

There are also more recent events that, at first blush, might not seem to impact supply chains but do. Here are a few:

Banking Failure

What does banking have to do with it? When Silicon Valley bank, a top tech go-to bank, collapsed, technology investors and startups, the bank’s bread and butter, scrambled to determine the immediate (and long-term) impact.

There were already a lot of layoffs in tech; capital availability was shrinking. The bank collapsed on a Friday, leaving companies worrying about sufficient operating capital and payroll. The FDIC’s $250,000 guarantee would fall miserably short for many.

Interestingly, Founders Fund, a VC firm founded by Peter Thiel, was said to have advised its companies to pull their money out of the bank before any inkling of the collapse. Other VCs were advising companies to diversify their risk. For most, however, it was too late.

A Cyber Crime Explosion

Cybercriminals are taking advantage of economic unrest and are even more sophisticated when it comes to infiltrating supply chains. The supply chain has vulnerabilities that allow external parties to enter systems, particularly via the supplier network. Criminals hack in through basic warehouse equipment, Internet of Things (IoT) devices, and other operational sites.

Manufacturing Changes

Manufacturing continues to feel the rapid rise in energy costs and price surge of key inputs. Those with manufacturing operations will be re-evaluating their manufacturing footprint. Questions will center on where manufacturing should take place. If onshore, the shift can’t happen overnight.

Inflation and Recession

As supply chain issues have led to increased inflationary rates, the rates will cause further problems in the supply chain. Inflation doesn’t happen on a straight line domestically or globally.

According to the IPC December Economic Update, global inflation rates rose from 4.7% in 2021 to 8.8% in 2022. The inflation rate is expected to slow to approximately 6.5% in 2023 and drop further in 2024. Central banks globally have aggressively raised interest rates – to limited success. Yet, the increased rates directly affected electronics manufacturing and supply chain costs, worrying companies. The IPC reports that 90% of electronics manufacturers are seeing rising material costs, 75% rising labor costs, and, of course, lower profit margins. Inflation reached its highest level in 40 years.

Global inflation still impacts the electronic components industry with shortages and wide cost fluctuations for noble gases, palladium, nickel, platinum, and aluminum because of the Russia-Ukraine situation. The global inflation wave is also impacting logic, linear, discrete, advanced analog, and passive component prices, which will continue to rise until conditions improve.

The Ukraine

Mounting pricing pressure is in part attributable to Russia’s war in Ukraine. The conflict and sanctions against Russia disrupted global food, energy, and chipmaking raw material supply chains. While OEMs found alternate suppliers, establishing new relationships is challenging.

Bloomberg reports that geopolitical conflicts and COVID lockdowns created inflationary pressure, making microelectronics manufacturing 20x to 30x more expensive—and rising operating costs for chipmakers are passed on to customers.

Technology to the rescue?

A cloud-based digital transformation strategy is now a key trend, and the technology is being adopted to mitigate inflationary pressures and economic stagnation. There is a move towards holistic supply chain platforms. Moving away from add-on systems, they instead incorporate them into one platform.

There will be increased reporting requirements for technology to handle. Supply chain sustainability strategies have long been integral to achieving corporate ESG initiatives. Regulators will likely demand a focus on Scope 3 emissions control, and companies will need to reduce these emissions. “Greenwashing” will not work. Investor activity will center on those that can prove their Scope 3 emissions are low.

Are we seeing supply chain challenges quiet down? No, we just seem to be watching them evolve. It almost seems that supply chains can’t catch a break before the next major issue is around the bend.