Founder: Turnaround Talk
One of the external causes of financial distress is undoubtably the current – and lingering – supply chain crisis. It does not help that 80% of the worlds manufacturing comes out of China (which suffered one of the worst global lockdowns in response to the pandemic), and the current Ukrainian conflict is not helping matters.
There were other factors that complicated the resolution of the crisis. These were mostly attributed to the fact that government have not had to deal with a Pandemic of this scale since the Spanish Flu. There seems to be global progress to deal with the crisis. However, according to an article by the New York Times, do not expect any normality during 2022.
No signs of abating
The article points out that, with the havoc at ports showing no signs of abating and prices for a vast array of goods still rising, the world is absorbing a troubling realization: Time alone will not solve the Great Supply Chain Disruption.
It will require investment, technology and a refashioning of the incentives at play across global business. It will take more ships, additional warehouses and an influx of truck drivers, none of which can be conjured quickly or cheaply. Many months, and perhaps years, are likely to transpire before the chaos subsides.
“It’s unlikely to happen in 2022,” said Phil Levy, chief economist at Flexport, a freight forwarding company based in San Francisco told the New York Times. “My crystal ball gets murky further out.”
For those who track the global supply chain, the very concept of a return to normalcy has given way to a begrudging acceptance that a new normal may be unfolding.
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No longer a given
The article points out that cheap and reliable shipping may no longer be taken as a given, forcing manufacturers to move production closer to customers. After decades of reliance on lean warehouses and online systems that monitor inventory and summon goods as needed — a boon to shareholders — manufacturers may revert to a more prudent focus on extra capacity.
The deepening understanding that the supply chain crisis has staying power poses a daunting challenge to policymakers.
The article adds that mayhem at factories, ports and shipping yards, combined with the market dominance of major companies, is a key driver for rising prices. Spooked by the highest rates of inflation in decades, the Federal Reserve has resolved to tighten credit, while the Bank of England and other central banks have already lifted interest rates, sowing alarm in stock markets from New York to Tokyo.
Public anger over rising consumer prices — especially for food and fuel — helps explain why Democrats may be in danger of losing control of Congress.
The article points out that record beef prices, along with rising costs for pork and poultry, have prompted the Biden administration to pursue the prospect of antitrust enforcement against the four companies that dominate the American meat supply.
Businesses continue to struggle
But whatever the politicians and central bankers unleash in the name of taming inflation, businesses continue to struggle to manufacture and distribute their products.
The article points out that Whirlpool recently warned that customers who purchased its washing machines, refrigerators and other household appliances would continue to experience delays as the company contended with supply chain problems.
Even as Tesla last week announced record profits amid overwhelming demand for its electric cars, the company said sales would be hurt by difficulties in the supply chain — not least due to continued shortages of computer chips.
The article adds that the chip shortage has limited the production of cars worldwide, while stymying makers of medical devices and a vast range of electronic gadgets. The U.S. commerce secretary, Gina M. Raimondo, recently described persistent chip shortages as an “alarming” threat to American industry.
The International Monetary Fund last week cited supply chain woes among other factors as it downgraded its forecast for global economic growth for 2022 to 4.4 percent from 4.9 percent.
The article points out that the breadth and persistence of supply chain troubles in part result from how the coronavirus pandemic has accelerated trends that have been unfolding for decades, especially the growth of e-commerce.
Lingering impacts
The article points out that the supply chain problems have endured despite much talk that they would prove a momentary phenomenon resulting from the pandemic.
In the initial months of the spread of Covid-19 — as markets plunged and American businesses laid off workers — manufacturers slashed orders for a vast array of goods on the assumption that health fears, lockdowns and diminished pay checks would limit demand for their wares.
The article adds that using the same logic, computer chip manufacturers cut production. Global shipping companies reduced service.
That calculus proved disastrously wrong.
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The pandemic did not eliminate spending so much as shift it around. People stopped going to restaurants, sporting events and amusement parks, while directing their dollars to outfitting their homes for life under lockdown. They added treadmills to their basements, desk chairs to their bedroom offices and video game consoles to their living rooms.
Many of these goods were made in China. And the surge of demand swamped the availability of shipping containers at ports in Asia, delaying transport.
Coping mechanisms
The problem with the supply chain crisis is that it is not localised. It is a global problem that impacts many companies. Challenges experienced in the US will be felt in South Africa.
Where does this leave companies? Obviously, for those in retail or production of physical goods, they will have to source alternate suppliers and look towards longer lead times on their products. This means that they may not be able to fill orders as they fall due.
This also impacts cash flow. Longer lead times in production creates a longer payment window that companies will need to manage. For tips on managing cash flow during a crisis, read our other featured article that was published today.
