The Morning Rant: Supply and Inflation - Joe Mannix

2021 was too big a disaster to call out a "story of the year" but two stories of the year were certainly supply chain disruptions and inflation. Both are real and neither is fixed and what's worse is that they can combine to increase risk. A big problem with offshoring manufacturing is that doing so is not free. You need to be able to exploit wage and environmental disparities (hi, China!), but you also have the problem of getting your goods from the slave state to which you offshored back to your markets at home.

Modern supply lines for a lot of businesses are very long, and that means risk. Some of the big risks are transportation cost, transit time and inventory lifecycle time The higher these things go, the higher your risks are. If stuff costs more to move, you have to pay it. If it takes longer to move, you have to keep that stuff in inventory and that ain't free. If it takes longer to get unloaded and onto shelves, it's more of the same.

Now add high inflation into the mix. The product you paid to have manufactured somewhere in Asia now costs you a lot more to ship. It takes longer to get to our shores. It takes longer to unload. It takes longer to distribute. Your inventory time increases. And worst of all, you don't know how long it's going to take or how much it's going to cost. You don't know what it will be next time, or the time after that. Now you have a problem, because you have to put a price on that stuff. People trading in physical goods have probably already seen significant profitability hits because of this elongation in time and increase in costs, but they also won't be able to reliably forecast what it's going to be on the next batch of goods. It's going to hurt these companies, and may hurt them a lot. The longer the supply chain, the more the risk and the bigger the consequence of being wrong - and the less likely you are to be right.

None of this risk mattered until two years ago. Everything ran like clockwork. Just-in-time inventory was brilliant and supply line length was irrelevant. Then the governments of the world decided that COVID justified screwing everything up across the entire economy from top to bottom. Now those risks which were zero just a year or two ago are very, very real. Long supply lines + unreliable transportation and unload + inflation all come together to make both pricing and availability/inventory management extremely difficult and introduces a lot of error where there didn't used to be significant error potential.

This has already gone on long enough to be dangerous and it's not getting appreciably better. I won't be at all surprised if a lot of physical goods businesses have "downside surprises" in earnings this year.

posted by Misanthropic Humanitarian at 11:38 AM

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