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Article14 Dec 2021

Global Supply Chains

The Complicated Road Back to “Normal”
It feels that the pandemic has made changes to just about everything in daily life. Not only have our routines changed, but we have also been put on a steep learning curve of new concepts. First, there was a need to get up to speed on disease prevention (e.g., transmission rates, viral loads, and how mRNA vaccines worked) as well as hospital capacity. As we shifted from commuting to offices and schools to working and learning remotely, we needed to get up to speed on home technology and remote applications. Lockdowns and quarantine orders meant the hunt for basic goods such as toilet paper and cleaning supplies became challenging, and suddenly economics and supply chain disruptions became part of our daily news feed.

We have also learned the global supply chains we thought were optimized and secure were actually riskier than we originally thought. The shift over the past 40+ years to just-in-time inventory and global manufacturing generated benefits for consumers, corporates, and governments. However, the pandemic added a new set of unforeseen challenges. On the supply side, border closings and lockdowns kept production sites shuttered, while on the demand side consumers who could not spend on thing like vacations and dining out, increased their spending on durable goods. As businesses tried to fill this demand, they found they weren’t able to secure intermediate goods or ingredients needed for production, and the typically smooth cadence of trade flows became uneven, leading to supply chain disruptions.

Citi’s Global Chief Economist Nathan Sheets identifies six macroeconomic factors that have come into play and disrupted global supply chains: (1) supply-chain management practices, (2) a shift in consumption toward goods, (3) massive monetary and fiscal stimulus by the public sector spurring aggregate demand, (4) the emergence of the Delta variant, (5) a shortage of available workers, and (6) commodity shocks that amplified other supply-side pressures.

Because more than one cause or event got us to our current situation, one single solution will not relieve the stress. Ultimately, the overall solution to resolving supply chain disruptions is tied to improvement in the pandemic. Addressing the other macroeconomic issues will take time, but we are already seeing key indicators improve — e.g., congestion issues at U.S. ports, and prices in energy markets and commodities. Without any other major setbacks, we believe supply chain issues should feel better in the first half of 2022 but probably won’t get back to normal until well into 2022 and beyond.

Over the next year or so, corporates will also likely take some time to review their supply chains and make changes based on lessons from the pandemic. These may include embracing digitization; placing a greater emphasis on long-term alliances and partnerships with suppliers; holding larger inventory buffers, especially for critical components; simplifying and bringing supply chains closer to home; and decreasing the amount of global integration to protect themselves from the next shock.

To get an “on the ground” view, we talk to Shahmir Khaliq, the Global Head of Citi’s Treasury and Trade Solutions division, about strategies to mitigate today’s supply chain challenges; and the importance of both working capital management and environmental, social, and governance (ESG) on global supply chains.

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