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A lot that happens behind the scenes to place products in consumers’ hands. Different parts and components come from all over the world, traveling by air, land, and sea to reach their destinations. The journey starts and ends with supply chains.
This is supply chains, Unpacked.
A supply chain is an intricate web of production, assembly, transportation, and storage that gets products where they need to be.
A basic supply chain may consist of sourcing raw materials, manufacturing parts, assembling parts, delivering finished products, and purchasing.
By offshoring production and sourcing, businesses are able to keep costs down, but this also makes them sensitive to delays and errors.
A supply chain is only as strong as its weakest link, and various factors can lead to logistical bottlenecks.
The logistics sector largely operates outdoors, leaving it vulnerable to events like fires, floods, blizzards, and storms.
With more than 80% of traded goods traveling by sea, shipping problems can lead to global disruption and push up costs.
That’s not to mention additional pitfalls for other modes of transportation, including rising fuel costs and a shortage of workers – particularly truck drivers.
If demand stays high, supply chains struggle to keep up. We saw this during the global COVID-19 lockdown. People spent more money on goods like work-from-home technology and furniture. This pushed up prices and led to the global shortage of chips.
When rises in demand are temporary, there can be a bullwhip effect. Retailers order more stock, so distributors order more from manufacturers. Then, manufacturers ramp up production to meet demand and build in buffers.
So, what begins as a small shift in demand causes disproportionately high production. If demand drops again, retailers are left with extra inventory that may need to be sold at a lower price.
Many supply chains have relied on the “just-in-time” model where parts are delivered as they are needed. The auto industry is a classic example of this process. By optimizing the supply chain and providing a continual flow of deliveries, businesses can keep inventory costs down.
To avoid future bottlenecks, companies may move toward the “just-in-case” model, which relies on higher inventory levels as a backup. This plan isn’t perfect, though, since it means higher warehousing costs, potential disruptions to cash flow, and the possibility of shortages in other industries.
Businesses might also move their supply chains closer to home. This improves reliability, avoids expensive freight transportation, and increases their green credentials.
From shifts in demand, labor availability, to inflation, there will always be problems to solve. The businesses that best optimize their supply chains to address such variables can win the competitive advantage.
What does it take to get a product into the hands of consumers? This video breaks down the complex web of logistics and the factors that can lead to bottlenecks including weather events, rising fuel costs and worker shortages.
The material contained herein is intended as a general market and/or economic commentary and is not intended to constitute financial or investment advice. Any views or opinions expressed herein are solely those of the speakers and do not reflect the views of and opinions of JPMorgan Chase. This information in no way constitutes JPMorgan Chase research and should not be treated as such. Further, the views expressed herein may differ from that contained in JPMorgan Chase research reports. The information herein has been obtained from sources deemed to be reliable, but JPMorgan Chase makes no representation or warranty as to its accuracy or completeness.