Since the COVID-19 pandemic, making and getting goods and services from Point A to Point B—known as the supply chain—has been difficult.
Multiple complications, including the Russia-Ukraine war, contribute to ongoing bottlenecks. As the effects linger, it’s a good idea to understand how supply chain disruptions could affect economies around the world.
What’s a Supply Chain Anyway?
A supply chain is the sequence of processes involved in producing and distributing goods. It includes core activities and resources needed to convert raw materials and components into finished products and services. Along with raw materials, the supply chain consists of inbound logistics, manufacturing, warehousing and outbound logistics.
Source: Chartered Institute of Procurement and Supply.
Supply Chain Complications
The pandemic set off a sequence of events that clogged supply chains. Since late 2021, it’s hard to escape the many headlines about how factory shutdowns, widespread lockdowns and mobility restrictions disrupted logistics, increased shipping costs and stretched out delivery times.
Supply chain challenges have been such a game-changer that the New York Fed introduced its Global Supply Chain Pressure Index (GSCPI), which measures global supply chain pressures relative to economic outcomes.
While many pandemic shutdowns have ended (except in China), supply chain pressures still widely impact the global economy. For example, supply pressures worsened in April 2022, predominantly driven by China’s stringent lockdown measures and the Russia-Ukraine war.
Even before the pandemic, supply chain issues existed. But the past two years’ events have exposed vulnerabilities of globalized supply chains. On top of the pandemic, disruptions from hurricanes, labor shortages and shifting geopolitics are causing more companies to evaluate their supply chains.
Supply Chain Impacts on Companies
Supply chain issues aren’t just disruptive; they are expensive. According to the Interos 2022 Annual Supply Chain Report, the average annual cost to organizations they surveyed is $182 million, or 1.74% of their annual revenue.
The amount organizations say supply chain shortages are costing them each year—about 1.7% of their revenue.*
The past two years have spotlighted the importance of a smoothly operating supply chain, and more companies are working to overcome the challenges. For example, almost nine in 10 executives agree that their supply bases are too concentrated in certain geographic locations. And while most organizations don’t have clear insight into their supply chains, 77% say they plan to implement or introduce technology to gain advanced visibility within the next 12 months.
Supply Chain Disruptions and Inflation
Clearly, supply chain hiccups have impacted the markets, especially with product shortages. And lower supply combined with higher demand contributes to inflationary pressures.
Long-lasting interruptions may also play a role in sustained inflation. The consumer price index showed an increase of 8.6% in May 2022 over the previous year—the most significant 12-month increase since December 1981. Supply disruptions may become more critical, especially for energy costs which climbed by 34.6% over last year, and food prices which rose by 10.1%.
Even as supplier delivery times improve and shipping costs moderate, the ongoing effects of supply chain disruptions and rising commodity prices are expected to keep the overall inflation rate elevated for a while.
Supply chain bottlenecks remain one of the chief obstacles to a successful economic recovery.
Supply Chain Strains and Investing
Understanding supply chain challenges can help you understand the impact they may have on different investments. Some types of companies are better able to weather—or avoid—supply chain bottlenecks than others.
For example, companies with pricing power could be well positioned for the supply chain storm because they may be able to pass along price increases to their end customers.
Opportunities Despite the Bottlenecks
Uncovering opportunities in the current environment isn’t just about finding companies that will underperform the least. It’s about finding opportunities for growth. Both are goals of active managers.
When it comes to investing, a diversified, balanced portfolio of stocks and bonds across sectors, styles and approaches can help you adapt to whatever challenges arise—even unprecedented supply chain disruptions such as the one happening now.
Interos 2022 Annual Supply Chain Report, May 2022.
Diversification does not assure a profit nor does it protect against loss of principal.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.