The interconnectedness of global supply chains means that when one price goes up, others tend to follow. Increases in labor, energy and transport costs are contributing to inflation around the world, posing difficult policy challenges.
Companies and suppliers are dealing with an unprecedented number of hurdles to meet increasing demand amid global pressure on supply chains. Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management (ISM) Manufacturing Business Survey Committee said, “All segments of the manufacturing economy are impacted by record-long raw materials lead times, continued shortages of critical materials, rising commodities prices, and difficulties in transporting products. In addition, global pandemic-related issues — worker absenteeism, short-term shutdowns due to parts shortages, difficulties in filling open positions and overseas supply chain problems — continue to limit manufacturing growth potential.”
Supply chains have been teetering on the brink of downfall for many years from issues such as labor shortages, and the pandemic has only highlighted this problem further. When lockdowns started around the world, many empty shipping containers remained where they were. However, in early summer 2021, many countries loosened restrictions around COVID, unleashing pent-up consumer demand.
Global lead times are now stretching six to nine months out. The problem is exacerbated further due to manufacturers seeing their workforce diminish rapidly and failing to rebuild it to full strength. Additionally, raw materials are taking a lot longer to reach manufacturers, and they are also becoming more expensive.
High commodity prices continues to weigh on consumer packaged goods as raw material shortages and transportation delays disrupt supplier operations and push up prices. Rising disruptions have companies shifting sourcing and finding alternate materials when possible. But those strategies also bring more cost. A slew of major U.S. companies that are reeling from the impact of high prices of raw materials, increased labor expenses and supply-chain woes are raising product prices as demand for several goods rebound with the reopening of the economy.
For many years, inflation rates in much of the world remained low, a relic of the 1970s that little concerned most procurement, supply-chain, and operations leaders. Specific commodities would experience sharp price increases, but those forces typically eased before they could trigger broad-based price pressures across swaths of the economy. However, that’s changed, and merchants today are planning and buying for their categories amid one of the hardest inflationary environments industry has seen in decades.
Global economic rebound is fueling a blistering commodities rally. The prices of raw materials used to make almost everything are skyrocketing, and the upward trajectory looks set to continue as the world economy roars back to life. From steel and copper to corn and lumber, commodities started 2022 with a bang, surging to levels not seen for years. The rally threatens to raise the cost of goods from the lunchtime sandwich to gleaming skyscrapers.
China, a crucial source of supply and demand for raw materials, is playing a big role, particularly as the government tries to reduce production of key metals like steel and aluminum. It’s also buying up massive amounts of grains. Food prices are also being affected as poor weather in key growing nations like Brazil and France hits harvests.
Shipping costs are exceptionally significant in the overall cost of raw materials (as raw materials are more bulky and lower value relative to finished products). That means the price of raw materials is likely to remain exceptionally high whilst the shipping price continues.
But raising interest rates, which is the standard inflation-fighting tool of central banks, risks weakening a fragile economy that is still fraught with uncertainty. This is one of the difficult balancing acts that will dominate policy-makers’ decision-making in 2022.