Supply Chain Reaction: Will Last Year’s Shortages Lead to a Glut?


I, Pencil is an essay published in 1958 detailing the complex supply chains involved in creating an ordinarily lead pencil. It involves the labor and capital inputs of hundreds of people from multiple countries, each with their own language and currency. Not a single person is responsible for the thousands of decisions that go into the pencil’s creation, but rather it is a product of a globalized supply chain. 

Since then, supply chains have grown exponentially more complex as advancements in transportation and finance have squeezed costs, reduced delays, and led to just-in-time inventory to deliver what is needed when needed. These vast supply chains span the globe and utilize inexpensive foreign labor, inexpensive shipping costs, and lean inventory systems to produce next-day or even same day delivery. 

Modern supply chains are dynamic, complex systems with a single-minded focus on efficiency. The unintended consequence of that system is that it’s fragile by design, with disruptions quickly cascading into catastrophic failure. The pandemic has shown that any system that scales too far will inevitably collapse under its own weight. We are in the middle of an inventory adjustment that spans the globe, a process that supply chain experts have dubbed the bullwhip effect, where fluctuations in demand lead to ever larger disruptions along the supply chain.


Customer demand is rarely stable and must be estimated to position inventory and other resources. Businesses carry safety stock to buffer these changes, usually in warehouses near retailers, but advances in supply chain technology have reduced these safety stocks to minimize costs. With demand forecasts improving, the supply chain itself acts as the warehouse, with cargo containers on ships, trucks, and 

rails serving as a warehouse-in-motion. Goods from around the globe arrive via truck on one side of the distribution center for immediate repackaging, regathering, and retail distributing hours or days after delivery instead of months (as would be the case in a traditional warehouse). Goods are packaged to retailers with automated ordering systems to keep on-hand inventory to a minimum since anything that sits on a shelf costs money to store. 

These supply chain innovations have drastically reduced the inventory-to-sales ratio, which is the months of supply retailers have on hand to buffer changes in demand. This ratio has been on a steady decline over the past 30 years, and prior to the pandemic, meant that your average retailer would completely run out of goods to sell in a little over six weeks. This was never a problem since the just-in-time restocking of goods happened every week or, in some cases, daily.

In 2020, everything changed as consumers hoarded goods, and bare shelves led to panic buying. Consumption shifted online as many areas of the country entered extended lockdowns. E-commerce sales have grown slowly over the past 20 years, accounting for roughly 12% of all retail sales immediately prior to the pandemic. At the height of the stay-at-home order, online sales accounted for roughly 16% of all retail sales—experiencing a decade’s worth of growth in six weeks. 
Production of domestic goods was interrupted as workers fell ill and factories were understaffed. These disruptions caused a ripple effect throughout the supply chain. Consumers who were stuck at home increased their consumption of goods dramatically while spending on services plummeted. This was especially notable in durable goods such as furniture, automobiles, and household goods. Year over year, durable goods spending rose 70% in 2021, fueling a rise in inflation, especially for new and used cars.
The pandemic is largely considered to be over, as most emergency COVID measures have long since been canceled. So too have the supply chain disruptions that made headlines in 2022—the bottlenecks and logjams all but forgotten.
»  Trade volumes have decreased dramatically over the last quarter, leading to improved transit times.
»  What used to take 120 days at the pandemic’s peak now takes 50-60, with the sudden shift leaving retailers one to two months of extra inventory.
»  Consumer expenditures are now much lower than at the peak, with retailers holding much more extensive inventory than anticipated.
As a result, we are amid an inventory glut with warehouses full of goods consumers no longer want, acquired at great cost to meet the demands of last year.

I’ve seen gluts not followed by shortages, but I’ve never seen a shortage not followed by a glut. -Nassim Taleb


2023 will see a slowdown in global trade, quite literally in terms of global shipping, as international shippers adopt slow steaming efforts to reduce carbon emissions, reduce fuel costs, and raise freight rates, causing retailers to liquidate and take losses on excess inventories. Rest assured, as these economic distortions are removed from the system, pandemic excesses, and supply shocks will eventually revert.

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Thomas Galvin is the Director of Research for Stream Realty Partners’ Southwestern Region. He is a real estate economist with a focus on understanding and explaining macroeconomic trends through a commercial real estate lens.

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