UM’s Barkey Issues Op-ed on Supply Chain Issues

The University of Montana’s Bureau of Business and Economic Research is always asking questions and seeking answers to our state’s economic conditions. So it’s no surprise that director Patrick Barkey has just published an op-ed regarding the supply chain issue.

KGVO has contacted Barkey for further details.

“Well, I think it’s (the editorial) an attempt to really try to reach out to Montanans to give them answers to some of the questions they may have about how long we can expect to see shortages and delays, and the unavailability of some of the key things we’ve been trying to buy everything from cars to four-wheelers, you name it,” Barkey began.

Barkey said the supply chain issue is somewhat educational, as Montana residents learn how the system works, the hard way.

“I think one of the things is that we all learn how everything works,” he said. “What I mean by that is that when we have a product that we want to buy, the process of putting it on the shelf before we buy it works exactly. Of course, we learn this because it is broken down for certain types of goods and commodities. And I try to give the Montanans an appreciation of why this happened.

Barkey took the approach reminiscent of Pogo’s iconic comic about who’s responsible for the supply chain problem. “We have met the enemy, and it is us.

“I think one of the things, for example, that’s really mind-boggling is the fact that even though we’re all pointing to various issues in the economy, whether it’s labor, whether it’s regulations, good navigation, etc.”, he said. . “One of the supply chain issues is really when you look at yourself in the mirror, and we look at ourselves, collectively, our demand for all kinds of physical goods has just exploded, and any system would be forced to respond to this kind of request.

Barkey was asked if this supply chain issue was “the new normal,” and he strongly disagreed.

“No, that’s definitely not a fact,” he said. “I wouldn’t even call it a long-term view, I think it’s more of a mid-term view because supply chains are already starting to heal. Unfortunately, some of the good news for supply chains supplies are actually happening because of worse news for the economy. The very fact that prices have risen so quickly has really caused people to leave the market for these kinds of goods. It’s the economic downturn that seems to be setting in on us, which eases the pressure. All of these things are going to help supply chains recover. So it’s not the ‘new normal’, but it’s been going on for a lot longer than people thought.”

Read Dr. Barkey’s full article below:

How much longer will supply chains stress Montana?

By Patrick barkey

The way many of us learn how the things we own work is when they stop working. Like your toaster. Or maybe your car. And in 2022, we all started learning about global supply chains for the same reason. Because for a surprisingly wide range of goods and components, they struggled to keep up with demand. Getting a promise of delivery instead of actual delivery has become all too common for businesses and consumers.

To understand why, we first need to understand a little about how the systems that store our shelves work and get all the bits and pieces of what ultimately become the things we buy and use. The first thing to know is that the systems are global. There may be a supply chain from Montana. But it’s integrated into a single global system that transports components, raw materials and finished goods around the world, with much of that volume involving Asian producers.

We have also evolved in a direction that often sources items from a single region, country or even a single factory. One of the reasons inflation has been so sluggish for decades until recently is the relentless downward pressure on the prices of goods exerted by efficient, low-cost competition from suppliers of other countries, which have gained in efficiency and market share thanks to their specialization.

Finally, the systems are lean. Another cost saving came from routine operations with very thin inventories. Tight supply networks coordinated with sophisticated processes that transmit information across the chain – relying on air, land and sea transport – have evolved to respond to fluctuations in demand.

So why did the system crash? In some ways, it wasn’t. Lost in the attention to empty toilet paper shelves and car dealership showrooms is the less newsworthy story that for the vast majority of goods supply chains have continued to operate. But there’s no doubt that for many kinds of things the system has choked.

The biggest reason for the outage was the huge spike in demand. In fact, that may be the only reason that matters. In October 2021, the demand for durable goods in the national economy was 40% higher than in October 2019, when stories of pandemics were still in the history books. Stimulus-fueled spending shifted toward goods and away from services, many of which were still impacted by COVID-related fears and restrictions. RV sales were booming, but barbershops and cruise ships were empty.

The impact of the request was amplified by the fact that it had not been foreseen. The dramatic decline in the economy in the spring of 2020 caused many businesses to plan for a longer and more painful recession than the one that actually happened. They canceled orders and laid off people, leaving them down to earth when the rapid return of spending arrived. They all sought to replenish and rehire at the same time.

Of course, the list of other factors contributing to supply disruptions is long. The COVID-related lockdowns in China, the withdrawal of air cargo capacity as international air travel has collapsed, and labor shortages in logistics industries stand out.

So the question now becomes, what happens next? That’s exactly what we’ll be covering in our economic update programs taking place across the state in August. The bottom line is that supply chains are recovering now.

But some of the good news for supply chains is the result of not-so-good news for the overall economy. Shortages of goods have pushed prices up, dampening demand. The economy returns to a more normal distribution of spending between goods and services. And slowing economic growth is giving respite to overstretched supply networks. But healing is often slow in coming. We are still feeling the effects of the disruptive events that happened three or four months ago.

How will supply chains change and evolve after this experience? Are we going to start “relocating” to bring manufacturing closer to home? For some critical items, such as those related to national security or pandemic preparedness, this is entirely possible. But for the full range of business and consumer goods, the forces of competition are likely to push us in the direction we were already going, with planes, trains and ships moving around the world.

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