Economic Aspects of Supply Chains

July 14, 2023

Gain Competitive Advantage by Understanding the Economic Aspects of Supply Chains

Supply chains play a crucial role in driving economic growth and prosperity. They encompass a vast ecosystem of industries and sectors that work together to deliver the right products at the right time, place, cost, quantity, and quality.

According to the Council of Supply Chain Management Professionals (CSCMP) the cost of U.S. business logistics amounts to 9.1% of the country's GDP or $2.3 trillion. The cost of U.S. business logistics reflects the highest percentage of GDP in history. However, there is a need for more precise and comprehensive metrics to understand the full economic impact of supply chains.

Understanding the Economic Impact of Supply Chains

In a report titled "Understanding the Economic Impact of North Carolina's Supply Chain: Conduit for Prosperity and Economic Development," researchers Dana Magliola, Lindsay Schilleman, and John Elliott shed light on the economic impact of supply chains in North Carolina.

Their analysis revealed that the supply chain employs over 479,800 people in the state — 12% of the workforce. The supply chain supports an additional 770,000 jobs, comprising 31%, of North Carolina's workforce.

The findings of this report are valuable for North Carolina and serve as a model for other states, regions, and the country. This research will help to measure the economic contributions of supply chains in various regions.

The Role of Supply Chains in Economic Growth

Supply chains play a crucial role in driving economic growth in developing and developed countries. For developing nations, supply chains create opportunities by augmenting productivity, improving technology and skills, increasing employment, and diversifying exports. They also establish long-term business relations that provide more income and ensure uninterrupted revenue.

In developed countries, supply chains leverage advantages such as skilled labor at cost-effective rates. As supply chains become more competitive and resilient, they offer increased transparency, trust, and reliability. All these help mitigate disruptions to supply chains.

Supply Chain Disruptions and Economic Consequences

Supply chain disruptions can have significant consequences for the global economy. Bottlenecks in global production networks reflect imbalances between supply and demand. Such disruptions have become more prominent.

The COVID-19 pandemic has further exacerbated these disruptions. Covid-19 has led to unprecedented shifts in demand and supply, along with containment measures that restricted consumption opportunities in the services sector.

The decline and subsequent recovery in economic activity during the pandemic have been accompanied by unconventional supply chain disruptions caused by waves of the virus and adverse weather events4. These disruptions have impeded activity and trade growth and contributed to increased prices.

Economic Markets and Supply Chain Challenges

The current economic landscape presents challenges for supply chains. Multidecade-high goods-related inflation, with the U.S. Producer Price Index approaching 10%, has proven durable and may worsen before reversing course4.

The services industry, which is much larger than the goods sector, has started a potential wage-price spiral through pay raises granted in 2021 and 2022.

Central banks in developed markets raised borrowing rates to reduce the cash flooded into financial markets through previous bond purchases Yet, monetary interventions have a lagging effect. So, that means constraints and inflation may worsen before they begin to subside.

Industries requiring large investments to boost capacity, such as semiconductors, may face excess supply simultaneously with slowing demand. As the baseline for comparison shifts to 2021 results, economic contraction becomes a possibility. However, central banks and occasional fiscal interventions may engineer a soft landing to mitigate the impact.

Geopolitical and Trade Risks for Supply Chains

Geopolitical and trade risks pose further challenges to global supply chains. Brexit fallout, characterized by additional red tape, dislocated labor markets, and anemic trade growth, continues to affect supply chains4. Other geopolitical risks, such as tensions between Russia and Ukraine, along with unpredictable regimes in Iran and North Korea, have the potential to disrupt global supply chains as well.

China's actions and policies also have significant implications for supply chains. Pressure on Taiwan, expansionist moves in East Asia, and the government's "common prosperity" goal can impact supply chains serving these markets. China's efforts to corner key mineral markets and develop a self-contained high-tech industry will put pressure on other players in those sectors.

China's zero-COVID approach, has disrupted supply chains in the near term. China will likely shift toward living with the virus in an endemic state. The uncertainty of that will challenge policymakers to adopt new strategies.

Supply Chains and Global Health

The path of the COVID-19 pandemic has significant implications for supply chains and global health. One likely scenario is that the virus becomes endemic, joining the ranks of the four "seasonal" coronaviruses that cause mild colds.

Studies of these seasonal varieties suggest that reinfections can occur, albeit with milder symptoms.

Achieving an endemic (of a disease… regularly occurring within an area or community) state will require sufficient global immunization rates. It will also require the maintenance of health and safety protocols.

The development of "pan-coronavirus" vaccines that provide immunity across variants could expedite the transition toward an endemic state.

How to Improve Your Supply Chain Management (SCM)

There are several things that you can do to improve your supply chain management process. These include:

  • Invest in technology: Technology can help to improve efficiency and visibility across the supply chain.
  • Partner with suppliers: Building strong relationships with suppliers can help to ensure a reliable supply of goods.
  • Use data analytics: Analytics can help identify areas to reduce costs and improve efficiency.
  • Focus on customer satisfaction: By providing a reliable and efficient supply chain, businesses can improve customer satisfaction and loyalty.

By taking these steps, you can improve your SCM processes and reap the economic benefits that come with it.

The Changing Landscape of Supply Chains

Supply chains have evolved significantly over time, particularly in response to the COVID-19 pandemic. Today, they face new challenges and opportunities. These include:

  • Resource optimization

Seamless procurement of raw materials

  • Effective inventory control
  • Demand-supply harmony
  • Efficient delivery, and
  • Customer satisfaction

Technology plays a pivotal role in reshaping the supply chain industry. Technology promotes transparency, visibility, and traceability. Digital supply chains have improved the industry performance. These advancements improve collaborations, satisfy customers, and increase transparency.

Conclusion

The economic consequences of supply chain disruptions, geopolitical risks, and global health challenges must be carefully navigated to ensure the resilience and efficiency of supply chains. Technology and collaboration will help supply chains survive in an ever-changing world.

SCM is a critical function for any business that wants to be successful in today's global economy. The economic benefits of effective SCM are significant. Businesses that can manage their supply chains effectively will position themselves to succeed.

Supply chains play a vital role in driving growth and prosperity. Understanding their contribution requires precise metrics and methodologies. The metrics must address the specificities of different regions and industries.

At American Global Logistics, we understand the economic aspects of logistics. The logistics industry is a competitive arena for any business. That’s why we track leading and lagging economic indicators.

We use these economic indicators to help position our partners for success. Specifically, we strive to gain a competitive advantage and maximize profits. We can do the same for you.

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