About the author: Christopher S Tang He is the Edward W. Carter Distinguished Professor and Chair of Business Administration at the University of California, Anderson School of Management.
The Covid-19 pandemic has put Americans in dire straits shortage of toilet paper, paper towels, personal protective equipment, and semiconductor chips in 2020. In 2021, a supply chain crisis at the dual ports of Los Angeles and Long Beach is causing a shortage of port workers, truck and container drivers, container truck drivers, warehouse operators and space warehouses.
in late October, 100 container ships They were waiting in the twin ports and carrying Nearly 500,000 containers products. These shipping delays will result in additional shortages of toys, shoes, and game consoles for holiday shoppers.
Is America running out of everything? Are there investment opportunities to meet these unmet demands?
The answer is no and yes respectively. But before you jump on the bandwagon, make sure you’re not chasing the short-term demand caused by the whip effect.
The whip effect It is a phenomenon in the supply chain. Describes how each link in the supply chain responds to rising demand by ordering more than necessary to hedge against potentially continuous increased demand and avoid running out of stock.
As consumer demands are rising, retailers are asking for more distributors. By observing a higher order quantity from retailers, distributors demand more from manufacturers. Because of the whip effect, the order quantities observed by manufacturers do not reflect real consumer demand.
During the epidemic, it is true that consumers have bought less services And more goods. Due to the whip effect, increased consumer demand has inflated order quantities from US manufacturers to suppliers overseas, resulting in an increase in container ships arriving at all major US ports.
But once the epidemic is under control, consumer demand will shift from goods to services. Consumers will want about the same amount of goods they did before the pandemic. It is dangerous to make speculative investment decisions based on signals of consumer demand distorted by the pandemic.
Investors need a clear understanding of market dynamics. And there is some good evidence that these market signals are not being interpreted correctly.
Consider the ill-fated investments in face mask production in the United States. The severe shortage of N95 masks in the United States in 2020 has created investment opportunities for domestic production. When is the number of Covid-19 cases peaked In January 2021, orders from US mask manufacturers are gone through the roof.
But after China started export more PPE arrived in the United States in December 2020 and after the CDC relaxed mask mandates for Americans vaccinated in May 2021, orders for US-made masks disappeared. By August 2021, Demetic was in Miami 1500 workers laid off in its own mask division and was stuck with a stockpile of nearly 200 million masks.
The American Mask Manufacturers Association estimates that as many as 10 out of 29 domestic mask manufacturers have Production stopped As of mid-September. To prevent these manufacturers from going bankrupt, the group is appealing to President Biden for government support.
Americans needed the domestic mask-manufacturing sector during the crisis. But their business models are not sustainable. The mismatch in supply and demand for American-made masks was short-lived, in part due to the effect of the primary whip as well as temporary suspension To export PPE from China.
Two considerations will help reduce the risk of speculative investments.
First, for many low-cost industrial countries in Asia, American manufacturers are not cost-competitive. Instead, domestic manufacturers must compete for agility and flexibility. Since domestic manufacturers can closely monitor real demand, they can gain a competitive advantage over foreign suppliers if they can respond to changing needs quickly and accurately.
Sensitive sectors such as PPE must develop a supply chain vision to monitor real consumer demand if they are to mitigate the whip impact to contribute to local resilience and responsiveness. At the same time, this sector must own Agile so that it can produce regular products such as clothing in normal times and pivot quickly to produce PPE during a crisis. Having the ability to monitor and respond to real changing needs is essential.
Second, while the demand for PPE is short-lived, investing in areas with sustained growth in demand is less risky. For example, many consumers have switched to online shopping during the Covid-19 pandemic, and e-commerce is expected to continue growth over the next few years.
US retailers are likely to give up retail space. At the same time, they need more warehouse space to process their customers’ online orders. The demand for warehouse space is increasing. Warehouse vacancy rate in the United States He fell From 4.3% in 2020 to 3.6% in 2021.
Commercial real estate company CBRE reports that the US still needs additional property 330 million square feet of warehouse space To deal with the increasing demand for e-commerce. As the demand for warehouse space is likely to continue in the post-pandemic era, investment in commercial warehouse space looks more promising.
To find rough diamonds during a pandemic, a deep understanding of real market dynamics is crucial – even more so than in normal times.
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