Assistant Professor of Economics at the University of Oregon
Keaton Miller is an economist who specializes in industrial organization. His research interests include understanding the way market competition, consumer preferences, and government policies combine to determine the prices and supplies of goods and services around the country.
Keaton Miller on Supply Chain Issues
There’s been a lot of talk about problems with the supply chain during the pandemic, but the factors for its logjam were in place well before COVID-19 hit, according to University of Oregon economist Keaton Miller.
Miller explained that it started back in the ‘80s, when final-goods manufacturers adopted a “just in time” approach to storing inventory on site. Companies like Toyota decided it wasn’t a smart business move to have warehouses full of parts well before they were needed for the final build of the car. They didn’t want to pay to store excess car doors or windshield wipers when they could streamline their production with more efficient timing of supply deliveries instead.
This operational strategy triggered a shift toward more specialization and efficiency in the supply chain, where every link of the chain got more precise. But while businesses may have experienced cost savings from enhanced efficiency, it also increased the fragility of the system.
“Essentially, this created multiple points of failure,” Miller said. “The supply chain became more susceptible to breaking down due to a disruption.”
Two such disruptions were the tariffs imposed on China during the Trump administration and the coronavirus.
“The pandemic hit and screwed everything up,” Miller said. “On both the supply side and the demand side, for certain goods.”
Take goods like toilet paper, for example. Images of grocery store shelves ransacked of all toilet paper were often associated with the onset of the pandemic. Miller explained that the reason for the shortage was directly linked to how specialized the supply chain had become. Every ounce of efficiency with the production of toilet paper had been wrung out.
The demand for toilet paper was very static, he says, because it’s not a consumer good that sees big fluctuations in demand due to seasonal changes or the health of the economy. There are also entirely different supply chains for consumer toilet paper and for commercial toilet paper – which is what virtually every office in America uses to stock their restrooms.
So when the pandemic hit, the demand that always stayed constant, changed. Fewer people went to (and at) the office. More spent a lot more time at home. And not only was the supply chain so specialized that it wasn’t prepared for that shift in demand, the pandemic disrupted every link of the supply-side of the chain, from the factories, to the shipping ports, to the final good production facilities. Workers were laid off. Everything shut down.
While the great toilet paper shortage of 2020 is an example that resonates with consumers, most every other manufacturer faced similar problems with the supply chain that continue to delay the availability of goods today.
Now that the economy is picking up, suppliers and manufacturers are operating again, but the supply chain is far from back to normal.
It’s kind of like when there’s a traffic jam from an accident on the interstate. Even after the accident has been cleared, the traffic jam takes time to sort out, Miller said.
With the pandemic still a factor and the supply chain still jammed, capacity is limited at every level from production to delivery. So, suppliers are making hard decisions about what goods to prioritize
“And how do you decide what stuff to prioritize?” Miller asked. “It’s the highest value, highest technology, lowest weight goods.”
Miller explained that it’s much more likely that a ship full of big TVs will head to Best Buy rather than bulk rice will make its way to the grocery store. This is one of the main reasons that prices, and the worry of inflation, are on the rise.
But the cost increases that are hitting consumers have a direct underlying cause, Miller said, which means if that cause dissipates, prices should also go back down.
Miller says that while consumers may be in for a bumpy winter, he is optimistic that by next summer, goods will be flowing again, labor wages will rise and prices will ease.
“Once the flow of goods is reestablished, prices should drop again.”