The supply chain disruptions fueling the rapid rise of inflation may take 12 to 18 months to settle, especially as shortages and other factors continue to ripple through suppliers and the companies that also supply them. That was one of several supply chain topics discussed on a recent edition of Debtwire’s Middle Market podcast. 

Senior reporter Bill Weisbrod interviewed Sean Laffere, who leads Alvarez & Marsal’s supply chain services national practice, about the nature and effects of supply chain challenges for mid-sized companies and when the economy may return to a more normal level.

Other topics discussed include root causes on inflation stemming from the pandemic, how companies are dealing with shortages, rising prices and how the war in Europe will affect inflation in the future. 

Listen to the podcast here or read below for a summary of the interview.

What Is the Current Status of the Supply Chain?

Early in the pandemic, companies were either dealing with peak demand or vanishing demand as the market experienced a massive shift way from services and a spike in demand for all types of goods. Exacerbating the problem, online purchases skyrocketed by locked down consumers, an unprecedented amount of stimulus money flooded the economy and employee reticence at returning to the workplace hindered the ability to make and move products.

Now, the economy is demonstrating a mixed bag of signals that indicate merely minor improvements may be ahead through the rest of 2022 and into 2023.

Unemployment is down, port congestion is improving and there’s still good access to capital, but on the other hand, there are still major challenges to overcome:

• Labor participation continues to be a problem, with about 11 million open jobs
• The Consumer Price Index rose 8.5 percent in March, the highest since 1981
• The Producer Price Index had its biggest gain on record, rising 11.2 percent from a year ago
• Scarcity continues for some key products, like automobiles and appliances

Altogether, these factors suggest it might take until late 2023 before most of the supply chain disruptions abate to some degree.

Are Mid-Sized Companies Seeing Any Improvements?

While medium-sized companies may be as sophisticated and agile as larger companies, they often have fewer personnel, and in some cases, fewer options for pivoting. Primarily, they are concentrating on improving Accounts Receivable (AP) or Accounts Payable (AP) to expand working capital. 

Most companies below $1 billion are built for a certain size and scale of business. They have established facilities, suppliers and customers, so they may be limited in the short-term alternatives they can employ to relieve the pressure they’re under. 

For example, a company that’s highly dependent on coal for its operations can’t suddenly switch to an alternative fuel source. While they can do some immediate hedging to counteract their dependency on coal, they have a long-term problem, given the environmental policy momentum, that can’t be fixed overnight.

Similarly, companies that were heavily reliant on their Asian supply chain have little to no control over factory stoppages or transportation problems, both of which hampers their ability to source raw materials and produce products.

Some companies have created a more resilient supply chain by diversifying geographically, but it takes a lot of effort. They must find suitable replacements at a time when many others are trying to do the same thing. The supply chain is also multi-layered, meaning suppliers have their own suppliers, and those also rely on suppliers — that ripple effect will take a long time to recover from. 

How Is the War in Europe Affecting North American Supply Chains?

The conventional thinking is that companies with exposure into Russia or Eastern Europe will experience significant challenges and others will not. The reality is that disruptions are already affecting sourcing and logistics in Europe. And while many assume North American is somewhat isolated from the war’s effects, it’s putting pressure on prices. That inflation is especially noticeable in commodities, such as oil and natural gas, and is exacerbating price hikes in the U.S.

Inflation and supply problems are showing up in other places besides the gas pump. In some sectors, like the materials market, Ukraine and Russia play a major role. Approximately 50 percent of the world’s supply of semiconductor-grade neon comes from these two countries alone, and more than a third of palladium is produced Russia. 

Politically, of interest to many companies and market observers is whether the current U.S. Administration is willing to reverse its course somewhat on fossil fuels to provide relief in this inflationary environment. However, that’s not a problem that gets resolved immediately, and if the war is prolonged, the issues will continue to compound.

What Will the Supply Chain Situation Look Like in the Near and Long Term?

Challenges experienced today create tomorrow’s opportunities, so expect improvement over time as companies and markets adjust. The labor participation problem can be solved through technology such as automation. And as companies “reshore” manufacturing to the U.S., the factories will likely be substantially automated since high labor costs and lack of labor render traditional facilities unworkable.

Meanwhile, the economy will continue to experience market difficulties. Inflation won’t likely fade in the near term, based on wage growth, commodity prices and the amount of money in circulation. The inventory to sales ratio is close to a 20-year low and panic buying continues to exist, especially as companies seek to stock up on product when they can obtain it. All this will continue to add to the backlogs we’ve seen in hard goods.

Companies are still halting operations or production due to supply shortages, and the transition to alternative energy in the U.S. carries with it risks and costs, such as the need for lithium in batteries and the creation of the infrastructure needed for electric vehicles. Lithium production is concentrated in only a few countries, for example, and recently China and Argentina entered into an agreement to produce it, effectively creating an oligopoly.

The bottom line is that there are at least a dozen hurdles to clear before the supply chain and inflation normalize, and they cannot be quickly remedied in the short term. It could be as long as 18 months for either one to subside significantly.