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Why The Supply Chain Has Collapsed

By Mike Adams




What is the most critical part for the manufacture of an aircraft like the Boeing 777? You have seen it. It is the little slider that says “occupied” or “vacant” on the bathroom doors. Once a plane has been ordered, the first part that has to be made is that little slider because it has to be in the language of the country where the airline is located. Once that slider is manufactured, it has to be shipped to the latch maker, which could be in another country. The latch then has to be shipped to the lavatory door maker and that may be in a third country. Once the lavatory door is made, it has to be shipped to the maker of the lavatories and that may be in yet a fourth country. Once the lavatory is complete, it is shipped to Renton, Washington where it is installed in the fuselage. From these early parts does a $320 million aircraft rise. A single plane is made up of 3 million parts which come from 500 suppliers around the world. If just one of those suppliers has shut down from COVID-19, the entire assembly will be held up until that supplier is back up and operational. Of course, Boeing has alternate suppliers for most parts, but a stoppage anywhere in the supply chain can slow production down. “The combination of the information technology revolution, which made communications affordable and reliable, and the entry of China into the world economy, which provided bountiful cheap labor, [transformed] manufacturing into a global enterprise…The OECD [Organization for Economic Co-operation and Development] … reckons that 70% of global trade now involves global value chains.”[1] I had a friend who owned a restaurant. During one of the recessions the 1990s, he told me he would rather be a car dealer than a restaurant owner. When I asked why, he explained: During a recession, when someone needs a new car, they will delay the purchase and maybe make some repairs. But eventually they will buy the new car maybe in six months or a year when times pick up again. But in a restaurant, if you do go out to eat tonight you do not put it off and go in six months. The car sale is delayed but will happen. The restaurant sale is lost forever. We are living in a time when there are delays in supply chains. But a good deal of the demand will not go away, it will be delayed, like my neighbor’s dealership example. We are going to go through rough spots as we emerge from the pandemic. But we will reach herd immunity here in the United States and worldwide. It might be through vaccination for many and infections for the non-vaccinated. But eventually we will reach herd immunity just the world did in 1919 from the Spanish Flu. The supply chain disruptions will affect some industries and some companies more than others. Demand will build for some companies and some industries when supply is curtailed due to the vendor difficulties. There is a scene in the movie Apollo 13 which illustrates American ingenuity well. Based on true events, there is an explosion, and the craft begins to leak oxygen. On the ground, the fate of the mission rested on engineers who were given the task of jury-rigging a solution. It is American ingenuity that will patch together, reimagine, and rebuild the supply chains. They will be different, but probably more durable. While the impact on the stock market may be that it begins to move in fits and starts, it is unlikely, in my opinion, to slow its upward momentum anytime soon. By the way, if you have not seen Apollo 13, it is well worth the watch during this time of COVID-19.


Article Written by:

Mike Adams, President & Principal

Adams Financial Concepts LTD

206-903-1019

https://adamsfinancialconcepts.com/

1001 Fourth Ave, Suite 4330, Seattle WA 98011

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