Covid-19 put us here, the market will get us out

Sager Electronics’ senior VP marketing, Faris Aruri

Sager Electronics’ senior VP marketing, Faris Aruri, explores the origins of today’s supply chain disruptions and how to plan for 2022 and beyond.

The pandemic has been unchartered waters for the entire world and we have learned much about what to expect and how to cope as we approach two-years of disruption to our personal lives and business norms. To predict what lies ahead for the supply chain in 2022, it is best to examine the factors that led to the current environment of excessive component lead-times, increased component prices and soaring freight costs.

When we began to understand Covid-19 in March 2020, we prepared for the worst business conditions, lockdowns, drop in demand and rise in unemployment. Order cancellations started, led by the automotive industry cancelling semiconductor deliveries for much of 2020. 

Anticipating a drop in housing starts, the lumber industry followed. In the electronics industry, customers started notifying of their mandatory shutdowns and putting product deliveries on hold. Other industries followed, recalling past recessions and prepping for a new major one. A couple of lackluster quarters followed but it seemed that large government stimulus money prevented a meltdown and in Q4 of 2020, we saw signs of recovery. 

By Q1 2021, the recovery was full on and the supply chain started warning of shortages due to reduced staffing levels, distance requirements, transportation issues, commercial flight reductions, sailing cutbacks, customs delays and port entrance bottlenecks. What followed was an unleashing of Covid-19 related pent up demand, population spend changes and consumer spending for everything.

Shortages of raw materials, limited manufacturing capacity and transportation issues added up to price increases and extended lead times not seen in years.

Our industry spent 40-years perfecting just-in-time, first introduced in Japan by Toyota. It has largely served us well, making companies more efficient, improving customer satisfaction and cash flow. The model has adjusted through speed bumps over the last several years but Covid-19 proved too much. It left us unprepared for the drastic increase in demand and as word got out, caused the industry to open its buying horizons even wider, leading to the incredible backlog we see today. 

The free-market system will come through however, driving us to acquire additional raw material, make more shipping containers, add warehouse capacity, hire more production workers and truckers, upgrade infrastructure and eventually relieve all the port congestion: but it will take time and come with higher costs. Open jobs will start to fill but require increased wages. Inflation may become a real concern. We must work through the substantial 2022 backlog and there are no shortcuts. It will take up to six-months to see the beginnings and likely up to 12-months to the other side. We should all be planning for this horizon while keeping an eye on 2023.