The Great Inventory Reset

From The Wall Street Journal May 3, 2021:

From The Wall Street Journal May 3, 2021:
Automotive supply chains are swinging to scarcity mode. After decades of keeping inventories low to maximize efficiency and cut costs, auto makers like Volkswagen and General Motors are stockpiling parts and even building their own factories to ensure access to batteries and other components, the WSJ’s Sean McLain reports. Supply-chain disruptions have been battering car makers. The volatility includes spikes in demand for passenger vehicles, semiconductor shortages that halted Ford pickup production lines and a February freeze that shut down a key U.S. resin refinery. That closure crimped output of seat foam, bumpers and steering wheels, shutting production at several Toyota plants and prompting some suppliers to take the costly step of flying resin in from Europe. The repercussions highlight the fragility of the global supply chain as businesses reevaluate long-held assumptions about just-in-time manufacturing and whether they can always get parts when they need them.

The word of the year for supply chain professionals is fragile.  I lost count of how many times I have heard a talking head tell us how covid has illuminated the fragility of our supply chains.  Umm, when you stop making stuff for a few months and have major issues with shipping, yes, the supply chain will break down.  Thanks for the insights.

Imagine the impact on the world economy if the automotive industry decides to carry more inventory.  It will be a one-time adjustment, but it will be major, especially now when commodities and labor are already in short supply.  You cannot sell what you do not have (unless you are Elon Musk).  Companies do not want to lose sales.  Inventories will be built to prevent lost sales.  Prices will go up.  And the government will continue to tell us there is no inflation.  Some things never change…

Other pundits have talked about how we no longer have boom and bust cycles due to the effectiveness of monetary policy.  This has all the makings of a boom that will bust at some point.  Eventually cheap capital will lead to too much building and the bust will come.  As in past cycles, we won’t know the bust has come until it happens.  Enjoy the ride while you can.  If you know when the bust is coming, let me know.  I promise to do the same.  I think we’ve got at least a couple years of higher prices and higher output ahead. 

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