Why Supply Chains Are Key To Fighting Inflation

Source: Knowledge@Wharton, Angie Basiouny
Photo: Person grabbing groceries off a mostly empty supermarket shelf to show how solving supply chain issues are key to fighting inflation

Shoring up supply chains is another way the federal government can tackle persistent inflation and make sure stores shelves aren’t empty, Wharton’s Marshall Fisher says.

The Biden administration has convened an interagency council to help solve America’s supply chain problem, an initiative that Wharton professor Marshall Fisher welcomed as an effort to try to reduce inflation by increasing supply.

“In terms of a grade, I would give it an A-plus for what it’s trying to do, but obviously an incomplete because they’re just starting. So, the devil will be in the execution details,” Fisher said during an interview with Wharton Business Daily on SiriusXM. (Listen to the podcast.)

The White House Council on Supply Chain Resilience was announced last month as part of nearly 30 new actions to strengthen supply chains described as critical to economic and national security. The actions include using the Defense Production Act to increase domestic manufacturing of essential medicines, along with a number of administrative measures to share data and develop a better strategy to deal with the types of disruptions that left store shelves bare during the worst of the COVID-19 pandemic.

The pandemic has subsided, yet the shortages persist, raising concerns about offshoring and higher prices amid dwindling supplies. From 2021 to 2022, retail food prices rose by 11%, the largest increase in 40 years, according to government data.

Fisher, a professor in the department of operations, information and decisions, said Biden’s plan is a bit of a “novel approach” to attacking inflation. Typically, the Federal Reserve takes the lead on combating inflation by raising interest rates to temper demand. The Fed has raised the benchmark rate 11 times since 2022.

“What is inflation? It’s an imbalance between supply and demand,” he said. “So far, we’ve focused on reducing demand. But this gives us a second approach: Let’s make sure also that we improve supply by avoiding disruptions to supply chains.”

What Production Is Essential?

Offshoring has always been around, but it became widespread across industries in the late 1970s when China began investing in low-cost manufacturing, Fisher said.

“Instead of getting something from 100 miles away, you’re getting it from halfway around the world. And that’s when you realize that it’s low cost, but it’s also very vulnerable,” he said. Factories can shutter for a host of reasons — natural and man-made disasters, war, political instability, the list goes on.

Bringing more production back to the U.S. would help with shortages, but Fisher said the new council will have a tough time figuring out what products are so essential that they should be made on American soil. He described himself as a “skeptic” on domestic manufacturing and pointed out the many advantages of participating in the global economy. Trading with other nations creates allies and builds influence. In that context, Fisher said, the U.S. has more to gain from being friends with China than enemies. The same goes for many Central and South American nations from which immigrants come seeking greater economic opportunity.

“There’s a saying that when trade crosses country boundaries, armies don’t,” he said. “A critique I have of generally bringing manufacturing home to the U.S. is there are also advantages to sourcing from other countries and having strong relationships with as many countries as we can.”

Fisher is also critical of what’s missing in Biden’s plan: specific mention of the less developed nations that make much of the world’s goods, such as Bangladesh. Instead, Canada, Mexico, the European Union, the United Kingdom, Japan, and several other developed economies are named.

“When I look at the list of countries involved in this initiative, I would add to that list less developed nations, which are important to developed nations as a source of low-cost supply,” he said.

Supply Resilience Is in Vogue

Fisher has spent more than 35 years studying supply chains, examining industries as diverse as transportation and fashion. Before joining Wharton in 1975, Fisher was a systems engineer in the Boston Manufacturing and Distribution Sales office of IBM and on the faculty of the University of Chicago Graduate School of Business. He doesn’t recall a time during his experience when supply chains were part of daily conversations among Americans as they are now. Recent product shortages of antibiotics, baby formula, computer chips that power most electronics, and other everyday items have people talking.

“Be careful what you wish for,” he said with a chuckle. “All my career, I’ve pretty much labored in obscurity, studying supply chains. Suddenly, it became front-page news, but not exactly good news.”

https://knowledge.wharton.upenn.edu/article/why-supply-chains-are-key-to-fighting-inflation