The reports of flooding out of British Columbia recently were unsettling: Rising water had cut off highways and rail lines, stranding consumers and businesses, and led officials to declare a state of emergency.
A new way to measure economic conditions surrounding the delivery of goods and services in Canada.
The severe flooding only compounded the disruptions to the delivery of goods and services caused by the pandemic, and further exposed just how dependent the nation’s economy has become on a supply chain that suddenly seems vulnerable.
As a way of measuring the health of Canada’s supply chain, we introduce the RSM Canada Supply Chain Index.
It is designed to account for factors affecting the delivery of intermediate goods to manufacturers and service providers, providing an overview of the economic conditions surrounding supply chains and offering a forward look for businesses.
The index includes eight elements: purchasing managers’ assessment of delivery times, prices paid and inventory level of goods, the values of wholesale and manufacturing inventories, inventory-to-sales ratio, railway car loadings and the labour force participation rate.
An index value of zero indicates a normal level of supply chain efficiency. Positive values indicate good supply chain efficiency, while negative values indicate deficiency.
In mid-November, the RSM Canada Supply Chain Index stood at 1.76 standard deviations below zero, higher than the all-time-low set early this year and in 2010 during the Great Recession, but still substantially below the level of the past 10 years.
Individual components
It’s no mystery what is behind this low reading: The pandemic, which limited the movement of people and goods internationally as well as among provinces. A look at three of the individual components shows the rising level of stress:
- Inventory level of goods: With lockdowns and stay-at-home orders, consumers stopped shopping last year, leading to high levels of unsold inventories. Following the reopening this year, the opposite problem followed: High demand without the supply to meet it.
- Delivery times and prices paid: The wait for goods and services and the cost of delivering them surged when the pandemic first hit in the summer of 2020 as COVID-19 restrictions set in, only to increase slightly later that year when both supply and demand stayed low. This year, backlogs at ports and other logistical challenges have caused serious delays in shipping, leading to soaring delivery times and prices.
- Inventory-to-sales ratio: This ratio, which measures a company’s efficiency in managing its inventory, spiked in the spring of 2020 as the economy ground to a halt. By the year’s end, the ratio had adjusted when production slowed with demand and no-contact shopping flourished.
Supply chain challenges mean that strong consumer demand is not being met as shortages of everything from raw materials to semiconductor chips slowed down industrial production after an initial burst early this year.
Shortages have also caused prices to jump, leading to the highest inflation since 2003. Now, Canada’s recovery is happening at a slower pace than anticipated, largely held back by supply chain disruptions.
Policy implications
Canada is the world’s second-largest country in land mass, with a cold climate and a sparse population, making it expensive to build and maintain infrastructure that supports the supply chain. So when natural disasters strike, as is increasingly the case, highways and railroads take longer to be fixed. The nation’s existing infrastructure was simply not built to withstand this.
The second main challenge for Canada is in its aging workforce. This is particularly evident among truck drivers, the lifeline of the supply chain. For years, Canada had counted on a constant inflow of immigrants for its truck drivers. As the median age of truck drivers has risen, more of those drivers are approaching retirement.
When Canada closed its borders and stopped processing immigration applications during the pandemic, down went the number of truck drivers and warehouse workers.
Put everything together, and the shocks to the supply chain are not surprising.
As in other areas of the economy, the pandemic has only accelerated challenges to the supply chain that were already taking place. These issues will remain a challenge in the years ahead, even as the worst of the crunch possibly eases early next year. The issues will require long-term solutions and serious investments to fix.
Investment in infrastructure, especially green infrastructure, will help mitigate the impact of these events and make the nation’s systems more resilient.
The takeaway
While specialization breeds efficiency, there might be such a thing as overspecialization. When businesses offshore their production, they become more vulnerable to disruptions.
Although individual businesses cannot single-handedly overhaul the country’s infrastructure, they can make improvements in their supply chain management, incorporating process innovation. Keeping parts of their production domestic, together with diversifying suppliers, can mitigate the risks of future supply chain disruptions.
