It’s Not A Supply Chain — It’s A Network Of Supply Pipes
The massive, complex, fragile network of supply pipes gives sellers much greater power to limit supplies & increase prices
What People Mean By The Term “Supply Chain”
The metaphor of a “supply chain” is commonly used to describe the units in the line of interconnected components that are eventually combined to produce a physical product.
The idea is that if sand is turned into glass which is turned into bottles which are filled with wine, identified by a label, packed in a box, shipped to a warehouse, and re-shipped to a retail outlet then each step in that process is a virtual link in the “chain” that ends up putting that bottle of wine on your store’s shelf.
Contrary To Links, Pipes Show The Volume Of Each Of A Product’s Components
Firstly, the supply chain abstraction would be more accurately described as a supply pipe because each step in the line is marked by the number of units of the component delivered to the next stage in the process. The smaller the pipe, the more limited the number of units that can and are being supplied.
A winery might purchase different quantities of bottles in different shapes from three different manufacturers. The number of bottles each fabricator supplies would be represented by a larger or smaller pipe with a diameter that varied according to the number of units supplied by each such supplier.
Similarly, the bottle manufacturer might purchase different quantities of its materials from various suppliers, from sand to trace elements for color, to tooling and spare parts.
And we need to add a “pipe” to each stage corresponding to the transportation system that delivers the input and the output to and from that fabricator.
If the sand is delivered in railroad cars then a shortage of those cars or a disruption in the railroad’s operation would be represented by a smaller “transportation” pipe representing a reduction in shipping capacity in the first case or a severed transportation pipe in the second.
And a bottle of wine is a relative simple product.
Consider The Supply-Pipe Network For An Automobile
Consider the supply network that puts a particular model of a vehicle on the local dealer’s lot.
A car has thousands, maybe tens of thousands, of components. Each of those components have tens, hundreds, or even thousands of components of their own. And each of them has components of their own, including shipping containers, transportation equipment and infrastructure (diesel locomotives, train tracks, bridges, train signals, computer controls, railroad workers, trucks, truck drivers, port facilities, cargo cranes, etc.).
Imagine A 3-D Representation Of That Supply Network
Imagine a K’nex sort of toy where the pieces are pipes of a hundred different diameters with connectors at each end with connectors also around the sides with adapters allowing tubes of differing sizes to connect to each other and other subordinate parts that would allow multiple tubes to connect together in a hub.
Now imagine labeling each pipe with an identifier of its role in the supply network that would eventually yield a new automobile sitting on your local car-dealer’s lot, including a pipe for each leg in the transportation of each physical part, a pipe for each component that went into manufacturing each box or crate that each part was packed in, a tube for the electrical, gas, or diesel energy that was used to manufacture that part, and so on.
Now, assemble all those tens of thousands, perhaps hundreds of thousands of pipes into a three-dimensional representation of the supply network for that Camry sitting in your local Toyota dealer’s showroom.
And Imagine A Pipe Construct For Other Products
Now, build one of those 3-D representations for each of the products we take for granted — dishwashers, refrigerators, flat-screen TVs, computers, baby formula, corn flakes, beer, sugar, sheet rock, lumber, tractors, etc.
And don’t forget to add pipes for the various different labor components required to build and deliver each product.
Now, you’re starting to get an idea of how interconnected our economy actually is and how fragile that structure is.
Now Imagine What Happens If You Sever Some Of Those Pipes
So, now reduce the diameter or sever some or all of the pipes representing the labor components — COVID.
Next, reduce in diameter each of the pipes that involve shipping each foreign component across an ocean to the U.S. — all the components that go into shipping containers, all the workers that load the containers on ships, all the cranes that unload the containers, all the warehouses that hold the goods that arrived in the shipping containers, all the workers that operate those warehouses, all the truck drivers that transport those goods from the port warehouses to wholesalers’ warehouses. Etc. Etc. Etc.
Now, take the massive, complicated construct you’ve built to represent the supply web for that Camry and copy and modify it to represent the creation of a commercial vehicle — a bulldozer, tractor, dump truck, diesel freight-hauling truck, diesel locomotive — and plug in that tractor, dump truck, locomotive as being itself a component in the models you’ve built for apartment house construction, wheat production, bread and cereal manufacture, etc.
Many Uncontrollable Events Can Cripple The Supply Network
Now, you’re starting to get the idea of how a disease, a natural disaster, a war, an embargo, a weather event, strike, climate change, etc. only needs to shrink or break a few of those pipes, just a few, sometimes just one pipe (e.g. the computer chips used in vehicles) to create massive, world-wide shortages.
When you realize that those massively complicated models are each just a precursor to other products like food production and commercial construction, you begin to get an inkling of how amazingly fragile our economy is and how subject our lives are to serious disruption from events far beyond our control.
The Link Between The Network’s Complexity & The Sellers’ Ability To Increase The Price Of The End-Use Product
When you interrupt or even reduce the supply of any crucial components you reduce supply and therefore trigger large increases in price AND you give the producers and sellers of the end product the power to raise prices out of proportion to the reduction of that component in their supply network.
Much of our current inflation is due to profiteering by producers and sellers because they can.
The more complicated the product, the more high-tech the product, the higher the level of education/training required for the labor force that makes the product then the tighter the supply and the greater the seller’s bargaining power and the greater the seller’s ability to raise the price.
The Changes In Economies In The Last 400 Years
- The change from an economy being centered around the operation of farming on landed estates to iron and steam industry.
- Then the economy changed from one founded on individual businesses relying on iron and steam to petroleum and electricity fueled assembly-line businesses whose market spanned an entire country.
- Now the economy is changing from assembly-line mass-market businesses to a small number of high-technology-using businesses dominating the markets they serve — farming, meat production, pharmaceuticals, lumber, energy, etc.
With each of these changes in the fundamental nature of the economy the game has changed, the rules have changed, the tools available to sellers and buyers have changed, all because each of these successive economic systems are fundamentally more complicated, with greater and greater concentrations of power in fewer and fewer organizations than the preceding ones.
The Decline Of Universal Free-Market Price Competition
Today we are moving out of an era where free-market competition guaranteed access to products at a low price and we are increasingly moving into an era where the complexity of the supply network and the ease of its restriction has given producers more bargaining power to raise prices closer and closer to the all-the-market-will-bear monopoly price.
The price-control tool of free-market price competition is dying and, politically, consumers have no other mechanism in sight to replace it.