Jammed Supply Chains
This is a general guide to post-pandemic business management.
There is a pandemic-induced problem that seems to be a temporary problem when it is in fact a semi-permanent problem due to the potential of being a recurrent problem in the post-pandemic world. That problem is jammed supply chains. We were used to traffic jams in major cities. Now we are getting used to shipping jams in major ports. Supply chains are jammed.
What is a supply chain? Basically, it is the processes and stages involved in getting a product to the final consumer. It typically starts at the raw material base, through manufacturing, assembling, shipping, distribution, deliveries, et cetera, right up to the point where the product is consumed by the final buyer.
The pandemic has exposed what was not considered problematic before. Globalization and offshoring led to long supply chains. JIT systems adopted from Japan led to supply chains that can be characterized as predominantly pull chains. These are chains whereby the process of manufacturing and supplying is driven by actual customer demand. Prior to that, supply chains were predominantly of the push-type, whereby decisions about when products are manufactured and shipped were determined by anticipated customer demand. The rise of applied management theories that ruthlessly focus on efficiencies led to the obsession with reducing inventory holding costs. Why stock up huge quantities of products? Wait for orders to come in, produce quickly and deliver quickly.
These efficiencies on a global scale have never been considered too efficient. World trade has boomed. More people enjoy cheap goods and services because of the establishment of functional and highly efficient global supply chains. Though the benefits are huge, a salient problem with global supply chains is that they are long and brittle, thus inherently unstable.
Long Supply Chains
Take any product you enjoy today; chances are high that it was not made in your local area. There are very high chances that it was made in China. Take an iPhone as the default example, you buy it in Cape Town, South Africa, but it was imported from Dubai, UAE, from a dealer who had imported it in a bulk order from China. The iPhone was assembled in Shenzhen, China but designed in California, USA. The assembly in China uses semi-conductor chips made in Taiwan, material from rare earth mined in Mongolia, and cobalt from Congo. The supply chain is long.
This is true for many other products. Food and beverages, which used to have very short supply chains, are increasingly joining the list of long supply chains. Due to increased global wealth, tastes and preferences have evolved. A person in New York, USA likes to drink wine from Cape Town, smoke cigars from Cuba, eat mangoes from Jamaica, avocados from Brazil, and prefers eating meals at a restaurant that uses organic tomatoes imported from Kenya. A basic meal in a restaurant can have ingredients that are sourced from miles away.
Long supply chains have a problem, inherent instability. The longer the supply chain, the more it is prone to disruption. Long supply chains are brittle.
Temporary Problem could Recur with increased frequency
There is a general view that the current status of jammed supply chains is just an inconvenience caused by the pandemic. Things will be fine afterward. This view ignores the inherent instability built into the supply chains. Our supply chains are so brittle that the smallest of bottlenecks on one route can cause a global shortage of essential items. The blockade of the Suez Canal by the Evergreen ship was just one example.
Whilst the current jamming is temporary, there is no easy fix. In August 2020, supply chain analysts were predicting that the jamming would be over within six months. Fast forward a year later, the jamming has actually increased.
Online shopping is increasing faster than what shipping, docking, and bay infrastructure can accommodate. Even though the largest of the shipping vessels are on the waters more often these days, to accommodate the high demand, bottlenecks remain.
The point on rising demand for shipped goods needs to be emphasized. In Los Angeles, a shipping bay that was receiving 10 shipping vessels per day before the pandemic, is now receiving 15 vessels. This is a 50% increase. The bay cannot magically expand capacity by 50%. It takes time.
The rise of online retailers (those dropshippers) reinforces the globalization trend. Online retailers source goods from anywhere. Consumers who are shopping online are also shopping for goods from anywhere in the world, as long as our supply chains can deliver. This exponential effect on global trade has occurred at a time when the infrastructure that supports this trade cannot magically scale up to match demand. Thus, the seemingly temporary situation could be with us for a little bit longer.
The exponential rise in trade, if followed by a scaling up of infrastructure that supports this trade, creates an even more brittle global supply chain system. The riskiness and inherent stability scale up as well because the system is fundamentally the same in terms of structure, the only difference being that more will be at stake.
- Global imbalance of trade — Whilst supply chains are long and brittle, another problem is that most of these chains are heavily reliant on China as the global manufacturing hub. Whilst China sends ships full of goods abroad, other nations will find it increasingly hard to ship anything back to China in exchange. This global imbalance of trade leads to trade deficits in other countries, which will eventually lead to import controls when those countries try to reign in on the deficits. These ‘resulting’ controls will act as shocks to the inherently brittle supply chains.
- Everything is interlinked — the situation is almost like falling dominoes, you push one, and everything down the line gets affected. Imports are connected to exports. A shock to any part of the global supply chain seemingly appears to be isolated but in a globalized world, it is difficult to isolate things. An import problem for the importing country can quickly turn into an export problem. For example, failing to acquire semi-conductors from Korea, for a critical sensor that Tesla needs for its electric vehicles can result in Tesla failing to export 250,000 vehicles in a given month or quarter, whilst holding 250,000 almost completed vehicles in stock, just awaiting one sensor. Failure to report these vehicles is now an export problem for the country. The more globalized the supply chains are, the more exposed they are to these risks.
The Politics — China CCP Question
Since the world is heavily reliant on China, the CCP question has to be asked. Is the world safe with the bulk of its goods being manufactured in a country paternalized by a dictatorial political party? The Chinese Communist Party (CCP) now has a president for life. So far, it has been so good. Can that be maintained over the years?
The key question regarding the President of China is that of trust. Can the world trust this guy for supplying almost all of its goods and services? What if CCP can weaponize the supply chains at a time when the world is fully reliant on China. It can be a bait. The CCP waits for the world to be fully reliant on China for cheap goods and services. Once the world is hooked, China flexes its political muscle on the global landscape.
With regards to global supply chains, China in itself is a single point of failure. If there is a revolution in China or political instability of any sort necessitated by the rising middle class, there could be serious shortages of goods globally. Households, cities, and towns could go without lightbulbs for months, as an example, because these countries no longer know how to manufacture lightbulbs, and won’t be able to quickly respond to the shocks in China.
The solution for the business manager
- adopt the China-plus-one strategy (alternative low-cost manufacturing hubs, localize processes that can be localized).
- allow for longer lead times, longer than what the supplier specifies.
- raise inventory levels (yeah, it's costly, tied-up cash bla blah bla, but you gotta do it this time).
- minimize opportunity costs for business lost whilst out of stock, and minimize transport and storage costs.
- make use of multiple fulfillment nodes.
- de-risk your supply chains, create supply chains that are more resilient to disruption.
- have the ability to pivot between suppliers, couriers, etc.
- purposefully built in some redundancies.
The post-pandemic business manager should understand how brittle global supply chains are. He or she can do very little to reverse globalization. He or she cannot fight against global trade and win. However, the manager should be aware of what's going on and not operate blindly. He or she should put in measures to defend the business from shocks on the global supply chains. It is going to be a normal part of risk management going forward, as the frequency of shocks increases together with the fragility of the global trade system.
The unprepared manager can easily sink the business after a couple of supply shocks.