The Coronavirus Caused a Global Supply Chain Crisis. It’s Time to Reckon With How To Fix It.

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Theorem
Sep 24 · 5 min read

The pandemic represented the first time tons of people were forced to consider the mercurial nature of supply chains. Predicated on the traditional, linear economic model of extraction, consumption, and inevitable waste, supply chains rely on predictability. So, you don’t need to look very far to find examples of traditional supply chains malfunctioning or dropping the ball (sometimes comically, sometimes gravely) throughout the pandemic.

As a result of these very public malfunctions, the world has embarked on a reimagining of what a global supply chain ought to look like, and how it should and shouldn’t function-especially under unexpected duress.

Take skyrocketing lumber prices for example-the supply-side crisis that launched a thousand memes. Even while the worst of the pandemic appears to be behind the United States, the traditional supply-chain models continue to be caught flat-footed by something as basic as consumer demand, leading to bizarre irregularities in the prices of goods, or sizable lag-times between the growth of demand and the actual supply to meet that demand. Sawmills are now kicking up production in order to meet current consumer needs, and it wouldn’t be surprising if this leads to an unexpected glut of lumber finally flooding a market after demand has receded. This is all to say: not only is the traditional linear supply chain bad for the business of protecting wildlands from needless deforestation, but it is also bad for business.

Bullwhip Effects

Examples of this profound lack of market agility are not relegated to sawmills and ungainly carrier-ships in the Suez. The current, waste-heavy model of consumption and rapid obsolescence has exposed a business model incapable of long-term strategic planning. While no one will go hungry as a result of delays in the manufacture of their Nintendo Switch, live-saving medical equipment or generic drugs are another story entirely.

Such failures often have what is described as a “bullwhip effect.” Namely, as MIT’s Sloan School of Management puts it, “they start with retailers and spiral out in greater and greater magnitude to distributors, producers” until finally reaching upstream suppliers. Smaller retailers and suppliers are markedly more likely to bear the brunt of this sort of downdraft, since they’re less likely to be able to sustain prolonged losses as compared to their larger competitors. This, in turn, can lead to even less market agility-more concentration and agglomeration, and reduced competition in certain sectors.

Moving Toward a Circular Economy

If the old economic model can’t adequately counter uncertainty or downside risk, the new model needs to be concretely articulated before it can overcome the industry-wide status quo.

Fundamentally, the “circular economy” is an umbrella term referring to the idea that economic models should reorganize themselves to more closely mirror the natural world’s aversion to absence and waste.

Let’s say a consumer suddenly possesses the purchasing power and desire to upgrade their Kenmore fridge. It should be abhorrent to the Kenmore corporation that the old fridge is shipped to a landfill, and that new organic materials are extracted, harvested, and refined, in order to simply make another fridge-not abhorrent because of some deeply held moral belief on Kenmore’s part (though that would be nice), but because all waste represents value lost for the manufacturer, the producer, the shareholder, and the consumer.

Stacking loss upon irretrievable loss, while also compounding risk and opportunity cost may at some point have been a fairly effective strategy for piloting a large company through the 21st century. But that’s also what created a current, linear economy that can’t handle any change. To cite one stark example, in a traditional supply chain, 95% of the material value of a given plastic is lost after first use. In a world where we produce roughly 1 ton of plastic per person born, that’s absurd. The circular economic model aims to short-circuit that absurdity.

The Path Forward

The major disruptions caused by COVID-19 have shown the need for greater supply-chain visibility. In a post-COVID world, a lack of clarity in the supply-chain ecosystem should be treated as a risk no less serious than building your mansion on a mudbank. But just transparency isn’t going to be sufficient. Suppliers need to automate antiquated legs of existing supply-chains, to invest early in digital solutions and innovation strategies, and to rethink the way that they approach supply chains to begin with.

The Pandemic put the lie to the underlying assumptions of most traditional supply chain operators. This is not an issue of peacetime strategists fighting the last war. Fixed model forecasts and the blithe assumption of relative stability are not luxuries retail supply chain operators can really afford anymore. The answer to all this existential risk is a threefold solution: sustainability, software sophistication, and stress-tested supply chains. A forecasting model or forecasting software that doesn’t account for the very real possibility of the next pandemic, for radical fluctuations in supply and demand, or for something as simple as transportation delays, needs to be radically recalibrated if not thrown out entirely. The fact that almost no major supply chain operators utilize machine learning or artificial intelligence to make forecasting models more agile is a pretty huge oversight, and one that won’t go unexploited forever. The reality is the industry standard is woefully antiquated, and it’s past time for a change.

If we’re to adopt the framework of the natural world for supply chain models, we should take another great lesson from nature: whatever doesn’t grow, dies. The shortcomings of the current global supply chain represent either an enormous hazard or an opportunity for forward-thinking global suppliers. The great peril is that transparency, digitization, and vertical integration are skipped in favor of easy, short-term solutions.

The great opportunity, though, belongs to those companies and industries who refuse to let a crisis go to waste — who seize on this moment to frontload investment in a new type of economic model, one that offers durability and agility. We’ve been shown, in grisly detail, what an extreme circumstance looks like, and what gaping holes there are in the existing system. We possess the digital tools, newer and more sophisticated predictive models, less traditional supply chain automation software, to more than meet the moment, but to do so requires focus and vision, and a plan, not just for the near-term, but for the long run. There is no paradigm shift that does not include some marginal risk. But, in this case, the cost of doing nothing can be measured in a business’s (or an entire industry’s) prospects for survival.

Originally published at https://journal.theorem.co.

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