Are the supply chains ok? — Aaron Mannes
In his PostEverything post the other day, Daniel Drezner argued against conventional wisdom, stating that global supply chains are fine. A year ago, we were all worried about toilet paper. More recently, the world watched as the ginormous container ship the Ever Given was stuck in the Suez Canal and now the world auto industry is slowed due to a shortage of $2 semiconductors.
Drezner, persuasively argues that none of this is that big of a deal. We survived the great toilet paper shortage of 2020 with just a bit of chafing. The Suez Canal blockage made for great memes but was just a blip. The auto industry was a victim of its own poor forecasting, there are plenty of chips, but they’ve been directed to other customers.
To be clear, Drezner is extremely alert to a different supply chain danger from weaponized interdependence. This occurs when nation-states that control critical nodes in the supply chain use this control to pursue their national ends. As for the supply chains themselves, he’s not worried:
To repeat a theme: global supply chains are not fragile and the geopolitical risks to them have been exaggerated. The current shortages are caused by producers underestimating demand and lacking the immediate inventory to respond. One lasting effect of covid-19 will likely be the increase of buffer stocks by final producers to ensure this problem does not recur.
I’ve been doing a bit of work on supply chains recently and while I’m not dismissing Drezner’s argument, I’m also not sure that there aren’t some serious risks in our global supply chains.
Back when terrorism research and analysis was my bread and butter, every expert in every topic would explain the damage terrorists could do within that expert’s domain. From poisoning livestock to taking down cell-towers to induce panic and a gazillion other aspects of modern life were all incredibly vulnerable and we were a mere well-placed IED from total social collapse.
Air Conditioner Repairman Scenario
The more I heard about these plots, the less likely they seemed. I dubbed them the air conditioner repairman scenario. On the first really hot day in June, when everyone suddenly cranks up their air conditioners a bunch break it. If you talk to an air conditioning repairman that day, it will sound like the world is coming to an end. But in reality, it is just the air conditioning repairman having a very busy and very bad day.
A lot of these supposed nightmare terrorism scenarios are just like that — big expensive hassles. And a lot of people having really bad days. (This leaves aside that doing damage to these systems requires extensive knowledge and access to the system, which may not that easy to obtain.)
Having interacted with supply chain professionals and researchers — who across the board are absolutely fascinating — they are very worried about the systems in which they work. This is understandable. The question is whether their concerns are truly systemic.
Put another way, in many cases the problem isn’t the supply chain so much as the supply. With PPE early in the pandemic, there simply wasn’t enough. Now, there is plenty as domestic manufacturing has ramped up to meet the need, although there are distribution problems.
Businesses, markets, and governments will react to the events of the past year. There will almost certainly be global strategic investments in vaccine production capabilities over the next decade. When the next pandemic hits, production capability will match the impressive feat of developing and testing a vaccine in a matter of months.
On a smaller scale, businesses will invest in technology and capabilities to better understand and manage their supply chain. The core of supply chain strategy is “buffer or suffer.” That is, keep some inventory around so that when there is a disruption, you can ride it out without too much difficulty. Lessons have been learned.
Failure of Imagination
In the case of most systemic failures, post-facto analysis finds that there were numerous warning signs, but they were ignored, overlooked, or not seen for what they were. The organization or complex system had handled a number of breakdowns (or had a number of successes) and thus was believed competent to handle what came next. The 1986 Challenger explosion, which came after five years of successful space shuttle launches (and a quarter century of NASA success) is a classic example. This confidence that “global supply chains will be fine” echoes this type of confidence.
As I mentioned above, at the core of managing supply chain risk is “buffer or suffer.” The core reason business don’t do this is that it is expensive. In the wake of the pandemic, businesses may re-think this and realize it is more expensive not to hold maintain some inventory. But, as normalcy returns, so will business-as-usual. The logic of efficiency will argue for reducing inventory, since pandemics don’t come around that often — without considering that the future shock might be even worse.
Supply chains is a misnomer, they are really networks. Networks can have greater resilience, there are more nodes and new pathways can be found, so that disruptions can be ameliorated. But networks can also be subject to cascading effects, in which failures unexpectedly ripple through the network and network adaptations actually exacerbate the failures.
Another point is that large parts of this network are “dark.” Businesses within a supply chain are often operating with very imperfect information about their partners or their partners’ partners. That is a given node in a supply chain network may know about adjacent nodes, but not much beyond that. And just to be clear, even relatively simple items (say a tennis ball) actually has multiple inputs, each of which in turn have multiple inputs. Beyond just the items needed to physically produce an object, supply chain analysis has to consider transport and distribution, and whether each of the providers of these goods and services has everything they need to function. If a factory’s workers can’t get to work because of a flood, that becomes a supply chain problem. But the user of the factory’s products several points downstream may be unaware that this factory is even in their supply chain. The lack of transparency and information could contribute to poor decision-making in uncertainty and cascading failures.
Most supply chain challenges will be inconvenient blips, leading to short-term price increases or social media panics… in the U.S.
With our enormous wealth and power, the United States is insulated from these problems. We can buy our way out of problems and be the first in line when there are shortages. For the U.S. to say the supply chains are fine is like the rich guy saying he’ll be ok weathering the recession. Other parts of the world may not be so fortunate. Where Americans find themselves paying a bit more for some staple, less developed nations may face severe shortages — which can have their own cascading effects.
None of this is a call for some giant global supply chain plan. It is a call for study. There should be investment into studying supply chains by social science — not just business and economics. Governments should invest in supply chain intelligence. This will be useful in its own right by providing finer grained picture of economic activity as well as detecting potential illegal activity (there are a host of other supply chain concerns, as evidenced by the Solar Winds hack). For the broader issues of global economic health and stability, supply chain intelligence will enable clear decision-making. If new regulations or investments are needed to ensure supply chain resilience, they should be grounded in serious analysis — not short-term panic or general impressions.
Originally published at https://aaronmannes.com on May 7, 2021.
