The Perfect Supply Chain Storm: Where We Are and How to Prepare for What's Next
If you’ve happened to be in the Bay Area within the last few months, you will have seen a sight peculiar even for these times: that famous stretch of water traversed by both the Bay and Golden Gate Bridges, littered with idle cargo ships. Ships stretched out onto the horizon in what appeared to be the slowest-moving traffic jam of all time. In April, some “25 container carriers were waiting to enter the Port of Oakland at anchor in San Francisco Bay and in a holding area offshore.” In ports up and down the west coast, as well as around the world, cargo ships are at a standstill, with Los Angeles and Long Beach’s ports alone seeing a 21-ship long queue during the same time period. As Port of Oakland spokesperson Marilyn Sandifur said about the busiest time in the 94-year history of the port: “Whenever you see container ships anchoring out in the bay, know that is unusual.”
So what’s happening? As summer 2021 is in full swing, the number of forecasts of a “perfect storm” in the global supply chain is rivaled only by those declarations of “unprecedented times” in 2020. The two are indubitably linked—Covid has brought the increasingly complex and interconnected nature of the supply chain into focus for millions of people, mostly by thoroughly dismantling it, and exposing its pitfalls. But even this newfound awareness couldn’t necessarily prepare us for this present and near future, in which there are shortages on everything from chlorine to labor, as well as looming threats of theft, counterfeiting, and food safety. As it’s difficult to understand just how all these factors seem to be coalescing at once without some background, let’s start way back in the spring of last year.
As the Washington Post recently, and succinctly, put it, “[t]he interruption of Chinese manufacturing at the pandemic’s outset toppled the first of several dominoes leading to today’s global supply chain pileup. While Chinese factories quickly returned to normal operations, an unexpected increase in American demand for goods during the work-from-home era discombobulated traditional trade patterns. [...] As a result, ocean-spanning supply chains, the distinguishing characteristic of the age of globalization, are failing at multiple points.” No wonder, then, that guides and strategies for supply chain improvement began popping up all over. From the more than 200 of the Fortune Global 500 firms who had a presence in Wuhan, China, to the 98% of companies surveyed by Ernst & Young who found themselves woefully un- or underprepared for the pandemic, absolutely everyone was impacted.
To hopefully counteract some of these global failures, most supply-chain guides offered advice similar or identical to Deloitte’s, which encouraged companies to, among other things: “enhance focus on workforce/labor planning; illuminate the extended supply network; update inventory policy [...]; evaluate alternative outbound logistics and secure capacity; and, conduct global scenario planning.” As we now head into late summer, all these points have proven their validity, as well as their almost-complete unsolvability on the individual company level.
To that end, the Biden administration released an executive order early on in 2021 which marked the beginning of in-depth scrutiny of US, and hence global, supply chains: “Resilient supply chains will revitalize and rebuild domestic manufacturing capacity, maintain America’s competitive edge in research and development, and create well-paying jobs. [...] More resilient supply chains are secure and diverse—facilitating greater domestic production, a range of supply, built-in redundancies, adequate stockpiles, safe and secure digital networks, and a world-class American manufacturing base and workforce.”
But as the Harvard Business Review has pointed out, acknowledging such facts is far easier than creating the conditions that allow for them. Citing the “erosion of the U.S. ‘industrial commons,’” Shih, Huckman, and Wyner track our current supply-chain ills back to the 1970s, when “American manufacturers offshored a significant amount of production in fields such as electronics [...], and this approach expanded dramatically into information technology (IT) and communications equipment in the 1990s and broad swaths of industry in the early 2000s. This offshoring was accompanied by the movement of suppliers who chose to follow their customers abroad, leading to a widespread loss of U.S. jobs in design and production.”
Practically simultaneously, China was opening its “special economic zones” in the 1980s, and, having “almost no indigenous suppliers and [having] to rely on far-flung global supply chains and on logistics specialists who procured materials from around the world,” it took the country some 20 years to “build a local base capable of supplying the vast majority of electronic components, auto parts, chemicals, and drug ingredients needed for domestic manufacturing.” Thus, not only would developing the types of recommended resiliency take possible decades, but this development is also counter to the current and popular practices of “just-in-time replenishment and lean inventories” (a 1986 article title also from the Harvard Business Review asked “What’s your excuse for not using JIT?”). Indeed, the very industry responsible for creating JIT practices is currently being hit the hardest by the same: “Automakers have been crippled by a shortage of computer chips—vital car components produced mostly in Asia. Without enough chips on hand, auto factories from India to the United States to Brazil have been forced to halt assembly lines.” As Willy Shih says, “‘It’s sort of like supply chain run amok. [...] In a race to get to the lowest cost, I have concentrated my risk. We are at the logical conclusion of all that.’”
And when you couple all of those factors, the majority of them preexistent to the pandemic, with the toll that a consumer base with lowest-price expectations has taken on the labor force (consider, for instance, Amazon’s mind-boggling 150% turnover rate for its hourly workers), and then throw on top the extreme weather conditions caused by climate change, all these port backlogs begin to make more sense. Finally, the incredible shift to online consumption during the pandemic--even as many of those consumers became more aware of the supply chain, at least conceptually--has only exacerbated every last one of these prior conditions.
So: a perfect storm indeed! Imports are up, exports are up, and there’s nowhere near enough labor to move either, neither at the docks nor by truck or train (you might remember that 2020 was repeatedly called a “bloodbath” for the US trucking industry, which was already in serious trouble). Citing “lingering concerns about COVID-19, highlighted by a worrying surge in the Delta variant, along with continuing childcare issues, [...] a temporarily strengthened unemployment-insurance safety net [which] has reduced the need to immediately return to work, or given people the chance to be more discriminating before taking up a role, [...] disruptions to immigration and international travel [that] have curbed typical summer job patterns for workers, [and] recent heatwaves,” Gregory Daco, chief US economist at Oxford Economics, said presciently: “It’s going to be a weird summer.”
And that labor shortage only applies to the goods that are actually here! As Dan Mafei, chairman of the Federal Maritime Commission said of current shipping issues: “If this is primarily a supply and demand issue, then, unfortunately, it’s going to continue because the supply is limited and the demand just keeps going up.” Hence the astonishing variety in current global and domestic shortages: a computer-chip shortage affecting everything from cars to “dog-washing technology”; a 22.5% spike in gas prices from last March, due to pandemic-induced OPEC production cuts, the “extreme Texas freeze, which halted a fifth of the country’s oil-refining capacity in its tracks for weeks at a time” as well as the ransomware attack resulting in the shutdown of the US’ largest fuel pipeline; a 40% increase in plastics prices, also due to those “devastating winter storms in Texas”; a lumber shortage, due to lumber mill closures and a “scorching-hot housing market,” which has added “$36,000 to the cost of a new home”; toilet paper, tampon, and diaper shortages, chicken, pork, corn, and chemical shortages, and month-long delays on imported goods. And as more products become the targets of theft and fraud--from alcohol to PPE supplies--and oversight failures in safety regulations further disrupt the already disrupted food supply chains, it seems likely that more and more unforeseen shortages will become the norm rather than a temporary inconvenience.
Short of encouraging everyone to buckle up for the ride, any general advice or concluding sentiment is bound to be either too long- or short-sighted. The uncertainty of how and when manufacturing and shipping sectors of various economies will reopen in light of new virus variants, as well as ongoing extreme weather conditions, make long-term thinking and planning difficult, to say the least. And while the importance of reshoring manufacturing as quickly and sustainably as possible is clear--not only would it strengthen the supply chain’s resilience, if 83% of North American manufacturers who currently say they are likely or extremely likely to reshore were to “bring on just one single-contract domestic supplier, the shift would drive as much as $443 billion in U.S. economic value”--acting accordingly won’t make much immediate difference.
That being said, it’s not impossible to quickly create a far more resilient, reshored supply chain. Shawmut, a Massachusetts-based advanced materials and textiles producer, did just that. Figuring out how they could best respond to the increasing need for and shortage of PPE, the company went from a “standing start to an output rate of 350,000 gowns per month in just over 90 days.” However, unlike other governments such as the UK and Canada which awarded ongoing contracts to PPE producers, Shawmut received no new orders from the Defense Logistics Agency, and stopped production just “140 days after the original award--resulting in layoffs for its workforce and those of other members of its coalition.”
Thus, even a reshored supply chain will face hurdles due to lack of governmental/infrastructural support, “regulators that are unwilling to reconsider bureaucratic processes that often prove too much to overcome,” and “buyers that continue to rely on pursuing the lowest price.” In other words, the opportunity for a full reconsideration of how and why the supply chain functions as it does is here, and shouldn’t be ignored. And with delays projected well into 2022, it seems that we’ll all have some time on our hands to do just that.