“The whole process of nature is an integrated process of immense complexity, and it’s really impossible to tell whether anything that happens in it is good or bad.”— Kurt Vonnegut
“There are more things … likely to frighten us than there are to crush us; we suffer more often in imagination than in reality.”— Seneca
“It is likely that some troubles will befall us; but it is not a present fact. How often has the unexpected happened! How often has the expected never come to pass! And even though it is ordained to be, what does it avail to run out to meet your suffering? You will suffer soon enough, when it arrives; so look forward meanwhile to better things. What shall you gain by doing this? Time. There will be many happenings meanwhile which will serve to postpone, or end, or pass on to another person, the trials which are near or even in your very presence. A fire has opened the way to flight. Men have been let down softly by a catastrophe. Sometimes the sword has been checked even at the victim’s throat. Men have survived their own executioners. Even bad fortune is fickle. Perhaps it will come, perhaps not; in the meantime it is not. So look forward to better things.”— Seneca
“Mark Twain’s “Worry Table”:— Unknown
On studying his chronic fears this man found they fell into five fairly distinct classifications:
1. Worries about disasters which, as later events proved, never happened. About 40% of my anxieties.
2. Worries about decisions I had made in the past, decisions about which I could now of course do nothing. About 30% of my anxieties.
3. Worries about possible sickness and a possible nervous breakdown, neither of which materialized. About 12% of my worries.
4. Worries about my children and my friends, worries arising from the fact I forgot these people have an ordinary amount of common sense. About 10% of my worries.
5. Worries that have a real foundation. Possibly 8% of the total.
What, of this man, is the first step in the conquest of anxiety? It is to limit his worrying to the few perils in his fifth group. This simple act will eliminate 92% of his fears. Or, to figure the matter differently, it will leave him free from worry 92% of the time.”
Note: This post is really a “thinking out loud” piece as I am trying to make some sense of what is going on for my own use. Time to worry, or maybe not?
What I have been reading lately goes all over the map. What to believe, if anything? I was going to hold off on writing this post until my understanding could be greatly improved but things just seem to be getting murkier by the day. Perhaps you are feeling somewhat the same way. In any case, here is where I have come out so far after much struggling through the fog and confusion.
This lengthy post has been broken into two parts:
Part 1: A look at what seems to be happening with “shortages of everything”, and why;
Part 2: A first attempt to figure out what we might do in this whatever-is-happening situation.
Part 1 follows below. Part 2, coming next week.
Much of the current shortages hysteria appears to be hype but there are some shortages that are clearly real. Many of the latter are supply-chain related. Supply chain struggles can affect nearly everything, and seem to be doing just that.
Shortages – real ones – are replacing COVID consequences as a major feature of our increasingly-vaxxed world. Your planning efforts surely caught this latest development well ahead of time, yes? So, you don’t suffer from any significant shortages as a result?
From my reading, such foresighted folks are in a seriously small minority. The rest of us got caught yet again by a foreseeable (so not a black swan) but surprise (and highly improbable) situation – that is now called a “grey swan”.
This means that huge numbers of businesses and organizations globally are going to be dealing with a fast-changing shortages environment for an uncertain but probably lengthy period. A shortages world is now upon us.
Why so many major shortages now?
COVID clearly had something to do with the current situation. Many producers, distributors, and retailers were greatly and adversely affected by lockdowns, distancing, workplace changes, and similar COVID impacts. Worldwide.
Such a huge disruption takes a while to overcome and recover. It really doesn’t matter what the causes are, although there are so many ideas about causes from which to choose. The bottom line is that we simply have to deal as best we can with major, and probably continuing, shortages whatever the cause(s).
Maybe COVID just broke an already over-stressed supply chain network. It was going to break anyway so perhaps COVID was the last straw. It really doesn’t matter.
Our most productive starting point for managing through this unfolding and catastrophic mess is to tackle first what can be tackled. Probably good to just skip over the disruptive COVID-vaxx mandates situation since there doesn’t seem to be a whole lot that most of us can do about it.
There are three areas of major shortage that seem to be worth addressing here (there are certainly many books being written today about the full story):
- Electricity (power) shortages
- Worker shortages
- Supply-chain driven shortages
If these three were all we had to deal with, nearly all of us would still have our hands more than full.
1. Shortages of electricity
Electricity is so central to, well, everything today that it should be the one thing that we will never be short. After all, we have huge government agencies and power suppliers worldwide spending trillions to make sure that such shortages never ever happen. And they almost never do, except short-term and locally – but only in a stable, predictable world. Kind of like the old pre-2020, non-COVID, old normal.
Everybody just knew for sure that a stable world was going to be with us mostly forever. Thinking about an unstable period coming along was simply unthinkable. And probably way too expensive even to contemplate. As noted in a recent post, lengthy unstable periods hardly ever occur – except on a roughly 80-year cycle, at least in the U.S.
Apart from this quite solidly demonstrated underlying long-term cyclicality, it is also possible to pin the blame on nasty […fill in the blank…] somebodies who messed up hugely. As an example, which seems valid in its particular context, we have Leonard Hyman and William Tilles of OilPrice.com arguing that “The Electricity Crisis Was Not Caused By A “Perfect Storm”:
“> From hydropower failures in South America to natural gas shortages in Europe, and coal prices soaring in Asia, the global electricity crisis has clearly gone global
“> While plenty of observers are willing to blame this on a ‘perfect storm’ of events, the truth is electricity providers were simply not prepared when they should have been
“> As a result of this crisis, consumers are likely to disassociate themselves from unreliable and profit-chasing producers as they search for resilience”
“Recent news from the global electricity sector looks grim. South Americans, heavily dependent on hydroelectricity, face drought-induced scarcity. Hard to believe in a continent laced by three enormous river systems. The alternatives for South American electricity users are an increased reliance on fossil fuels or turning off the lights (conservation). And unlike relatively inexpensive hydroelectricity, generating electricity with fossil fuels (apart from the ecological consequences) incurs fuel expense, which raises prices.”
“These and similar problems are not accidents and do not result from one-off difficulties or calamities. Forget about the perfect storm excuse. The problems arose because electric companies chose to defer capital and maintenance expenses, skimped on adequate fuel reserves, and focused on cost efficiencies. Customers would have been better served had they focused on hardening grid infrastructure and preserving continuous service against an increasingly hostile climate. Excessive focus on creating shareholder value can mean cutting corners to achieve savings. But the implied hope (and whether hope is an adequate basis for corporate strategy is another question) is that nothing untoward happens as a result. It’s like building a house of cards outside assuming the wind will never blow. It was in this vein that electric utilities adopted what amounts to a just-in-time supply system mentality with respect to electricity.”
“And there is another point to be emphasized. A well-functioning just-in-time inventory management system is a thing of beauty, efficiency, and cost minimization. But because of the extreme interdependency, one factory relies on the output of another, often thousands of miles away, any break in this carefully choreographed manufacturing process results in chaos and dysfunction. This corporate mentality has resulted in electricity systems that are now relatively low-cost but increasingly fragile.”
So, the underlying story is one of fragility and lack of resilience?
Nasty somebodies of some kind are certainly a convenient blame target but the story here, at least to me, goes much deeper. Much, much deeper.
Resilience. Fragility. In several posts, I have been beating this critter pretty much to death: see here, here, and here. It is in fact the fundamental story of our recent times, and likely for a good while ahead.
You have probably already figured out that electricity shortages are yet another manifestation of supply chain failures. Power purchasers who have locked themselves into the admittedly-rigid, fragile electricity supply chain structure simply made a bad bet, or perhaps had no other options.
The “why” here seems to be the common tendency among major power suppliers and their governments to avoid spending any more than they can manage and to assume that the resulting rigid power supply structure will hang together indefinitely. Groupthink at work?
Fixing this kind of problem will be very costly and will take decades. Meanwhile, power shortages and disruptions seem to be part of the near-term business environment. Part 2 of this story will look at some interim fixes and patches.
2. Shortages of workers
In the midst of widespread cries about the earth’s overpopulation, we are seeing global worker shortages. There are only about 8 billion people around, with maybe 6 billion adult potential workers, so worker shortages should be expected?
Clearly, something else has to be going on. Something very big and worldwide.
And we had, in August 2021, about 4.3 million U.S. workers quitting their jobs. Almost 3% of the total workforce. What could this possibly mean?
The St. Louis Fed’s Bureau of Labor Statistics (JOLTS) quits rate is a measure of confidence among workers. It indicates that workers feel empowered to chase after higher wages and better and safer working conditions, better schedules, and the like, perhaps in a different industry.
It’s a sign of very strong demand for labor and aggressive hiring practices by companies to find labor, and a sign that they’re hiring workers away from other companies. When those workers quit to change jobs, they count as “quits.”
Note however that the quits rate has been on a serious uptrend since the 2008 financial unpleasantness, as the chart below shows. This may well be good news since you often have to quit a job to be free to hunt for a new, better one.
It may also reflect a major restructuring of the workforce – a potentially positive change. COVID dislocations have given many workers the opportunity to see what new work and workplace arrangements might offer. See my post on this.
Michael Snyder in his blog writes about “What Is Causing the Global People Shortage?”:
“But this isn’t just a U.S. phenomenon. What many Americans don’t realize is that there is a shortage of labor all over the globe at this moment…”
“Some 69% of employers worldwide are having trouble finding the people they need, with countries like India, Romania and Singapore reporting a particularly difficult time hiring. The poll results, which include data from over 45,000 employers from 43 countries and territories, underscores just how desperate companies are getting. While half of them are dangling monetary incentives, 20% are offering non-financial benefits like extra vacation days or, yes, the ability to do (certain) drugs in the employee’s free time without worrying about repercussions.”
“Did you ever think that we would see the day when India was complaining about a labor shortage? I just looked it up, and Google says that India has 1.366 billion people. How in the world can they have a labor shortage?”
What all the countries do have in common right now is COVID and its near-term consequences. Governments almost everywhere are locking down entire countries in a so far unsuccessful effort to eliminate COVID. Now we have vaxx mandates to contend with and to further reduce the available worker population.
The impact of COVID-related actions and population responses has to be a major factor in worker shortages. People have a really inconvenient habit of wanting to eat regularly among other needs. This fact-of-life pretty much ties economics to population. You don’t build businesses to serve people who aren’t there.
This means that the worker-economy linkage is always fairly tight. Depressions and booms mess with this underlying linkage in short-term bursts but overall the rough balance remains. So …
Is the underlying problem too many workers who don’t want to work?
When a COVID hits the fan and puts millions (or maybe billions?) of workers on the street (but fed temporarily by generous money-printing supplements from governments everywhere), you sure are going to have a huge worker shortage. For a while at least.
Workers are still around but their availability is being scrambled by financial supports, workplace regulations, plant closures or reductions – due to reported new COVID outbreaks. Almost no organizations have in place the systems and processes needed to cope quickly and effectively with such chaotic situations.
The amazing thing to me is that organizations are coping so well with whatever is going on out there right now. My bet is that the worker shortages, absent some kind of major new pandemic, will soon diminish and even disappear as business-worker ingenuity and resourcefulness get fully rolling.
If worker shortages are mainly COVID-driven, then these shortages should steadily diminish and disappear as COVID gets under control. But what if it doesn’t?
The ability of governments anywhere to respond effectively to anything has been brought into serious question since 2020. This seems to mean that government incompetent meddling and fumbling will be part of our work environment for quite a while ahead. But maybe this has always been so. Maybe nothing has really changed in this respect.
From what I am reading lately, organizations are dealing with great ingenuity and flexibility with worker shortages. Part 2 of this post will look at a few pretty impressive examples of what is being done.
3. Supply chain disruptions and related catastrophes
Blaming much of the current economic mess on various aspects of supply chains has become a very popular sport. A bunch of nasty or incompetent somebodies, upstream or downstream, are causing whatever seems to be happening. Most of us are just being caught and jerked around in the resulting whiplash storms.
You don’t really believe this, do you?
Of course not. The underlying story as always goes much deeper and more broadly. Containers and ships backed up in China And LA are caused by – causes and reasons. What is really going on here?
A whole bunch of things, it appears.
Publisher CFO Dive makes a clear statement about the recent past focus on just-in-time supply chains: “CFOs rethinking cost savings of just-in-time supply chains”:
“CFOs are reexamining just-in-time production after the pandemic left many businesses unable to meet customer demand because of supply shortages. Until some form of equilibrium is once again reached, CFOs should rethink how just-in-time is used, says Debbie Fogel-Monnissen, CFO of the Institute for Supply Management. The pandemic made clear the total cost of the supply chain, which includes safety stock to increase resiliency, is more important than just short-term gains for maximum elimination of inventory. ”
“Companies that don’t have a resilient supply chain, she says, even as the economy recovers, might miss growth opportunities or even suffer permanent damage to brand loyalty if consumers can’t get what they want, when they want it. ‘The pandemic caused rapid changes in demand and supply — a shock to the global supply chain ecosystem that threw the prior equilibrium out of balance’, Fogel-Monnissen says. ‘Just-in-time by its nature requires some predictability and the pandemic interrupted that cycle [emphasis added].’”
Requires “some predictability”? Who would have guessed? On the other hand, who would have guessed about black swan (unforeseeable) COVID?
The Boston Consulting Group goes right to our resilience point in its recent “Real-World Supply Chain Resilience”:
“The COVID-19 crisis has been a wake-up call for supply chain managers. For years, companies have focused on eliminating redundancy in sourcing to reduce fixed costs and promote efficiency. Greater efficiency, however, came at the expense of diminished flexibility and effectiveness—a tradeoff the pandemic-induced supply chain disruptions have made painfully clear.”
“Now, leading companies are seeking to avoid that tradeoff, using innovative capabilities such as risk-focused analytics engines, simulation, and end-to-end transparency to design supply chains that are both cost effective and resilient. It’s a difficult balance to achieve, one that requires a thoughtful analysis of scenarios and economics to ensure that additional costs are rewarded with reduced risk. But the benefits of a resilient supply chain can be enormous—adding significant value in normal environments as well as during major disruptions.”
“Resilience—the capacity to absorb stress, recover critical functionality, and thrive in altered circumstances—has become a key element in a company’s overall health. Resilient companies enjoy better outcomes than their peers in three ways: the immediate impact of an external shock on their performance can be lower, the speed of their recovery can be faster, and the extent of their recovery can be higher.”
Just-in-time supply chains are inherently brittle and suited only to stable, predictable times. COVID was a hard way – and perhaps the only way – to learn this vital lesson.
Brittle supply chains break under relatively small stresses. COVID was huge stress so breaks were inevitable. How many businesses planned for such an occurrence? Not a bunch it seems. So, maybe the supply chain problem is really us.
My take on the shortages-of-everything situation thus far:
- Our pre-2020 world was tightly integrated and very brittle – designed largely for maximum efficiency in a predictable, stable environment.
- COVID killed predictability and stability – perhaps forever, leaving us with a very different world that requires agility, adaptability, and resilience.
- This dramatic change was inevitable in hindsight – timing and nature only being uncertain; Our job going forward is to redesign almost everything for this new world.
This post has reached its useful limit of length. The story will be continued in the next post – Part 2 – that looks at what is being done to cope with and even benefit from this time of shortages.
Almost every day now we read about something or other being “unavailable” or “in short supply”. Supply chains everywhere are crashing, leading to major shortages. Many kinds of workers are no longer looking for work despite millions of open jobs. COVID has largely vanished so we are told so shortages must be due to “something else”. What “something”? How do we manage in this terrible mess? A time to worry? Maybe not. This may well be a vitally important lesson, learned the very hard way.
British publisher The Guardian recently offered a predictable but useful overview of just how important and ubiquitous inflexible supply chains are today: “Why it’s high time to move on from ‘just-in-time’ supply chains”:
“A price shock on the global natural gas markets brings down several small energy providers, leaving customers without heating and facing rising fuel prices. A fire knocks out the huge cable sending electricity from France to the UK, threatening homes with darkness and increasing power bills. The container ship Ever Given, bound for Felixstowe from Malaysia, gets stuck in the Suez canal for six days, backing up shipping traffic at an estimated cost of £730m and delaying that electronic gadget you ordered from Amazon Prime.”
“What these incidents have in common is the speed at which a single event can disrupt the supply chains that crisscross the world . Almost every time you order something online, it is transported via a network of factories, rails, roads, ships, warehouses and delivery drivers that together form the global economy’s circulatory system. This tightly calibrated infrastructure is designed for perpetual motion. Once one link breaks or stalls, the impact on today’s just-in-time supply chains can be felt immediately.”
“Just-in-time was the idea of Taiichi Ohno, an engineer at Toyota in the 1950s, who was inspired by the work of Henry Ford. Ohno defined it as a way of eliminating “waste” – by which he meant stockpiles, extra workers and unused minutes – in the production and movement of goods. Instead of wasting time, labour and money by storing parts along the assembly line or warehousing goods (as manufacturers had done for decades), Ohno’s idea was that suppliers could instead deliver these just as they were needed. In turn this would increase profits, reducing the amount that businesses spent on maintaining inventories and paying for additional labour.”
“After its introduction to the west in the 1980s, the just-in-time model gradually moved out of the car plant and into every type of goods and service production. It forced its way down every supply chain until each supplier, big or small, was expected to deliver products promptly to the next buyer. This increased competition between companies to deliver goods quickly, which meant firms reduced their costs (usually the price of labour). Just-in-time delivery thus contributed to the growth of low-wage, often more precarious jobs, with workers recruited only when they would be needed. This constant squeezing of workers has fuelled our 24/7 work culture and the mental health problems that go with it, while attempts to cut the price of labour have added to the growth of economic inequality, regardless of who sits in government.”
VoxEU, the “policy portal” for Center for Economic Policy Research (CEPR) in the EU, described the supply chain situation in a somewhat more global context: “Just-in-time supply chains after the Covid-19 crisis”:
“Global supply chains have received significant attention since the early days of the Covid-19 crisis (e.g. Baldwin and Evenett 2020). When China implemented the first lockdown anywhere in the world, the supply shock immediately hit European and American companies. The staggered shutdown and re-opening of manufacturing hubs around the world has multiplied supply chain issues in what Baldwin and Freeman (2020) have referred to as `supply chain contagion’. The general public turned their eyes to the global supply chain problem when it became apparent that medical equipment was affected, too.”
“Even before the Covid-19 crisis started, however, the business model of the highly coordinated and efficient international supply networks, which greatly enhanced the speed and vigour with which the supply shock hit, had come under pressure. An increasingly uncertain political environment at least since the Great Recession, as well as the looming effects of climate change, have prompted concerns about robustness, resilience and indeed about the very structure of such global supply chains.”
VoxEU also addressed a likely piece of the solution: “Decoupling from global value chains”:
“The Covid-19 pandemic has dramatically affected international trade (Friedt 2021, Liu et al. 2021). In particular, it has caused severe and widespread shortages of intermediate inputs traded along global value chains (GVCs) (Baldwin and Freeman 2020). This shock hits the world economy in a phase of stagnating growth in trade and GVCs participation, as well as a widespread political backlash against globalisation, culminating in Brexit and the US-China trade war (Antràs 2020). The Covid-19 pandemic adds further momentum to this de-globalisation trend by providing a new rationale for protectionism (Irwin 2020). As firms around the world are lacking inputs from abroad, it may seem natural to ask: Would countries be better off by decoupling from GVCs (and relying on domestic inputs instead) to reduce their exposure to foreign shocks?”
“Decoupling or ‘reshoring’ of GVCs ranks high on the policy agenda. It is by far not only populist politicians who have advocated such policies (e.g. White House 2020). Considering options for reshoring and increasing the resilience of supply chains are also key priorities of the Biden administration and of the European Parliament (White House 2021, EU 2021). However, making an informed decision on this matter is difficult, as it involves two types of counterfactual analyses. First, one needs to determine whether a given country would really be less exposed to an adverse foreign shock if it had pre-emptively decoupled from GVCs. Second, even if the response is affirmative, one still needs to answer another, frequently neglected question: What would be the direct costs to this country of decoupling from GVCs in the first place? It is only by comparing these costs and benefits that one can evaluate the net welfare effect of decoupling GVCs in the presence of foreign shocks.”