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 three 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 – focusing what to do about energy and labor shortages.
Part 3: What to do about the global supply chain mess is below.
Where we left off in Part 2
Let’s recap things: 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.
Catastrophe or challenge? The latter I think
While there is no doubt that the “shortages” situation is huge and very damaging, I have begun to see the situation quite differently from what I mostly have been reading. The old world of stability and predictability has ended. The new world of instability and unpredictability is here. It’s coming was inevitable. Hard lesson.
We have a real mess on our hands at the moment but there are some quite promising signs appearing that suggest the situation is being dealt with effectively. Rather than a “catastrophe”, the COVID black swan has been the essential and valuable world-changer. What we really have today is a set of very great challenges as we move ourselves into a new world.
As ancient Chinese general and military strategist Sun Tzu reputedly observed, “In the midst of chaos, there is also opportunity” and “Opportunities multiply as they are seized”. We certainly have chaos so we must also have opportunity. The challenge then is to survive and at the same time identify and take advantage of the associated opportunities. Sun Tzu says so.
A bit tricky to actually pull off but there are so many creative and farsighted leaders around that this is certainly doable. The difference is your chosen context for moving ahead: dealing with catastrophe, or taking advantage of opportunity?
What to do about “shortages of everything”?
Shortages of everything are really a huge sign that the past structures and practices have failed and that a new way is required. Pretty nasty “sign” but one so essential to moving forward productively. Nothing less than COVID could have motivated the changes that are beginning to take place.
This is truly great news!
Global supply chains today are so tightly-linked and location-diverse that almost everything is being disrupted to some degree by any number of malfunctions in the various supply chains. Tight integration worked beautifully in the good old days of stability and predictability but, in today’s greatly unstable and unpredictable times, not so much. Probably a major understatement, yes?
Where to begin?
As Walt Kelly’s great philosopher Pogo character once observed “We have met the enemy, and he is us”. “We”, as defined in the grand scheme of things, caused the supply chain mess – intentionally. Not the mess outcome itself but just the conditions that made the current mess outcome inevitable.
Supply chain evolution has been carefully planned and executed. When it worked, it worked very well. It generated huge cost savings and huge business profits. Just as it was supposed to do.
So what went wrong? COVID supplied the answer. Supply chain design and operation was based on the assumption that the world would remain largely stable and predictable. Enough so that minor corrections and adjustments could be made without causing any great disturbances. Nobody told COVID that this was how things were supposed to be, forever or longer.
Unfortunately, the beautiful theories and designs based on a forever stable and predictable world simply failed – spectacularly – in the new COVID-disrupted world. Stable and predictable are gone, probably forever.
The result was our current supply chain mess with its symptomatic shortages nearly everywhere.
The cause was certainly “us” but the intentions were consistent in a large measure with the world as it was. We ignore here the Strauss-Howe turnings cycle, which were, at least in hindsight, quite predictable in terms of high-level, long-term, repetitive happenings.
Supply-chain-driven shortages then are simply a (nasty) message that our world has changed so greatly that current designs and operations no longer work. Change happens, especially when forcefully introduced by the flapping of black swan wings. These changes were unforeseeable – a core definition of a black swan situation or event.
Today’s supply chains are tightly integrated and inherently fragile
They break when stressed by a COVID-scale situation. Unavoidably. Unforeseeably. You can’t plan for these without a fully-functioning crystal ball.
Complex systems that are tightly integrated and interdependent are inherently fragile. They are typically the result of some kind of optimization, such as just-in-time inventory cost minimization. The optimization that makes them cost-effective also removes the redundancies that make them resilient. Things can fall apart quickly when some unforeseen event occurs.
Stability itself isn’t necessarily destabilizing, but as Hyman Minsky’s Financial Instability Hypothesis explains, long term stability breeds instability and diminishes resilience in economic markets. And probably in almost any complex system.
Long-term detail stability sets the stage for systemic instability if the essential background stability disappears. People and organizations behave differently when stability rules. They tend to pursue approaches that work only in a stable context, based on the usually implicit belief that stability will persist forever.
So, today’s supply chain mess was largely inevitable. It was a stack of cards just waiting for a strong wind or other disturbance to come along. Which it did.
Okay, so what do we do now?
Fixing the supply chain mess will take a long time and beaucoup bucks
There are no quick or cheap fixes available, except in terms of duct tape patches to buy some time. The real danger that I see in all of this is that too many will regard the quick-cheap duct tape fixes as good-enough and will go no further.
Major system redesign is what is ultimately required.
Moreover, this essential redesign almost certainly holds a multitude of opportunities for the agile, creative, and visionary. This seems especially true if instability and unpredictability remain with us for an extended period.
Rob Bailey writing in Inbound Logistics identifies one aspect of the solution: “Fixing Our Broken Supply Chain”:
“Supply chains are long overdue for a complete overhaul. This was made abundantly clear amid the COVID-19 pandemic. The recent fracturing in the flow of products has shed light on a broken system’s vulnerabilities. Clearly, transparency and efficiency are achievable only when we have automation tools in place to maximize intercompany data. Only then will we see the resiliency required to navigate fluctuating market conditions. So, what exactly is the problem?”
“Supply chains are plagued by digital silos connected by manual processes, such as emails, spreadsheets, and one-off file transmissions. As companies attempt to streamline their supply chains in new, ever-changing market environments, the COVID-19 crisis has highlighted these gaps. Although we saw this impact in essential sectors first, such as medical equipment and food, the COVID-19 crisis will have long-term implications across supply chains everywhere.”
Same story and conclusion from another source: “The pandemic highlighted major issues within the supply chain system: Manual processes created data silos, lack of automation led to lack of transparency in inventory, and multiple sources of data from different systems left a large chasm for error.”
Integrating systems across many supply chains seems like a major, long-term undertaking. It may well be a worthwhile ultimate goal but what about today and the near-future?
SupplyChainBrain affirms this vital prioritization:
“Years of building supply chains with efficiency and cost as primary drivers resulted in significant gains in growth and profitability. However, the resulting lack of operational flexibility and resiliency led to an inability to handle catastrophic disruption, posing an existential threat to many companies. Organizations now have the imperative to restore broken operations in the near term, while rethinking and redesigning what the supply chain can handle in future [emphasis added].”
Elements of a long-term supply chain system redesign
As you might expect, there are many ideas out there about how to go about a long-term supply chain fix. After a bunch of reading on this topic, I have come away with a few core elements:
1. Automate and integrate intercompany data flows
Despite decades of information system investment and integration, many data silos still exist. It took COVID to make them, or their consequent problems, visible. Although it is clear that data needs to flow through the supply chain quickly and accurately, most companies still have multiple, redundant data items between their systems. This holds for intercompany data flows as well.
The redesigned architecture must integrate and harmonize internal data as well as importing vital distribution partner data such as SKU identifiers and units of measure. IT consultants are very happy; big surprise.
2. Shorten and localize your supply chain flow
Many global companies source, produce, and distribute products in the lowest-cost locations around the world, however far away those distances may be. “For example, a dress from Zara starts in Europe where the material is sourced. It then travels to Egypt to spin the fibers into yarn. From Egypt it goes to China to weave the yarn into fabric. It then goes to Spain to dye the fabric, Morocco to cut and sew the fabric into a dress, back to Spain to be packaged, and then finally lands in the UK to be sold”. Just-in-time, of course. Cost-effectively and minimal, if any, inventory along the way. Lots of places for supply chains like this to get hit and damaged.
3. Build safety stocks of essential materials and products
Bet you didn’t think of this one. Kind of an old-fashioned idea from days gone by. Safety stocks cost a bunch but they are worth it today. Forbes addresses this and a number of other points: “Your Supply Chain Doesn’t Have To Be This Broken”:
“Then there’s Toyota. The Japanese automaker, which is widely credited with perfecting just-in-time, has been the least affected by semiconductor shortages because it has encouraged suppliers to set up operations just outside its assembly plants. After previous supply chain disruptions, top management also revised its lean inventory thinking so that Toyota now carries up to a four-month supply of critical components, such as computer chips [emphasis added]. While competitors have been forced to idle production because they can’t get semiconductors, Toyota keeps motoring ahead.”
4. Diversify your sourcing
Having just one or two suppliers for any critical item gets you great pricing because volumes are so concentrated but it creates huge risks when things go bad. Which they never do, of course.
When I was managing purchasing for a very large natural gas transmission company, there was a pretty firm rule that nothing major could have any fewer than 4-7 sources. We intentionally spread the business around despite higher costs in some cases. Here, the driver was the risk of shutting down huge construction projects if something vital was delivered late for any reason. Plus, my nether parts were usually on the line.
5. Identify your primary points of supply chain vulnerability
This one should probably be top-of-the-list. Apart from fixing some screaming needs as quickly as possible, developing plans for next steps might best be based on a clear understanding of supply chain vulnerabilities. Some of these will be obvious but many will not.
Identifying and prioritizing vulnerabilities is likely to be neither simple nor quick. Many supply chains are quite complex and figuring out where vulnerabilities are located and how important they are to the business resilience will require much analysis and verification. Starting this process yesterday is good.
What about competition? Who goes resilient first?
Just-in-time supply chains are virtually a requirement today to stay competitive. Price (and cost) drives almost everything. Stepping back to a more resilient supply chain adds costs, making the more resilient less competitive in many cases.
This is a major management dilemma. In practice, you really can’t step back toward resilience much faster than your primary competitors.
The “good news” here is that dealing with supply chain problems is itself quite costly, costs that must be priced in going forward. Prices everywhere are going up almost inevitably. The only flexibility for an individual business seems to be in the manner in which it addresses supply chain challenges. You can spend heavily to do quick-fixes that provide some relief and breathing room or you can attempt to balance quick-fixes with small steps that build long-term resilience.
Building supply chain resilience – gradually
Given that vital quick-fixes have priority, the resilience-directed effort will have to select its targets and internal priorities carefully. What might be done with minimal cost and reasonable timeframes? Here are some ideas:
- Source diversification. This aims at highly-concentrated sourcing situations – with maybe just two or three primary suppliers. You might want to develop at least a half-dozen primary sources wherever feasible, sources that are geographically diverse. Some should be local but not all.
- Localization of sources. Local suppliers are often more costly than those in distant but low-cost locations. The idea here might be to add local sources gradually into the overall mix and to help your local sources reduce costs.
- Agile sourcing. This probably means more short-term or on-demand contracting. Inflexible long-term contracts will have to be replaced with volume that depends on supply performance and that also have the ability to adjust contract volumes quickly when supplier deliveries falter.
- Early warning systems. There is nothing worse than a surprise shortage or delivery failure. This suggests setting up simple systems with each primary supplier that flag emerging supplier problems. Not easy to do of course, and probably different for each supplier, but the enhanced intercompany communication and deeper system knowledge gained may turn out to be invaluable.
- Greater supply chain segmenting. Long supply chains invite problems. The Zara dress manufacturing example above seems like a poster-child here.
Building adequate supply chain resilience without damaging vital efficiencies will be a major challenge for many businesses over the next few years. Most important is to begin this process now and not believe that quick fixes alone will serve adequately over the longer term.
Up Next: Is the Back-to-the-Office Push a Big Mistake?
This seems to be a huge conflict between employers and (remote) employees. Workers have changed greatly and many employers are not responding effectively or quickly. Which side will prevail?
Late summer data showed around 10 million unfilled job openings and over 4 million workers quitting their jobs. This is not even close to normal. What is going on?
This turn out to be one of the most important stories of today.
Shortages of everything is being reported so often as a catastrophe or worse. We may well be doomed. But what if this is just a symptom of massive changes underway that are accelerated by the COVID black swan? Changes that were inevitable in our way-too-brittle world. If so, this shifts our management context to one of challenge and opportunity. Lots of struggle ahead short-term but the extended outlook seems very positive and full of opportunities.
ZeroHedge focuses on the transportation aspect of the supply chain mess in: “’There’s No Simple Fix’: Maritime Analyst Breaks Down What Supply Chain Hell Means For Shipping Stocks”
“There are supply chain bottlenecks almost everywhere we look! This ranges from a shortage of available ships to log-jams at the nation’s top ports, to insufficient storage and warehouse space, missing or broken truck chassis, rail line delays, and shortages of truck drivers.”
“Despite what politicians or other talking heads like Jamie Dimon might tell you, there’s no simple fix to this situation. This has been a long-time coming, primarily due to a decade of underinvestment and delayed port upgrades, and the COVID-19 disruption was simply the straw that broke the camel’s back.”
“We have a nationwide shortage of truck drivers which has been a slowly developing problem for the past 4-5 years. This didn’t happen overnight, but nobody cared about this stuff until a few months ago. This is a tough career field, but it can be financially rewarding and allow younger drivers with only a high school level education to become financially independent.”
“Unfortunately the benefits haven’t been well explained and with all the hype around ‘automated trucks’ (which are likely decades, or at least many years, away from being approved), it’s not surprising that there hasn’t been enough new recruits over the past years.”
Kim Moody in the UK Guardian writes about the just-in-time supply chains’ role in the crisis: “Why it’s high time to move on from ‘just-in-time’ supply chains”:
“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.”
“Supply chain managers and logistics experts are aware of all the potential problems, and have been debating the trade-off between “risk” versus “resilience” – the latter being the ability to minimise or quickly recover from a disruption – for the past decade or more. Low just-in-time inventories increase the risks of shortages when a crisis bites. “Resilience”, however, means bigger stockpiles, more workers, multiple suppliers and higher costs. This creates a dilemma. Competition makes resilience itself risky for individual companies. Who wants to buy from the higher-priced laggard? Yet so long as profitability is the driving force, national efforts to turn inward or “take back control” – ironically, often in order to create an imagined resilience, as with Brexit – simply create more disruptions, broken supply chains and higher prices as businesses seek to recover losses. The regime of cheap consumer goods becomes more and more difficult to sustain.”
The Boston Consulting Group has a quite detailed prescription for increasing resilience: “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.”
“And resilience translates into value, as our analysis shows. We studied the performance of approximately 1,800 US companies from 1995 to 2020, assessing their resilience by measuring the relative total shareholder return (TSR) of each company as compared with the average of its industry during crisis quarters—quarters in which that industry’s TSR saw a peak decline of at least 15 percentage points from the start of the quarter.”