Supply chain disruptions have been a major theme of the news cycle throughout 2021. Disruptions have been blamed on various causes, with warnings of “buy now before it gets worse”. But if everyone is “buying now”, isn’t that what’s making it worse? And actually, that has been part of the problem.
The problem began with the toilet paper supply chain. As people started staying home more, the demand for residential toilet paper rose (and the need for commercial toilet paper fell). So it took some time for toilet paper manufacturers to switch production over from commercial paper to residential. And during that time, people panicked because the stock on their local store shelves was disastrously low. This resulted in panic buying and hoarding.
Hoarding resulted in massive quantities of toilet paper being taken out of the supply chain and stored in individual garages resulting in a further shortage. Interestingly, if everyone had stocked up on toilet paper in advance (i.e., when it was readily available), there wouldn’t have been any panic, and the manufacturers could have made the transition to residential paper almost seamlessly.
Why the Supply Chain is So Fragile
Nicolas Taleb’s book, Anti-Fragile, explains that the more complex a system is, the more inherently fragile it is. Although Murphy’s law is often said in jest, there is a grain of truth in the saying, “if anything can go wrong, it will”. And obviously, the more complex the system is the more places for something to go wrong.
In the old days, the supply chain stretched from the farmer’s field to his house and then perhaps to the mill to get his grain ground into flour. If the farmer’s horse came up lame, he could just borrow his neighbor’s horse. Not much could go wrong except for a poor crop due to weather or insects. But then he could still go hunting to feed his family.
The Worldwide Supply Chain
But today, the supply chain stretches around the world and has literally millions of moving parts. Not only are container ships part of the chain, but also trucks, planes, communications, fuel, canals, warehouses, and factories, etc. And those are just a few of the physical components. How about factory workers, ship workers, dock workers, truck drivers, stockboys, and retail merchants?
A typically reliable and resilient supply chain has resulted in a trend toward “just in time inventory management (JIT)” so manufacturers don’t keep excess supplies on hand “just in case” as they did in the “old days”. Instead, they order what they need to arrive just before they need it because it is cheaper than warehousing it yourself. But, this means that any delivery delay can cause a chain reaction, as the delivery delay causes a production delay, which causes another delivery delay, and so on. Thus, we have an inherently fragile system where any little thing can cause it to break.
Amazon
The one major exception to this rule is Amazon which has its computerized warehouses located throughout the country so that it can fulfill its one-day delivery promise. Of course, they still rely on trucks and drivers, but the distributed network of warehouses reduces the reliance on long-distance delivery and has redundancy built-in. Amazon’s model of warehousing supplier’s products means that they aren’t paying for the inventory so they only have storage costs without inventory costs, eliminating the incentive to reduce inventory to cut costs. Quite the contrary, they have an incentive to stock more items so that the consumer will choose Amazon as their “one-stop-shop”.
COVID Breaks the First Link in the Supply Chain
Along comes COVID creating a global supply chain disruption. First, a large portion of the workforce stops working (i.e., reducing production) while simultaneously reducing consumption. At first, this isn’t too much of a problem because inventory in the pipeline continues to flow, albeit slower, since fewer “key” workers are pushing it along. But fewer goods are also entering the pipeline, so before long, fewer goods are leaving the pipeline as well. And as people start consuming again, the flow from the slower pipeline is inadequate, and delays are more frequent.
Recently, a single COVID case in Vietnam disrupted Toyota’s supply chain. A worker tested positive in a factory in Vietnam that produces wiring harnesses for Toyota, and on August 4th, provincial officials suspended work at the auto-parts manufacturer. Toyota was often touted as the model of JIT, so the lack of Vietnamese harnesses forced Toyota to slash its output of cars in September by 40%.
More Disruptions Along the Way
Staffing issues arise due to “key” personnel either being sick or afraid to go to work. So, the remaining workers are overworked and perhaps less experienced, and institutional memory was reduced, so accidents like container ships going sideways blocking the Suez canal happen. This further disrupts (or at least delays) the global supply chain.
Many believe that the generous unemployment benefits of 2020 offered by the Federal Government, in addition to normal State unemployment, benefits had the unintended consequence of keeping people away from work for longer than they would have been without that economic incentive not to work.
On September 21st, 2021, CBS News in Los Angeles aired a story about a record 70 container ships waiting to enter the Port of LA.
In it, they say that 40% of all cargo entering the U.S. enters through that particular port. This is probably due to its proximity to China. CBS implies that the ship “traffic jam” results from a lack of truck drivers due to the virus. But truck drivers familiar with the area say that the problem isn’t a lack of drivers but rather an intentional “work slow down” by dockworkers in preparation for rapidly approaching contract negotiations and perhaps the mandatory vaccination clause contained in the new contract.
Mandatory Vaccinations
Many “key workers” who continued to work through the pandemic, and may have obtained natural immunity, are now being fired because they refuse to get the vaccination. They may be doing it for personal health reasons or because they are standing on health privacy issues. It is interesting to note the number of healthcare workers who are refusing to get the jab.
This will probably further exacerbate the supply chain issues. Some hospitals are being forced to cut services, including at least one that has ceased providing maternity services.
In addition to this workforce reduction, the fact that so many people were initially getting the vaccination created its own logistical problem. Global vaccine transportation itself was dubbed the biggest logistics project since World War II.
BCI Supply Chain Resilience Report
For the last 12 years, the Business Continuity Institute (BCI) has published its BCI Supply Chain Resilience Report report based on how resilient the supply chain was. According to the report, “27.8% of organizations reported more than 20 supply chain disruptions during 2020, up from just 4.8% reporting the same number in 2019.” In response, more companies are now using technology to help analyze and report on supply chain disruptions.
As mentioned above, supply chain disruptions can result from your suppliers’ suppliers (i.e., a tier 2 supplier). For 2020, respondents reported that 40.2% of COVID-related disruptions were due to disruptions in tier 2 and beyond.
Major Supply Chain Disruptions in History
Supply chain disruptions aren’t unique to 2020-21. Back in 1963, the National Council of Physical Distribution Management was created to take advantage of the new computer technology and help give visibility to the emerging field of computerized supply chain management. But way before that, supply disruptions were still a way of life.
Antwerp, Belgium 1585
Antwerp is under siege by Spain, which has blockaded its harbor resulting in the ultimate supply chain disruption. The city has a bread shortage. Smugglers were addressing the problem, but in his “wisdom”, the Mayor of Antwerp felt the smugglers were “profiteering” off the backs of the poor populace. So he capped the price of bread. This had an immediate effect… it eliminated the incentive for smugglers to risk death, so the city starved. But the smugglers probably survived.
The 13 Colonies 1775-1778
The British Empire declared the American colonies to be in a state of rebellion after the First Continental Congress and refused to recognize their Declaration of Independence. The blockade ended with the Treaty of Paris recognizing U.S. independence and ending the war.
Hershey 1999
In 1999, Hershey’s suffered one of the largest supply snafus for a single company. Halloween was rapidly approaching, and Hershey’s IT department was in the process of implementing a new order fulfillment system. Unfortunately, it didn’t go as planned, and more than $100 million dollars worth of Hershey’s Kisses and Jolly Ranchers candies didn’t get to stores in time for Halloween, causing a 10% drop in Hershey stock in a single day.
Sony Playstation II 2004
2021 isn’t the first time that a ship has gotten stuck in the Suez canal. In 2004, an oil tanker got stuck, resulting in a logjam preventing the shipment of the new Sony PS2s from arriving in time for Christmas. Sony resorted to chartering Russian cargo planes and flying in the Playstations. But there were a lot of tears on Christmas morning.
Boeing 2007
In 2007, Boeing launched the production of its twin-engined 787 with a goal of record-setting production times. Unfortunately, quite the opposite happened. Minor supply chain glitches like running out of fasteners held up the first phase of construction. Boeing got so desperate that they actually sent employees to surrounding Home Depots to get more. Eventually, the minor delays escalated into a revised timeline amounting to years.
General Motors 2011
One major cause of supply disruptions is weather events. In 2011 Japan suffered from a major Tsunami. It ended up shutting down production at Japanese factories for several days due to rolling blackouts. Japan was a major supplier of parts for General Motors, and the supply disruption caused GM to have to shut down for several days due to a lack of components.
Europe 2014
Another weather-related disruption occurred in 2014, as the Bardarbunga volcano in Iceland erupted. The resulting ash did not significantly affect Iceland but stopped most Transatlantic flights (since they primarily fly over Iceland). This stranded passengers and air commerce were halted for an entire month.
Soviet Union
Socialist countries with a central planning system are so full of stories of supply chain snafus that it is difficult to choose just one. Raconteur tells this one:
“As recently as the 1980s, it was found that a leading factory wishing to use the chassis of their buses for lorries was unable to get them sent from their own factory of origin except in complete bus form. After years of failing to get decisions from the ministry, they had to accept the complete buses, knock their bodies off with steel balls and install their own lorry bodies instead.”
Plastics 2021
Covid caused an inventory drawdown in the Summer of 2020. Then in August, Hurricane Laura shut down several petrochemical factories in Louisiana and Texas, cutting 10% to 15% of U.S. polyethylene (PE), polypropylene (PP) production. To make matters worse, a significant winter storm struck the Gulf Coast in February, and in March, the Container ship blocked the Suez canal. All these factors combined to drastically reduce plastic production.
Semiconductor Chip Shortage 2020-2021
This shortage resulted from both supply and demand issues. Even though auto production slacked, demand increased during COVID because people were sitting around with nothing to do, so they decided to buy more electronic devices. When car manufacturing picked back up in September, chips were in short supply.
The supply problem is that there is only one company capable of producing the fastest top-tier chips, and that is Taiwan Semiconductor Manufacturing Company. Their chips offer 15-20% higher chip density than their competitors. So their chips are in very high demand. High demand combined with limited supply equals shortage.
Conclusion:
The pandemic has triggered a global supply disruption unlike anything previously seen. Prior disruptions were localized, with perhaps the largest being the Europe flight shutdown in 2014. However, throughout history, there have been blockades due to wars that have resulted in many supply disruptions. But this virus has resulted in worldwide supply disruptions of everything from toilet paper to computer chips. “Everywhere You Look, The Global Supply Chain is a Mess” (WSJ, 3/18/21) PCs, electronics, cars, gaming consoles, appliances, gas, metal, plastics, chemicals, and paint.
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