I have often thought it funny when world events make us all feel as if we have suddenly become experts on topics that until recently we had never even heard of. Over the past two years, for example, I’ve heard people debating the merits of monoclonal antibodies, messenger RNA, herd immunity, etc., as if they were participants in an epidemiology seminar.
At recent holiday dinner tables, the talk seemed to have turned from virology to logistics (which is probably a good sign in itself). For veterans of the toy industry, the term “supply chain” was quite familiar, but for most people it was every bit as mysterious as the “spike protein.”
For the uninitiated, a supply chain is simply the network of companies and organizations that provide goods and services to a given business, making it possible for that business to produce whatever it produces. Most chains have grown much longer over the years, and have more links than you might think.
Back in the days of the robber barons and the great monopolies, conglomerates often sought to control every step of their process from start to finish. They owned the farms and mines and forests where raw materials were obtained, they owned the railroads, the factories and the retail outlets. They bought out their suppliers (and their competitors).
You might expect that model to be more efficient than our current situation, but it is actually the reverse. By breaking the process down into all its component parts, and bidding out each part, a company can produce better products, and deliver them more quickly and less expensively.
Take publishing, for example. A hundred years ago, it was not unusual for a publisher of books or magazines to print its own products, but over the course of time printers and publishers gradually decoupled. By the time I entered the industry in 1976, newspapers were about the only publishers that commonly owned printing presses, for obvious reasons.
As it happened, however, my employer was one of the throwbacks, a publisher of books, magazines and various teaching aids that was housed in the same building as a printing company. I worked in the editorial department upstairs, while the ground floor was mostly devoted to machinery.
It would seem as though there would be advantages to such an arrangement, but it never seemed to work out that way. Every printing company is efficient only to the extent that a given publication fits the presses and other equipment that it has. If a product is the wrong size, color, print run, binding or whatever, then the cost is out of line. Since we didn’t have the option of printing somewhere else, we ended up simply paying too much.
Years later, when I got involved with founding a publishing business myself, one of the things I was careful to avoid was a too-close relationship with a printer, let alone ownership. We deal with a number of printers and constantly evaluate others, based not only on price, but also on quality, turnaround time, flexibility, customer service, etc.
A similar process has happened on the editorial side. We are much more likely to engage freelance writers, artists, photographers, and so forth than we were in the old days. When you add in all the other contractors that every business needs, like tech people, legal services, accountants, and so on, you realize that we have constructed quite an intricate supply chain, and that’s before we entrust our product to the United States Postal Service.
At any rate, you get the point. If the supply chain has become complicated for small businesses like yours and mine, just imagine what it is like for, say, an automobile manufacturer.
On December 5th, The New York Times published a helpful timeline of the events that led to the massive supply chain disruption that has so roiled the world economy. As you would expect, it began with the eruption of COVID 19 in the winter of 2020.
In March that year there was a sudden, dramatic drop in both production and demand, as people everywhere retreated into their bubbles. Under the circumstances that was not surprising, but the slowdown turned out to be much more brief than expected.
Almost immediately, there was an enormous worldwide demand for personal protective equipment (PPE), another term we were previously unfamiliar with, along with household paper products and cleaning supplies. China quickly ramped up production of masks, surgical gowns, and so forth, and began shipping them by the billions to ports across the globe.
Unfortunately, most of the world didn’t have anything to trade back, and shipping containers piled up in hundreds of far-flung locations. The first real malfunction in our system occurred when China ran out of shipping containers.
The next step was the recovery of consumer demand in the U.S. and other developed nations, which increased to full bore as 2020 unfolded. That would be a good thing, except that there was a catch to it. The demand was different than it had been prior to the shutdown.
People were not wanting to spend money on travel, entertainment, or dining out. Those are big industries, and most of the money which would normally be spent on them was instead going to more tangible things that were meant to be used at home. Instead of concert tickets, somebody might buy a new stereo.
That shift from services to goods compounded the shipping problem, as did an increased reliance upon online shopping. Ecommerce had been growing rapidly for years, of course, but really shot up in 2020, meaning that consumers were not participating in the shipping process themselves, leaving more work to be done by other carriers.
It was the U.S. government, though, that threw gasoline on the fire. However necessary all of the bailout spending may have been, it’s not possible to inject trillions of dollars into the economy without some unintended consequences. Demand surged.
U.S. ports were overwhelmed, and cargo ships backed up into the ocean, particularly along our West Coast. The Danish shipping giant Maersk recently reported that on an average day it has 84 stalled vessels, each of which will wait about 18 days to dock.
Once those ships are finally unloaded, all those products have to wait in line to be picked up by land carriers. It’s not so much the shortage of trucks, although there is one, as it is the shortage of truck drivers, which existed pre-COVID but has grown more acute.
People being people, they have responded to the perceived shortages by ordering more of things, and ordering them earlier. We’ve created a vicious circle, and frankly I don’t see how it could not cause inflation.
Being an optimist, I’m hoping that the trend lines will change in a few months. In the meantime, I think we would all be well advised to consider our own chains.
You can e-mail Kevin at email@example.com