Three Reasons Why the Supply Chain Problems Will Persist

Three Reasons Why the Supply Chain Problems Will Persist
Three Reasons Why the Supply Chain Problems Will Persist

The COVID crisis has exposed the vulnerability of the immense global supply chain system. The supply lines run in tightly coupled processes that can be incredibly complex. The system can handle minor disruptions by handing them to multiple players to get goods to market just in time for sale.

However, when the system is hit by monumental disasters like the present COVID crisis, it enters into convulsions with fits of starts and stops or chokepoints of feast and famine. It can take years of assumed stability to recover momentum and rhythm. A gigantic system can move huge amounts of goods, but it can also generate equally monumental problems that tax a divided world’s ability to remedy.

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The Bigness Factor

The gigantic seamless system has evolved into a rigid, clunky and inefficient machine that does not adapt well to apocalyptical events. Indeed, the supply chain crisis was already experiencing problems before the present situation. Three problems are not going away soon.

The first problem is that the supply chain is very big and long, with a tendency to expand. Gigantism frequently cannot operate outside the box. When systems get too big, they lose the agility of smaller, more human manners of working.

The present supply chain must operate inside the box. In this case, the box-like shipping container serves as the basic cargo unit. The largest ships carry as many as 20,000 containers, enough to hold the volume of the Empire State Building. East Coast ports cannot handle these biggest ships because they lack enough facilities. Bigness further restricts the supply chains since high-volume ships can only be handled by some 15 congested American ports.

The bigness factor complicates the growing problem of building new or expanding old ports. The process is now hampered by reams of environmental regulations and red tape. Cities lack the area and resources needed to support such long-term projects.

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The Bullwhip Effect and Getting Containers Where They Are Needed

The second major problem is the increasing container pileup. Each container changes hands some twenty times between manufacturer and final market. Each stop must be supported with transport, storage and infrastructure facilities. Any significant disruption will not only stop the individual container but throw the whole system out of sync. A single-day delay at one end can have a “bullwhip” effect of ten days at the other end as handoffs are missed and delivery windows extended.

The gigantism of the container system presents other problems in times of crisis. Chinese goods pour into Western ports depositing mountains of shipping containers. The most likely commodity shipped back to China from the West will be air. Millions of empty containers must be transported back, wasting shipping capacity because the present system is gearing to maximize costs, not efficiency. Supply chain disruptions put these containers in all the wrong places at the wrong times.

In addition, most imported containers are deposited at large shipping ports close to population centers where the goods are needed and distributed. Any containers needed for export must find their way to manufacturing locations usually found in more rural areas where land, labor and infrastructure costs are cheaper. The present crisis makes this disconnect yet worse.

Finally, the American container distribution system is more complex because of the Jones Act of 1920, which does not allow foreign-flagged, crewed and owned ships to transport goods between American cities. Since American shipping has long been replaced by cheaper foreign shipping firms, the containers of foreign goods that usually could travel on the nation’s river systems now clog the highways by massive trucking fleets.

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Complex Financial Processes Intermingled

A final problem with the supply chain crisis is its interlinking with other processes. The choreography of coordinating physical shipments is mirrored by financial processes accompanying each container as it steams toward its destination. Some commodity shipments often change ownership while traveling as speculators determine the final landing price of fungible goods, and dealers then take physical possession.

Other goods follow elaborate business models that need regularity and stability. In an interview on Liberty Law Talk, logistics expert Richard Rentz relates how giant retailers like Walmart can use the logistics system to sell at a loss and still make money. The retailers receive goods on their store floors and only pay for them when consumers buy them. The payment terms are negotiated at 90 to 120-day cycles after the sale. In the meantime, the companies take the interest-free sales money and invest it, often securing a 7-9 percent return. The forced loan compensates for the loss sustained on the store floor.

These and other complex practices work best when logistic systems are in sync. It also underscores how un-level the playing field can be when such huge processes can be put into practice at the expense of lesser competitors.

Beyond Logistics

These three supply chain disruptions are not going away soon. The present crisis has called the whole system into question as the business world is considering how to shorten supply lines and bring back industry to America where things will be more secure.

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However, the massive supply line challenge is not just about the logistics of moving goods from one side of the world to another. The nature of trade is to transport goods and even vast amounts of them.

The more important questions involve the operative wisdom of the choices now made in this global supply network. It involves political, social and moral factors that the business world prefers not to consider since only costs, profits and quarterly earnings make up the concerns of countless CEOs.

The problem is not how to get things from one place to another, but why so many things are moving in the first place. It is not about meeting demand but moderating the nature of the demand.

Western leaders should consider that long and complex supply lines are vulnerable points in a dangerous and chaotic world. They should question the wisdom of making so many things abroad, especially when so much is put in the hands of adversaries like Communist China. A healthy society should also see its economic production as an expression of its culture and not just a number on a financial spreadsheet.

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Supply chain breakdown reveals how the frenetic intemperance of voracious demand overturns everything to satisfy material gratification. People need to evaluate their priorities to include more spiritual values rather than just consumption. A table of values based on honor and virtue would do much to bring balance, commonsense and temperance back to the economy. The supply chain would then regain that human touch and agility smothered by massively automated systems.

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