Will the supply chain crisis change the way we trade?

On the morning of March 23, 2021, one of the world’s largest container ships, the Ever Given, was forced off course by a sandstorm and then wedged across the Suez Canal. The obstruction of the Suez Canal halted nearly 12% of global trade, equivalent to $6.7 million a minute. 

The incident quickly went viral and became an internet sensation, with images of a small construction vehicle attempting to free the massive freighter serving as a popular meme template. Despite the situation’s frenzied reception, the incident served as foreshadowing for the continuous supply chain problems that have recently intensified — wreaking havoc on the global economy.

Over the past year and a half, there have been an abundance of supply shortages. From baking yeast to sewing machines to condoms, with each passing month, a new list of goods seem to encounter major production issues. Most recently the city of New York announced that it is running out of its signature spread: cream cheese. 

At first glance, these shortages may seem small in impact and even somewhat comical. After all, one might think that cream cheese is not an essential good, and that New Yorkers should be able to survive without cream cheese for a few weeks. However, much like the Ever Given incident, the underlying impacts of these shortages — which affect nearly every industry and business, big and small — are more detrimental than they may initially appear to be.

Personal protective equipment (PPE) supply chain issues were a massive and constant problem in the early stages of the COVID-19 pandemic. Healthcare workers were at times forced to enter ICUs filled with COVID patients while only wearing trash bags as protective gear. In April 2021, Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases and the chief medical advisor to the President, recognized that PPE shortages in U.S. healthcare facilities were estimated to have contributed to the deaths of more than 3,600 healthcare workers. 

On an international scale, supply chain issues have manifested themselves in the form of drastic increases in supplier delivery times. The Global Purchasing Managers Index (PMI) is commonly used to track the delivery times of intermediate goods. Since the start of 2020, the PMI index has seen an increase of almost 30%. 

This increase is representative of the severe strains global firms are experiencing as they attempt to maintain their pre-pandemic levels of output. Delays in supplier delivery times translate to increased delivery times for finished goods and affect consumers globally.

The COVID-19 pandemic served as a catalyst for the supply chain issues that we continue to experience today. At the start of the pandemic, companies across almost all sectors cut production in anticipation of an economic recession and decreased demand. However, nationwide lockdowns did not equally affect all sectors of the economy. While theme parks and restaurants may have been closed, consumers found plenty of other ways to spend their money.

Consumers renovated their homes, bought webcams for virtual work and home offices and purchased expensive exercise bikes for their at-home gyms. In short, demand did not dramatically decrease, rather it dramatically shifted. In the wake of this shift, companies were left scrambling to keep up with consumer demand. The whiplash in demand generated by repeated closures and reopenings contributed to companies continually miscalculating demand and under producing goods.

How did global supply chains become so fragile? 

To better comprehend the current crisis it is necessary to understand the economic model of inventory management that has come to dominate the corporate space: the dominance of just-in-time (JIT) manufacturing. 

Pioneered by Toyota in the 1970s, the JIT inventory model focuses on increasing efficiency and lowering costs by producing only enough of a product to meet its respective demand level. For this model to be successful it requires an accurate prediction of demand. 

If this sounds like a fragile system it is because it is. Toyota was nearly bankrupted by the policy when one of its factories that was responsible for the production of a tiny engine valve caught on fire. Toyota’s entire production was shut down for weeks, costing the company $1.4 billion.

Production delays have run rampant over the past year with over 60% of the U.S. manufacturing industry experiencing some sort of domestic supply delay. Combine constant underproduction with a system that relies on essential parts arriving “just-in-time” and supply chain issues across the world start to make a lot more sense. 

So if JIT inventory modeling carries immense risks, especially when combined with the unpredictable nature of a global pandemic, why do companies continue to use it? 

The system allows companies to cut costs and to increase their profits. Peter Goodman, an economics correspondent for The New York Times, explained that corporations realized they could redistribute the savings they generated from JIT production to shareholders in the form of buybacks and dividends, subsequently driving their stock prices to all-time highs, which further incentivized use of the model.

However, these pressing supply chain issues are forcing many companies to reevaluate their dependence on the hyper efficiency of JIT production. Volkswagen AG announced that it would be constructing six new factories in order to produce its own batteries and limit the company’s exposure to supply chain inefficiencies. Similarly, semiconductor manufacturer Intel has committed $20 billion towards chip fabrication plants in Chandler, Arizona. Even Toyota, the JIT pioneer, recently admitted that the company had begun stockpiling an extra four months worth of parts to ensure production capabilities for the coming year.

The big question posed by the crisis is whether or not consumer behavior will change to value resilient and dependable supply chains, rather than their cheaper alternatives. Will this continual crisis alter consumer behavior in such a way that resilient supply chains that deliver reliable results prevail over fragile supply chains that deliver cheaper ones? 

Professor Willy Shih of Harvard Business School thinks not. He asserts that we should be skeptical of consumers’ willingness to “pay for resilience when they are not in crisis.” 

But, as supply chain issues drag on and more and more companies begin to invest in creating their own resilient supply chains, it is possible that we will see a dramatic shift in what has been a long standing corporate trade policy.