Supply chain worries loom over global economy


Everyone has become a supply chain expert, even White House aides. This is not a good development. It is as if everyone thought they knew how to disarm unexploded bombs.

And some who have been systematising supply chain management for decades are having doubts about how the world they helped create has developed. The all-seeing companies organised through the application of supply chain genius, such as Alibaba and Amazon, are under relentless political pressure.

“Paddy” Padmanabhan, of the Insead Emerging Market Institute in Singapore, co-wrote an influential 1997 paper on “information distortion in supply chains” and went on to advise major corporations and other academics on the topic.

Now, he says: “Twenty or 30 years back you had three or maybe four layers in supply chains. We have so many more layers that it is not clear we are adding to viability. We could have more bottlenecks and more chaos than before.”

At the moment, people across the globe are experiencing many more idiosyncratic shortages, from oxygen in Indian hospitals to gasoline on the US East Coast to automobile semiconductors pretty much everywhere. Geopolitical tensions such as US-China military manoeuvring over Taiwan, the Ruhr Valley of advanced semiconductor manufacturing, have added to worries on supply chain vulnerability.

Specific supply shortfalls will be solved. The question is whether they are part of a general trend of intensifying cycles of shortages, followed by recovery and overstocking, which lead in turn to speculative binges and then to deeper recessions spurred by inventory liquidation.

That is part of what concerns Padmanabhan. Recessions would be amplified by these shocks (such as Covid) that impact the global supply chain. He cites shipping. Some 90 per cent of the world’s goods trade is transported by ship, according to the OECD.

Padmanabhan points out many crews are from India. So a lack of Covid vaccine distribution and oxygen supply in India affects much more than the country’s own exports and imports. “While there is better visibility today (on events like Covid as they occur), the ship operators’ ability to forecast them is minimal or non-existent,” he says.

“Logistics”, the name for the supply chain discipline that originated from a French military term, was supposed to solve this sort of problem. The tendency of each layer in the production, shipping, warehousing and delivering sequence to order too much or too little could be minimised if managers used a system-wide perspective to make decisions. This imposition of order on chaos became mathematically described by the engineers of “operations management”.

In the post-second world war period, gradual computerisation made it possible for operations management algorithms to co-ordinate flows of goods across firms and their suppliers. Even monetary economists give the microeconomics of supply chain management much of the credit for the moderation of recessions in recent decades.

Except now it does not seem to be working so well. There is an uncomfortably large number of significant supply chain events that have been leading to price increases or outright rationing.

The big debate among market people and economists is whether the supply chain events are just “transitory” echoes of the Covid shock, or are indications of longer lasting general price inflation.

I have been inclined to think “transitory”, but that belief has become fainter with each official statement. The reassurances from the Fed and Treasury and their international counterparts would induce anyone to throw away their weapons and flee to the rear area.

The problem with putting our trust in the capacity of scientific solutions to manage supply and production is the limit of human rationality. As John Sterman, an MIT professor and supply chain expert, says: “In real life there is no evidence of learning. People’s mental models are oversimplified and they don’t handle time delay well.”

Indeed. Anyone who has seen the mountains of unused equipment left in the wake of foreign military operations that used excellent supply chain management would have the sense that maybe logistics does not solve all our problems.

So now I am more inclined to think the developed world is going into a long boom-bust economic sequence. Instead of settling for being an efficiently managed greying Japan, we will all be resentful, early-70s Britain, without the fun sex.


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