A century ago, what we now call supply chains were relatively simple.
Everything from raw materials to finished goods and food moved by rail or barge if going long distances. Products were trucked from depots and freight stations to homes and warehouses. In many cases, farming and manufacturing of basics was small scale and close by. America was nearly self-sufficient.
The young automobile industry was setting a standard that would influence business for decades: Vertical integration. Ford’s River Rouge complex, finished adjacent to Detroit in 1927, was the world’s largest integrated manufacturing center. Steel was forged and parts made. Cars rolled off assembly lines. Henry Ford even bought a railroad to ensure a supply of coal.
Today, as the pandemic has shown like a two-by-four to the head, supply chains have changed. They’re global, dispersed, highly complex — and fragile.
On March 3, the World Health Organization warned of a “severe and mounting disruption to the global supply of personal protective equipment,” saying industry needed to increase production by 40%.
By March 20, Washington’s state epidemiologist said the supply here of protective gear was so low that health workers were wearing bandannas and the state warehouse was empty.
Some help has come from Mukilteo upholstery manufacturer Kaas Tailored switching over to produce badly needed lightweight surgical masks. Respirator masks are being sent by 3M and Elon Musk’s Tesla. Microsoft used its global contacts to secure 240,000 advanced N95 surgical respirator masks.
The volunteer response, however gratifying, is inadequate to the crisis. In pleading for the federal government to release 20,000 stockpiled ventilators for hospitals, a frustrated New York Gov. Andrew Cuomo said, “When we went to war we didn’t say, ‘Any company out there want to build a battleship?’ ”
President Donald Trump has been ambiguous on a response from the Other Washington, saying it was mainly a problem for the states to solve and failing to use the Defense Production Act. That Korean War-era law gives the government power to direct industrial output in an emergency.
In a tweet earlier in the week, Trump wrote, “The Defense Production Act is in full force, but haven’t had to use it because no one has said NO! Millions of masks coming as back up to States.”
This is misleading.
He used the act to, as The Washington Post reported, “prioritize contracts and allocate resources to Health and Human Services Secretary Alex Azar” and “take measures to prevent people from hoarding health and medical resources.” But he hadn’t used the law’s most important tool, to direct production.
This is a fluid situation as I write, and it may change. But back to supply chains, which Puget Sound residents see in action from our two deep-water ports, railroads, trucks and warehouses, as well as Boeing, which depends on worldwide sources for the airplanes it assembles here.
While shortages can sometimes be traced to hoarding and panic buying, the root cause of our challenge is a market failure of today’s supply chains.
The old “Fordism” vertical integration started to see major change in the 1980s, under pressure from the “shareholder value” movement. Companies moved production offshore and outsourced it. They began to use “just in time” practices, which limited inventories. All this helped slash costs and reward stockholders.
Medical supplies today are vastly more sophisticated than those available in the 1918 global influenza pandemic that killed at least 50 million. But with this comes complexity and fragility in the 10,000-mile supply chain.
“Thankfully, hand sanitizer is simple to produce, allowing other producers, such as perfume manufacturers and distilleries, to step into the breach,” according to Sunil Chopra, a professor of operations at Northwestern University. “Masks present a trickier problem, however, in that they are produced almost exclusively in China. Since other countries are not equipped to quickly ramp up production, shortages will likely continue.”
Faced with the COVID-19 pandemic, today’s supply chain suffers a lack of resiliency.
In the Harvard Business Review, Tom Linton and Bindiya Vikil wrote, “In many cases, the roots of this current supply-chain crisis stem from decisions made far upstream — for example, sourcing a common plastic resin that is vital to several industries from one supplier or one region.”
They continue: “Such decisions cascade down through supply chains, even impacting companies who themselves don’t directly source materials or products from China but whose suppliers do.”
The result: Situations where multiple sources for some materials and parts can’t be found.
Linton and Vikil write, “For example, a supplier may possess unique intellectual property; sometimes volumes aren’t sufficient to justify two sources; or multiple sources are simply not available. In these cases, companies need to supplement their traditional sourcing practices with new sources of data and new approaches to understand and mitigate the risks they take on.”
All true, but adapting to the sudden surge in demand with all these roadblocks and disruptions will take time, maybe months.
Who would have imagined the nation whose productivity and innovation provided the “Arsenal of Democracy” to win World War II, landed men on the moon and led decoding of the human genome would be so backward in responding to a pandemic long feared? Not me.
But from fast, far-reaching testing to tracing and isolating those infected, the world leader is South Korea. It’s too early to claim victory, but Seoul has “flattened the curve” without China’s authoritarian measures.
Think tanks and commentators are busy churning out speculation about how the pandemic will “change everything.” Maybe. I’ll hold fire on that. But when we come through this, our supply chains will need a serious rethinking.
Because this won’t be the end of deadly global diseases.