Q&A: What got us into this supply chain mess? When will it end? Stanford professor has answers

Confronted by a pandemic, we suddenly couldn’t find what we needed: Hospitals ran short of N95s and ventilators, auto manufacturers didn’t have crucial components and store shelves suddenly emptied of everything from sneakers to sofas.

Kostas Bimpikis, an associate professor of operations, information and technology at Stanford Graduate School of Business, talked with this news organization about how to keep our supply chains reliable – even when the world is upended. His remarks have been edited for length and clarity.

Q: What did COVID-19 reveal about our supply chain?

A: It revealed two things. The first is how interconnected supply chains are. A disruption in Italy, Taiwan or Korea may be felt all over the world. The second thing it revealed was how fragile the supply chain is. Any deviation from normal operations creates a huge shock all over the world.

Q: What got us into this mess?

A: One trend is so-called “just in time” manufacturing. Typically, firms produce only as much inventory as they need to satisfy short-term sales. It keeps costs low.  They do not necessarily hold excess inventory.

The second reason is the specialization of product lines. For example, cars are being manufactured that consist of thousands of components. Disruption in a supplier for a specific component – such as a small screw somewhere in the car — may hold up production of the entire car.

And the third thing is outsourcing and globalization of manufacturing.  So a disruption in Taiwan, for example, affects our domestic supply chain, as well.

Q: What’s driving these trends?

A: Typically, companies take the view of minimizing costs, maximizing speed, maximizing efficiency and maximizing choice for consumers.

Costs are minimized by having very low “safety stocks,” because carrying excess inventory is very costly.  Maximizing speed and efficiency means lean operations and “just in time” manufacturing. Maximizing choice for customers points to the specialization of the line. You can buy Nike sneakers in a zillion colors.

These have big advantages, but they do have disadvantages.

At the beginning of the pandemic, the shortages were mainly driven by a surge in demand for products. Now, more of the problems originate from problems with the supply chain.

Q: Do some industries experience greater disruption than others – and why?

A: Industries that have experienced the most disruption are those with sustained demand and a high geographical concentration.

For example, the semiconductor industry is still experiencing quite a bit of disruption. The demand for semiconductors has surged because they’re used in many consumer products, such as cars.  And the semiconductor industry is very concentrated in two geographical regions, Taiwan and South Korea. Manufacturing is done by only two companies.

The final thing, especially for the semiconductor industry, is that the entry costs are very high. It’s not easy to decide tomorrow that you will become a semiconductor manufacturer.

Q: Can we reduce risks by producing more goods in the U.S.?

A: Products that are manufactured in the U.S. don’t face as much disruption, because they’re not subject to the shipping constraints.

But to be realistic, the outsourcing and the globalization of trade cannot be easily reversed because of the advantages that it has. Outsourcing led to much lower prices, due to much lower production costs.

Domestic manufacturing needs to be boosted in industries that are of strategic concern for the U.S. Semiconductors are a good example. The White House has some initiatives to invest heavily in the domestic semiconductor industry to increase capacity.

It’s not likely that all manufacturing will be onshore. But maybe we’ll see more in strategic industries.

Q: Can supply chains be made more resilient?

A: There is a trend towards diversification of the supply chain, called “dual sourcing.” It’s “China plus one” — an alternative supply source outside China.

But this takes time. Especially in China, there’s a lot of investment, know-how and infrastructure that makes operating there much easier.  Companies are trying to replicate the same infrastructure and the same efficiency in countries such as India and Vietnam.

Q: Are there other strategies?

A: One way to prevent shortages could involve increasing “safety stock” excess inventory.

Also, making production more flexible.  If you have a simple product line, and there is some disruption in one of your facilities, you can conceivably ramp up production capacity in other facilities.  It’s “reverse specialization”  — if you make your components more common across your product lines, then it’s easier to deal with disruption.

Q: What should the government’s role be?

A: The government is already taking some steps towards increasing manufacturing capacity for strategically important industries. And the government can bolster domestic production, through tariffs, subsidies and so on.  Another action is to hold strategic reserves for important products, just as we do for oil.

It also can offer greater transparency of complex international supply networks. It’s currently not easy to identify risks, because firms do not have full visibility on where their suppliers get the raw materials. One way to identify risk is to conduct a “stress test,” similar to what we did with the finance industry — simulating adverse effects and see how this propagates through the entire supply chain.

Q: When might our current disruption ease up?

A:  It will take some time — maybe three or six months, probably longer. Firms typically underestimate the investments needed to fix them. I would guess the situation will not be back to normal before another year.

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