In many ways, the disruptions in the global supply chain of products, materials and resources is a lot like the weather ”” it is something that everyone talks about it, but no one can actually do anything to control it.
Just where did the supply chain start to fray and is there a way to mend the situation in a timely manner? For Jon Krchnavy, a professor in the business department at Sacred Heart University, the issue evades easy solutions.
“Start at the top of that supply chain,” said Krchnavy. “When we think about it throughout the world, it”™s not a linear process like they show on TV ”” somebody produced something, and ships it to a supplier, and they use it. It”™s more complex, with a lot of interrelated parts and it”™s getting increasingly complex.”
Krchnavy observed that the pre-pandemic supply chain was a global orchestra of precise supply-and-demand execution.
“If I look at the supply chain philosophy that we”™ve been operating under for the last 20 to 25 years, that”™s where companies maintained really low inventories and they expected their suppliers to ship products to them and receive exactly when they want,” he continued. “And it”™s more global than most people realize. Pre-pandemic, more than 90% of our medical masks that we use are made in China and 84% of all the meds we use are made in Asia. Ukraine is the number one producer of fertilizer rushes and ships about 4% of grains, and the world”™s fourth largest producer.”
Krchnavy added the weak link in the supply chain “is based on an assumption that the system is overall reliable and it”™s not going to have any long-term problems. Our risk aversion plans that we had were for short-term, single-point disruptions ”” think about a snowstorm impacting trucking or a storm at sea where the ships get delayed for a little bit, but nothing really long term.”
Of course, that was the pre-pandemic world. But Krchnavy insisted the world had faced a similar situation nine years before the coronavirus paralyzed the global economy, but it failed to heed those lessons.
“Did you remember back in 2011 when Japan had an earthquake and tsunami?” he asked. “I remember that ”” Japan got hammered because so much of the spare parts in our auto manufacturing came from that region of Japan. For weeks, there were shortages and they had to close down facilities ”” that should have given us a heads-up that they were a little exposed.”
Krchnavy drilled down on the electric vehicle sector that has taken on greater prominence in recent years, noting how it has become hostage to supply chain disruptions.
“When we think about lithium batteries, we think about also geopolitical potentials,” he said. “We get the lithium from Australia and South America and they ship it to China for processing ””they”™re probably the single largest producer of lithium polymer in the world. And if they decide to shut that off, everybody”™s going to be scrambling.
“And the cobalt that is used in lithium batteries comes from the Congo, and that”™s another real stable place, right? Then the pandemic shows up and we have this cascading of problems that the world was too slow to react ”” we sort of sat back and watched this play out thinking that it”™s going to be over shortly. And obviously it wasn”™t, but we didn”™t have that Plan B.”
And that doesn”™t even take into consideration the logistics catastrophe created by the disruptions.
“When you think about freight train schedules or airplane schedules, there”™s a certain date when things arrive someplace else to get unloaded,” Krchnavy continued. “If they lose their place in the schedule, they have a long wait ”” at least one cycle before they can get back in. But staffing at the ports fell apart ”” they got sick and were unable to load ships. But when the people came back, the freight drivers weren”™t there.”
Krchnavy lamented that the consumers ultimately pay the price for this ”” literally, with historic high inflation not seen in decades. But he also warned that fixing this situation so it doesn”™t occur again requires a significant investment of time and money.
“We need to take a step back and look at reliability,” he stated. “We need to rebuild our supplier base, trying to figure out maybe we shouldn”™t be using everything that is concentrated in one area. And then we should become more diversified and maybe reassess a lot of our products that we buy, especially the strategic products such as medicines.
“I think solving underlying problems requires looking at the system rather than doing this piecemeal,” he said. “My fear is that we”™re not going to solve the underlying issue, and we”™re going to be prone to another repeat of what we”™ve seen before.”
