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The fatal flaw in global supply chains? Their extreme efficiency

November 12, 2021 GMT

A supply chain is like a Rorschach test, with each analyst seeing in it a pattern reflecting their own preconceptions. This might be inevitable since everyone is a product of differing backgrounds, but some observed patterns are more plausible than others.

Consider the following sampling of perspectives. For Jason Furman, formerly US president Barack Obama’s chief economic adviser, and Lawrence H. Summers, a former US Treasury secretary, today’s supply chain problem is one of excessive demand.

According to Furman, it is a “high class” issue that reflects a strong economy. The “original sin” was the American Rescue Plan, which provided too much support to US households.

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For John Tamny of RealClearMarkets, the supply chain problem is one of ” central planning ”. Had President Joe Biden ’s administration not sent directives to port managers, free markets would have sorted everything out.

And for Awi Federgruen, a professor of management at Columbia Business School, the issue is inefficiency. The remedy for this is to work harder and do more with less.

None of these interpretations withstand scrutiny. The excess demand story fails on a glance. After all, there is no shortage of goods. Ships bearing the supply ” 30 million tonnes of it ” are sitting outside US ports, with more on the way.

Neither have production prices risen much. Most of the “inflation” so far has been in energy prices and used cars and trucks, goods that are in demand because of the semiconductor shortage affecting carmakers.

That particular shortage is not the result of excess demand, either. During the pandemic, chip makers predicted a bigger shift in demand ” towards household gadgets and away from cars ” than actually occurred. Now they have too much of one kind of chip and not enough of another.

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As for “central planning”, that is to be expected from certain circles. The implication is that all would be well if only the Biden administration had not paid attention. Never mind that Biden’s intervention amounted to urging port managers to work “24/7″ to get the boats unloaded, which presumably had already crossed their minds.

The point about efficiency gets closer to reality, except that the problem is not too little efficiency but too much. To be precise, the extreme efficiency of today’s global supply chains is also their fatal flaw.

Well-run ports are models of high throughput and low costs with equipment to suit the traffic they expect. Building capacity beyond a small margin of safety would be a waste.

In normal times, any excess capacity sits idle, yielding no revenue while interest on the debt issued to build it must still be paid. Over time, efficient operators will minimise the excess and keep the docks humming away. The success of global supply chains to this point reflects the relentless operation of this principle.

In the pandemic slump, much of America’s port capacity was idle. When production stopped and container ships remained anchored in Asian ports, empty containers piled up at American ports, awaiting ships to carry them back to Asia. But then demand revived and production accelerated as households diverted income from services to goods.

The ships bearing the goods started showing up again, but there was a new problem. To offload full containers, one must have a place to put them. Yards and warehouses were filled with empties and trucks bearing fresh empties could not unload them or take on new containers, so the cargo sits and waits.

A supply chain requires all its parts to function smoothly all the time. Failures cannot be isolated or fixed with higher prices or new techniques. Instead, they cascade; a breakdown in one part can become a general one.

In his 2011 book The Global Minotaur, economist Yanis Varoufakis compared the United States to the mythical monster that lived in a labyrinth from which nothing could escape.

For 40 years, the US economy has taken in goods produced by Japan, South Korea, China and others. To sustain the Minotaur, the world built a global labyrinth of ports, ships, warehouses, storage yards, roads and railways.

One day, the Minotaur got sick and missed a meal. The next day, he sought to catch up by eating four meals, only to find he could not quite get them all down.

Now the Minotaur sits choking, hoping the blockage will clear. If it doesn’t, the consequences could be grave. If choking the beast had occurred to Theseus, he might not have needed Ariadne, her sword or her ball of yarn.

James K. Galbraith, a professor at the University of Texas at Austin, was an adviser to the Greek ministry of finance in 2015. Copyright: Project Syndicate

This article originally appeared on the South China Morning Post (SCMP), the leading news media reporting on China and Asia. For more SCMP stories, please download our mobile app, follow us on Twitter, and like us on Facebook.

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