Ask the Expert: The Persistent Problem of Supply Chain Shortages
By Brian Hiro
It was in January 2020 that much of the world began to learn about a new disease emanating from China called the novel coronavirus.
As an expert in global supply chains, Cal State San Marcos professor Robert Aboolian paid particular attention when many companies shut down their operations in the city of Wuhan, from which the virus originated. He knew that the disruption would have a ripple effect on the global economy, but he thought that the impact would be manageable.
Two months later, though, when the World Health Organization declared COVID-19 a pandemic and Korean car companies such as Hyundai started to close their assembly plants around the world, “it became clear that global supply chains were in for a wild ride,” said Aboolian, chair of the Department of Operations and Supply Chain Management at CSUSM.
The nature of the ride may have changed over the ensuing year and a half – from shortages of things like masks and disinfectant wipes to car computer chips and lumber – but it’s still a wild one, and uncertainty remains about how long it will last.
Question: Was this global supply crunch an avoidable problem, or did the pandemic make it inevitable? What could nations or companies have done differently?
Robert Aboolian: Pandemics and other major disruptions could cause havoc in global supply chains, but companies can be prepared and resilient, and proper preparations and resilience could reduce the impact of such disruptions. The impact is inevitable even when companies are prepared, but better preparations could reduce the level of impact and reduce the time to recover. So the important question for designing a resilient supply chain for companies is not whether a disruption would impact them, but rather what would be the level of impact and how fast they could recover after a major disruption.
Q: Are you surprised that it’s still such an issue about 15 months into the crisis?
RA: Although I foresaw that the issues in global supply chains would take some time to sort themselves out, the general increase in demand surprised me quite a bit. In fact, the increased demand has been the main catalyst that has exacerbated and dragged out this crisis. Companies did not forecast such an increase in demand and are having a hard time satisfying this surge. During the crisis, many who had steady jobs spent less on restaurants, travel and commuting, and translated that savings into spending more on other products that were mostly available for sale online.
Q: Last month, the Biden administration announced the creation of a task force to address bottlenecks in construction, transportation, semiconductor production and agriculture. What was your reaction to that move?
RA: The United States has a great demand outlook but has been having consistent shortages in supply. This combination is a recipe for price increases, so it is natural for the government to step in and solve the supply shortage issues before they result in out-of-hand inflation. Another reason for the study was to investigate the level of dependency on our rivals, most importantly China, when it comes to critical products such as semiconductors, large-capacity batteries, critical minerals and materials, and pharmaceuticals.
Q: How big of an issue is the U.S. dependence on nations like China for imports in critical areas like semiconductors and high-capacity batteries? Do you see that changing anytime soon?
RA: It is a very important issue. Our dependence on China for these critical products is quite concerning. In fact, it is a matter of national security. And I do see it changing, and apparently so does the Biden administration with its creation of the task force. If anything positive comes from COVID-19, it is the fact that it showed American supply chain security vulnerabilities. This, of course, will result in the continuation of the trade war between the U.S. and China. I would also hope that, in an effort to reduce our current level of dependence on rival countries, we will substantially increase our domestic capacity to manufacture these critical products.
Q: The New York Times recently published an in-depth story about the history and influence of Just In Time manufacturing and the role it has played in our current situation. Are you familiar with the concept, and what do you think about its effects, both good and bad?
RA: The idea of Just In Time and lean manufacturing is basically to minimize inventory and have it available just when you need it. The idea is to save inventory holding costs. This works well for companies that need to be efficient to compete, but it works well only when there is no uncertainty in supply and demand. On the other end of this spectrum and on the opposite side of efficiency is flexibility, where companies become responsive to consumer demand during times that supply and demand are uncertain. Companies could use different methods to become flexible. One way to achieve flexibility is through keeping additional inventory (also known as safety inventory) for when there is either a shortage in supply or an increase in demand. This contrasts with Just In Time manufacturing since it results in increased levels of inventory costs. Another way for companies to be flexible is to diversify their supply base, have multiple sources for their supply needs and use mostly low-risk suppliers. All in all, being flexible is a costly proposition and it must be considered when one decides to design a resilient supply chain.
Q: When the giant container ship got stuck in the Suez Canal, causing delays that rippled across the global economy, it seemed to serve as a symbol of the precarious nature of global supply chains. Do you see it that way?
RA: A supply disruption such as this has short-term effects and can sort itself out rather quickly, but events like pandemics have more long-term and far-reaching global effects. I agree, though, that it was another cursor to the interdependence of global supply chains, which could become vulnerable if they are not designed to be resilient.
Q: Do you think companies have gotten too lean when it comes to inventory?
RA: Smaller companies that are competing on small margins need to continue to be efficient and cannot really risk investing in flexibility, but I expect bigger companies to invest more in flexibility and being resilient.
Q: How have supply chain shortages most affected you personally during the pandemic?
RA: Overall, the supply chain shortages did not affect me much, except that in the beginning stages of the pandemic, we could hardly find any disinfectant, gloves, masks and of course toilet paper.
Q: How long do you think it will take for things to begin to return to normal globally?
RA: One of the reasons for the current shortages is companies underestimating demand for their products and not having enough inventory to satisfy this demand. I expect demand volatility to decrease and consequently allow suppliers to plan better and satisfy consumer demand. Another reason for the current shortages is shipping delays and logistical backlogs. There are many parts of the world where COVID-19 is still not properly controlled. For example, Yantian, China, which is one of the biggest ports in the world, was recently shut down because of a COVID-19 outbreak. Add in the fact that millions of people aren’t returning to work for various reasons, and there’s a lot to sort out to get back to a more reliable and steady flow of material in the global supply chain. All that said, I expect supply-and-demand issues stemming from the pandemic to resolve themselves within a year, assuming we do not see another wave of COVID variants.
Q: Do you think any lasting lessons will be learned from the pandemic, causing fundamental change to global supply chains? Or will it be back to business as usual?
RA: We could see many changes, but mostly in big companies. I expect that it will be business as usual for smaller companies that cannot invest in flexibility. On a more global scale, there would be an increase in product prices because of increased flexibility. I also expect companies to offer less customization and fewer product options to offset their increased cost of being flexible. But if we do not see a major disruption for an extended period and if the government does not regulate companies to have preparedness plans in case of disruptions, I also foresee that the competition will force even big companies to return to their old habits of cost-saving and business as usual. After all, companies, like people, have short-term memories. To avoid this, I strongly believe that the federal government must regulate companies to make sure their supply chains are resilient and prepared to respond properly in case of a major disruption such as the COVID pandemic.
Brian Hiro, Communications Specialist
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