Supply chain concerns loom over the global economy

Everyone has become an expert on the supply chain, even White House staff. This is not a good development. It’s like everyone thinks they know how to disarm unexploded bombs.

And some who have systematized supply chain management for decades have doubts about the evolution of the world they helped create. Ubiquitous businesses organized through the application of supply chain genius, such as Alibaba and Amazon, are under relentless political pressure.

“Paddy” Padmanabhan, of the Insead Emerging Market Institute in Singapore, co-wrote an influential 1997 paper on ‘Information Distortion in Supply Chains’ and subsequently advised major corporations and other academics on the subject.

Now he says, “Twenty or 30 years ago you had three or maybe four levels in supply chains. We have so many extra layers that it’s not clear what we’re adding to the viability. We could have more bottlenecks and more chaos than before. “

Right now, people around the world are experiencing a lot more idiosyncratic shortages, from oxygen in Indian hospitals to gasoline on the east coast of the United States to automotive semiconductors all over the place. Geopolitical tensions such as US-Chinese military maneuvers over Taiwan, the Ruhr Valley of advanced semiconductor manufacturing, have added to concerns over the vulnerability of the supply chain.

Specific supply shortages will be addressed. The question is whether they are part of a general trend of intensifying cycles of shortages, followed by recovery and overstocking, which in turn lead to speculative crises and then to deeper recessions stimulated by the liquidation. stocks.

This is part of what Padmanabhan is concerned with. Recessions would be magnified by these shocks (like Covid) that impact the global supply chain. He cites the expedition. About 90 percent of global merchandise trade is transported by ship, according to the OECD.

Padmanabhan points out that many crews are from India. Thus, the lack of Covid vaccine distribution and oxygen supply in India affects much more than the country’s own exports and imports. “While there is better visibility today (of events like Covid as they occur), the ability of vessel operators to predict them is minimal or nonexistent,” he says.

“Logistics,” the name for the supply chain discipline that originated in a French military term, was supposed to solve this kind of problem. The tendency of each level in the production, shipping, warehousing, and delivery sequence to order too much or too little could be minimized if managers used a system-wide perspective to make decisions. This imposition of order on chaos has become mathematically described by engineers of “operations management”.

In the post-World War II era, progressive computerization enabled operation management algorithms to coordinate the flow of goods between companies and their suppliers. Even monetary economists give The microeconomics of supply chain management is a big part of the credit for moderating recessions in recent decades.

Except now it doesn’t seem to be working that well. There are an uncomfortably large number of important supply chain events that have led to price increases or outright rationing.

The big debate between market people and economists is whether supply chain events are just “transient” echoes of the Covid shock, or are indications of more sustainable general price inflation.

I tended to think “transient”, but that belief weakened with each official statement. Assurances from the Fed and the Treasury and their international counterparts would make anyone throw down their guns and flee backwards.

The problem of confidence in the capacity of scientific solutions to manage supply and production is the limit of human rationality. As John Sterman, professor at MIT and expert in supply chain, said: “In real life, there is no proof of learning. People’s mental models are oversimplified and they don’t handle deadlines well. “

Indeed. Anyone who has seen mountains of unused equipment left behind as a result of foreign military operations using excellent supply chain management would feel that logistics may not solve all of our problems.

So now I’m more inclined to think of the developed world going into a long boom-bust economic streak. Instead of just being an efficiently run graying Japan, we will all be resentful, in the early ’70s, in Britain without the fun sex.

About Catherine Sturm

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