Why Global Supply Chains Remain Vulnerable
Institute for New Economic Thinking
AB: As soon as it said Global Supply Chain, I was interested. I spent much of my career working globally in Asia and Europe for various nationalities. I did make some comments in the text of half of this interview. Maybe indulge a little bit and catch the rest of it.
Journalist Peter Goodman delves into the persistent problems with supply chains and how to fix them his new book, “How the World Ran Out of Everything,” in conversation with the Institute for New Economic Thinking
Are the supply chain issues that emptied your grocery store shelves and left your business scrambling during the COVID-19 pandemic fixed yet? Don’t count on it.
Journalist Peter Goodman takes the reader on a fascinating journey through global supply chains, uncovering their intricate logistics and the harsh realities of exploited workers, shipping cartels, Wall Street greed . . . All of which leaves us relying on a fragile network for the things we need.
He highlights the vulnerabilities that left medical workers scrambling for PPE and millions without life-saving medications during the global spread of COVID-19. Goodman argues the critical problems persist due to decades of prioritizing cost-cutting and Wall Street profits. He warns we’re still just a natural disaster or global conflict away from another supply chain crisis.
In the discussion with the Institute for New Economic Thinking, Goodman traces the evolution of supply chains since World War II, spotlighting game-changing moments such as the rise of shipping containers and China’s WTO entry. He shows how these advancements shifted supply chains globally, putting efficiency and cost-cutting at the forefront, often to the point of vulnerability and practices that defy common sense.
Goodman breaks down how the Just-in-Time manufacturing principle, beloved by McKinsey consultants for its promised efficiency gains, can leave supply chains wide open to catastrophic disruptions. He is adamant about how prioritizing shareholder returns has compromised essential supply chains, posing risks to both lives and communities, with human beings sacrificed to fatten corporate wallets. AB: I would argue it costs more in the end.
Goodman urges an overhaul, championing resilient supply chains that protect human welfare and environmental sustainability in our interconnected world. He argues achieving a better, safer, and more humane supply chain is not beyond our reach. That is if we can think differently and change the corporate incentives that drive practices that don’t serve us. AB: A sound supply chain was never beyond our reach. The systems for it were already in place.
Lynn Parramore: Let’s start with a look at how the global supply chain functioned from the end of World War II until the late 1970s. Say, I’m running a U.S. company manufacturing toasters during the 1950s. What would the global supply chain have looked like?
Peter Goodman: It was much more dependent on domestically made parts and raw materials. Imported things were generally finished goods. Now, so much of the supply chain is so-called intermediate goods: parts that become parts of other parts. Famously, we know that a single auto part could move across borders dozens of times before reaching its final assembly.
The turning point, as I lay out in the book, was the development of the shipping container in the early 1950s, which enabled supply chains to jump across oceans. Suddenly, you could depend upon factories very far away. And then, of course, there were international trade agreements. I spent a lot of time on the Chinese entry to the WTO in 2001 under Clinton, but NAFTA is certainly a landmark. CAFTA [The Dominican Republic-Central America Free Trade Agreement] as well. These were huge regional and global trade deals that opened up markets all over the place. AB: I would argue it was corporations looking for cheap labor with little overhead attached to that labor
LP: You discuss shifts in economic and business philosophy, particularly the “Just-in-Time” concept, which minimizes inventory and production waste by ensuring goods are produced or acquired only as needed. Could you talk about how this concept has influenced supply chains?
PG: Sure. Just-in-Time is a wonderful idea. It goes back to a time when Japan had limited capital. They’re dealing with the devastation of the war. Unlike the United States, they don’t have that much developable land, so they can’t just build ships. In comes the idea called “Just-in-Time,” which later became known as lean manufacturing. Instead of having as much product as you possibly can, à la Henry Ford, let’s just make enough vehicles to replenish those that we’ve sold. Let’s work with our suppliers, too, to make sure that they’re only delivering the parts that we need on our assembly lines as we need them, so we don’t have to waste lots of space and money tying up parts in warehouses. This works very well for Toyota. They become, by many measures, the world’s most successful auto company. The concept of Just-in-Time is embraced widely around the world, especially in the ‘80s.
Unfortunately, it doesn’t mix nicely with the rise of shareholder-led profit maximization. The issue is really about shareholder interest trumping everybody else’s interest. In the book, I tell the story of McKinsey. McKinsey figures out that a good way of using the Just-in-Time fascination and the obsession with lean principles is to cater to their clients – for example, executives who just want to make their share prices go up.
Just-in-Time becomes this kind of crude imperative to slash inventory and take the savings and give it to yourself — for the corporate CEO, it’s a reward for being smart enough to hire McKinsey. You give the money saved to your shareholders through buybacks – hat tip to INET’s Bill Lazonick for his heroic work on this — and your dividends. The result is that cutting inventory becomes a key means of driving up your stock price.
LP: You highlight that human beings came to be viewed as inventory in a certain sense. Could you elaborate on the challenges workers faced as this concept gained widespread adoption?
PG: Yeah, I appreciate you picking up on that. So McKinsey fixes on “lean” as this mantra for every form of cost-cutting, and also flexibility. It’s all about cutting waste — but waste includes wages, and so humans become costs to be contained and scheduling becomes all about what’s best for the company. If you’re operating a warehouse, you need people when you need them. Never mind that your workers need some more reliability in their schedules, that they have kids and elderly relatives to care for, or need time for sleep and leisure. Now they can’t schedule their own time, and their wages are constantly a target. All of this is done under this mantra of “lean” and Just-in-Time. AB: They do this to railroad engineers. They are almost always on call for when there are enough box cars or containers to haul.
LP: “Scale” and “efficiency” are highly esteemed principles in business. Could you discuss the pitfalls that arise when they’re pushed too far?
PG: Yeah, it’s a really important question. Take the case of precision-scheduled railroading, a fancy term for Just-in-Time on the rails. What it really means is that you fire lots of workers, reduce rail service, and generate savings that you’re going to hand to your shareholders, again, in the form of share buybacks and dividends. Meanwhile, you prove to Wall Street and institutional investors that you really get the need to deliver numbers that show that you’re ruthlessly efficient. The one that I focus on is “dwell time,” which is how much time a given rail car sits somewhere as opposed to moving along the rail.
I talked to this engineer in Idaho for Union Pacific, who tells me that he’s horrified to discover in the middle of the pandemic that he’s actually pulling cargo to the wrong places! He’s doing that not because somebody screwed up, but because somebody took this mantra really seriously.
A rail yard in Nebraska is pressured to minimize dwell time. So somebody says, ok, I’ll just attach these cars to whatever train’s moving out of here next. Never mind that it’s going to Oregon and that lot of this cargo has to go to California. The result is that some factory in California is waiting for chemicals that are supposed to be there by now, but instead they’re making their way back from Oregon through Idaho to artificially lower dwell times on a spreadsheet. That’s not efficient. AB: I would suggest that they are using longer trains of 66 to 200 box cars or flat beds hauling containers. Sending an engine with a few flat beds for containers or box cars is not considered economical by railroads. So they will stop on the way back.
LP: So businesses fixated on implementing these principles can end up with highly inefficient practices that completely undermine what they’re trying to achieve.
PG: Right. I also emphasized that in terms of inventory, reducing your inventory by definition boosts your return on assets. It’s like a magic metric for Wall Street. Cutting inventory means you have fewer assets to divide into your revenue. So the metric of return on assets just went up. I talked to a business school professor who made the point that, ok, that’s fine, but if you can’t make a ventilator in the middle of a public health catastrophe, you don’t get to say, well, at least my share price is high!
There is more to this report if interested. I did an introductory part to add to it. Why Global Supply Chains Remain Vulnerable, Institute for New Economic Thinking
In the 1930s, a big railroading breakthrough was switching from section to route management. Until then, each section of the system was supposed to minimize the number of cars waiting, so it was get them moving to some next sector whether it made sense or not. There was a big productivity improvement when they started thinking in terms of getting things from point A to point B.