Guest essay by Eric Worrall
According to Yale, companies are re-discovering keeping a component inventory and supply chain redundancy, but there are fears this will increase costs.
How Climate Change Is Disrupting the Global Supply Chain
The impact of the Covid pandemic on the global supply chain has been widely reported. But extreme weather, from floods to wildfires, is increasingly hammering ports, highways, and factories worldwide, and experts warn these climate-induced disruptions will only get worse.
BY JACQUES LESLIE • MARCH 10, 2022
The Covid pandemic has rightly received most of the blame for global supply chain upheavals in the last two years. But the less publicized threat to supply chains from climate change poses a far more serious threat and is already being felt, scholars and experts say.
Scientists say that such climate-related disruptions are bound to intensify in coming years as the world warms. In addition, ports, rail lines, highways, and other transportation and supply infrastructure will be threatened by increases in sea level of an estimated 2 to 6 feet — and perhaps more — by 2100. Around 90 percentof the world’s freight moves by ship, and, according to Becker, inundations eventually will threaten most of the world’s 2,738 coastal ports, whose wharves generally lie just a few feet to 15 feet above sea level. But to most port managers, the threat still feels remote. The rate of future sea level rise is so uncertain and solutions so elusive that only a few port managers have taken action to counter the threat, and only a fraction have tried to assess it.
As the ripple effects of what are likely to be ever-increasing and intensifying climate-related disruptions spread through the global economy, price increases and shortages of all kinds of goods— from agricultural commodities to cutting-edge electronics— are probable consequences, Mims said. The leap in the cost of shipping a container across the Pacific Ocean as a result of the pandemic — from $2,000 to $15,000 or $20,000 — may suggest what’s in store.
A 2020 paper in Maritime Policy and Management even asserted that if current climate science is correct, “global supply chains will be massively disrupted, beyond what can be adapted to while maintaining current systems.” The paper argues that supply chain managers should accept the inevitability of economic upheaval by the end of this century and embrace practices that support rebuilding afterwards.
Supply chains are, in essence, strings of potential bottlenecks. Each stopping point is a node in a tree-like system that conveys raw materials from the system’s farthest tendrils to sub-assemblers along its roots to manufacturers, who are the system’s trunk. Products like smartphones possess hundreds of components whose raw materials are transported from all over the world; the cumulative mileage traveled by all those parts would “probably reach to the moon,” Mims said. These supply chains are so complicated and opaque that smartphone manufacturers don’t even know the identity of all their suppliers — getting all of them to adapt to climate change would mark a colossal achievement. Yet each node is a point of vulnerability whose breakdown could send damaging ripples up and down the chain and beyond it.
In response to the threat of increasing supply chain disruption, manufacturers are considering enlarging their inventories or developing “dual supply chains” — supply chains that deliver the same goods via two different routes, so that if one breaks down, the other will prevent shortages. But both solutions would increase production costs, and would contradict the still-predominant “just in time” manufacturing approach, which relies on robust supply chains to eliminate the need for companies to keep extensive parts inventories in stock. American companies could shorten their supply chains, shifting production facilities back to the U.S. or a nearby country, but in many cases they would be removing their factories from the constellation of suppliers that grew up around them in countries such as China and Vietnam.
…Read more: https://e360.yale.edu/features/how-climate-change-is-disrupting-the-global-supply-chain
There is no need to invoke climate hobgoblins to explain what has gone wrong. And there are other problems with the US supply chain, which can be summed up by the words “California” and “Biden”. But lets explore the issues raised by Yale 360.
Go back a century, and supply chain disruption of non-perishable goods, at least in peacetime, would never have been such a serious issue. People were used to supply chains being disrupted, so they kept large inventories onsite, and a large address book of alternative suppliers, to ensure resilience.
Then computers came along, and people started using computers to create just in time delivery systems.
I’ll never forget the head of IT in an Australian heavy manufacturing plant showing me through an empty warehouse, explaining that he was the reason the warehouse was empty. By identifying exactly what component parts were needed for each order, his company no longer needed to keep large inventories of components, they knew ahead of time exactly what would be needed and when.
Holding component inventory also potentially creates significant taxation issues. Tax law is complex, so I might be wrong, but my understanding is the US warehouse tax prevents companies from deducting the cost of purchasing component inventory from their taxable profits. This is potentially a potent Federal incentive to keep component inventories small, and keep contingency and resilience to an absolute minimum.
Those same computers also run massive accounting programmes to search who the cheapest suppliers are, and recommend placing all the orders for key components with the same low cost supplier. Since everyone runs similar software driven searches, using the same data, which all produce similar conclusions, the entire manufacturing world now depends on single points of failure.
These computer models lowered capital costs, for sure. From an accounting point of view, parts and components sitting on shelves are dead capital, which impact the return on shareholders’ investment. But parts inventory is also resilience against supply chain disruption.
This insane concentration of vulnerability, and razor thin contingency, was always going to come unstuck, as soon as the practice became widespread enough to start causing problems.
Companies got away with extreme zero inventory practices, so long as OTHER companies held inventory.
The inventory held by others camouflaged the downside of zero inventory practices, allowing zero inventory companies to behave like vampires, allowing them to feed off the resilience of others, the capital and inventory holdings of companies which did not practice strict zero inventory.
But now the practice of zero inventory is almost universal, now almost everyone is a vampire, there are no longer any buffers or contingency left in the system on which to feed. The entire supply chain system is brittle, like a fragile glass sculpture. The slightest disruption sends painful ripples and cracks throughout the global manufacturing and production system.
Unwinding will be painful – building component inventory unequivocally means accepting lower profits, maybe paying more tax, until the next disaster strikes. There is going to be a lot of management opposition to anything which threatens the size of their annual bonus. Managers will need the courage to defy their own accounting software, and the self confidence to face down their model obsessed accounting departments. But companies putting all their eggs in one basket was never a good idea, nor was assuming delivery at the exact agreed time, with near zero contingency for delay or failure.