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Is It Time to Rethink Globalized Supply Chains?

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Re: Is It Time to Rethink Globalized Supply Chains?

#161

Post by naasking »

giantrobot wrote: post #152
naasking wrote: post #95

Definitely time to rethink globalized supply chains. The centralization inherent to this obsession with efficiency is simply not resilient to disruptions. We learned to build redundancy into our food production to handle disruptions like, centuries ago, which is (partly) why we pay farmers to produce more food than we technically need. We don't invest much to keep manufacturing of some other critical goods domestic.…

Farming is not a good comparison to manufacturing when it comes to overproduction. Food can be eaten or processed/preserved to be eaten later. Some foods have elastic demand but in general food doesn't since we all need to eat. With a lot of manufactured items demand is far more elastic and any given manufactured item isn't necessarily a substitute for any other. If Intel or AMD overproduces higher power desktop CPUs…

I never said supply chains should be slower or less dynamic, I said they should be less centralized and thus more robust, and arguably critical goods manufacturing absolutely also need a domestic presence.

This is completely obvious when you see how Hurricane Maria led to drug shortages because Puerto Rico was the sole produce of some critical drugs, or how China recently had to halt outgoing shipments and everyone else in the world started running out of masks and medical equipment.

> But the solution to supply chain issues is more complicated than just building factories.

Right, it's building factories in the right places, and ensuring they can tolerate disruptions.

> Many companies are also simply unwilling to take a profit hit by diversifying their supply chains or moving to longer production cycles.

Sure, just like banks and investment firms would be unwilling to have more robust debt ratios in order to improve their returns when all is well, if we didn't force them to maintain a less risky debt ratio in order to avoid catastrophes when all is not well.

Manufacturing isn't meaningfully different in this respect, it's all about managing risk. Corporations should have more responsibilities to quantify and manage risks like this.

Re: Is It Time to Rethink Globalized Supply Chains?

#162

Post by quanticle »

shas3 wrote: post #155
asdfman123 wrote: post #149

Earlier quoted context omitted.

How do you build in redundancy, though? If China makes widgets for $0.13 a unit and the US makes widgets for $0.15 a unit, how do you incentivize people to buy some of them from China, and some of them from the US? It seems like the logic of free trade and specialization dictates it's mostly all-or-nothing. That's a genuine question, by the way. I'm curious.

The incentive has already been created by Covid-19 exposing the vulnerabilities and need for decentralization. Diversification will emerge such that the next time there is a shock companies that diversified will survive, while others fail. Some industries will not learn because they will be bailed out, others like consumer electronics have probably already learned their lessons.

The incentive has already been created by Covid-19 exposing the vulnerabilities and need for decentralization. Diversification will emerge such that the next time there is a shock companies that diversified will survive, while others fail.

There is an incentive for now. When the current supply shock goes away, the old market pressures will reassert themselves, and those companies whose supply chains are narrowly focused on the lowest-cost/highest-quality producers at the expense of diversification will outcompete those whose supply chains are diversified.

The parent questioner is asking, in essence, how can we turn this incentive from a one-time shock into a continued incentive to maintain diversification? As it currently stands shocks are far too unpredictable and episodic to serve as a market incentive. In practice, people don't diversify unless there's a constant and ongoing pressure for them to do so. It's much easier and cheaper to find a good supplier and rely on them as much as possible.

Re: Is It Time to Rethink Globalized Supply Chains?

#163

Post by GuB-42 »

Is it really a problem? Obviously, now, it is. But everything is a problem.

Having the supply chain less globalized doesn't mean there is an excess. Now, there is a shortage of surgical masks, but that's because the demand is too high, not just because they are made in China.

You have to balance efficiency and reliability. And normally, the global supply chain is very efficient, and surprisingly reliable. Black swan events happen regularly and besides a few price hikes and some company coming and going, business continues as usual. A de-globalized supply chain will certainly be able to deal with such event better, but at the expense of permanent inefficiencies.

Of course, right now, it is far from "business as usual", but that's because there is a freaking virus in the air, and if you catch it, you may die. Still, you can still buy food, and the essential shortages are of things that are directly related to the disease, like masks, hand sanitizers, and respirators.

And governments and companies alike do plan for shortages. Most countries produce more food than necessary to account for the risk of famine. There is a reserve of essential medical items, and it is being used right now... within reason.

One thing is for sure, it is too soon to draw conclusions.

Re: Is It Time to Rethink Globalized Supply Chains?

#164

Post by e40 »

GuB-42 wrote: post #163

Is it really a problem? Obviously, now, it is. But everything is a problem. Having the supply chain less globalized doesn't mean there is an excess. Now, there is a shortage of surgical masks, but that's because the demand is too high, not just because they are made in China. You have to balance efficiency and reliability. And normally, the global supply chain is very efficient, and surprisingly reliable. Black swan…

It doesn't take much of a thought experiment to understand it could be a problem. China and the US have worsening relations, what if they get much worse? We are at their mercy.

Also, isn't competition a good thing? If the companies of the world had dual supply chains, in China and elsewhere, that would foster competition, which isn't just good for a lower price, but also for higher quality.

Re: Is It Time to Rethink Globalized Supply Chains?

#165

Post by xkcd-sucks »

jdennah wrote: post #10

That's silly, you can easily fix the problem by using a subscription only on staples like food. That way they can't surge the supplies and you end up with one guy getting all the eggs and reselling them.

The word for this is "rationing", right?

Re: Is It Time to Rethink Globalized Supply Chains?

#166

Post by quanticle »

belorn wrote: post #144
tvanantwerp wrote: post #36

I feel like the problem is less that supply chains are globalized, and more that they aren't redundant. By that I mean, there's too much reliance on China as the primary producer/exporter for countless industries and products. Having just one nation account for such a large share of manufacturing introduces single points of failure. It would be wise to have multiple sources for any given good, especially if it's esse…

From what I have heard and seen, the reason is that there isn't any other place where labour is that cheap. In combination with very cheap transport costs (which may be quite subsidized in order to encourage trade), what you get is a single location where almost all production occur. A extreme example I have heard of (could of course be false) is that some fish from the north parts of Norway get sent to be processed…

The cheap labor argument is one that was valid in the '90s and 2000s, but hasn't been valid for quite some time. At this point, especially with regards to electronics, it's just not possible to assemble some goods outside of China. The supply chain expertise is there. The skilled workers are there. All the tacit knowledge about the issues one encounters with mass production is there. To bring all that knowledge back would take decades, and is beyond the ability of any single firm acting alone.

It's a classic collective action problem. Diversification offers a diffuse benefit to everyone, but the costs are borne by the individual firms that put in the effort to train workers, document tacit knowledge, refactor supply chains, etc. As a result, without a central coordinating authority, firms will not diversify, because to do so would be to move away from the Nash equilibrium that incentivizes them to use the cheapest/fastest/most specialized supplier at the cost of diversification.

Re: Is It Time to Rethink Globalized Supply Chains?

#167

Post by quanticle »

TeMPOraL wrote: post #118
unethical_ban wrote: post #114

Earlier quoted context omitted.

I said this last night to a friend: The United States (and all nations really) need to look at supply chains the way we look at AWS regions. You don't build anything in just one region when it's in production - you always have redundancy, in this case, geographical and political redundancy if possible. We have strategic reserves of petroleum, foodstocks, and other necessities. It is time to think about the same with…

It's not stupidity that caused supply chain fragility. People involved understand the benefits of redundancy. It's the market that doesn't . It's fundamentally unable to protect itself against black swan events, because they're (by definition) outside of its optimization horizon. Redundancies and buffers that could protect us from once-in-couple-decades events are considered as "fat", and are cut off by competitive p…

It's fundamentally unable to protect itself against black swan events, because they're (by definition) outside of its optimization horizon.

I agree with your conclusion, but I want to push back on the assertion that COVID19 was a "black swan". Pandemics (especially pandemics such as this one) are not black swans. Numerous experts saw predicted them. There were examples of similar events in the recent past (for example, SARS, MERS, H5N1 influenza, etc).

The reason markets are bad at dealing with pandemic preparation is the same reason that markets are bad at dealing with pollution. It's a collective action problem. The benefit of pandemic preparation is spread across society in a diffuse manner, whereas the costs are borne by the individual manufacturers and distributors who take on the increased transaction costs of dealing with three or four suppliers, when their competitors get away with only having one or two.

It's analogous to dumping untreated sewage in a river. Even if the executives at a want to install scrubbers, as long as it has a competitor who can manufacture goods or provide services more cheaply by dumping untreated sewage, the company cannot do so, because the costs incurred will put it at a competitive disadvantage, and it will lose business to its competitor. In the same way, even if executives understand that having a supply chain dependent on a few key suppliers is a potential liability, they can't diversify as long as those suppliers are the lowest cost option, and moving away would result in them providing the same goods and services at a higher cost than their competition.

Re: Is It Time to Rethink Globalized Supply Chains?

#168

Post by RandallBrown »

asdfman123 wrote: post #149
tvanantwerp wrote: post #36

I feel like the problem is less that supply chains are globalized, and more that they aren't redundant. By that I mean, there's too much reliance on China as the primary producer/exporter for countless industries and products. Having just one nation account for such a large share of manufacturing introduces single points of failure. It would be wise to have multiple sources for any given good, especially if it's esse…

How do you build in redundancy, though? If China makes widgets for $0.13 a unit and the US makes widgets for $0.15 a unit, how do you incentivize people to buy some of them from China, and some of them from the US? It seems like the logic of free trade and specialization dictates it's mostly all-or-nothing. That's a genuine question, by the way. I'm curious.

Maybe tariffs?

I'm not sure if this is practical to actually implement, but if you increase tariffs based on how many of each item you're shipping, it would eventually be cheaper to manufacture some of them in the United States.

Example, first million widgets have no tariff. Next 500,000 are $0.02 per widget. Next 500,000 are $0.03 per widget and now it's cheaper to make those last 500,000 in the US.

And for companies with smaller runs, like 50,000 widgets, the volume savings might not make up the extra cost of dealing with Chinese manufacturing (shipping, time zones, language barriers, etc.)

The biggest trouble would be setting those values at reasonable levels based on different industries. Not sure if you could actually do that in a way that scaled to EVERYTHING manufactured in China.

Re: Is It Time to Rethink Globalized Supply Chains?

#169

Post by stormdennis »

at-fates-hands wrote: post #147
TeMPOraL wrote: post #118

Earlier quoted context omitted.

It's not stupidity that caused supply chain fragility. People involved understand the benefits of redundancy. It's the market that doesn't . It's fundamentally unable to protect itself against black swan events, because they're (by definition) outside of its optimization horizon. Redundancies and buffers that could protect us from once-in-couple-decades events are considered as "fat", and are cut off by competitive p…

>> Redundancies and buffers that could protect us from once-in-couple-decades events are considered as "fat", and are cut off by competitive pressure. THIS. My brother-in-law owns a company and they put in place a ton of redundancies after the 08' crash. They're in a specialized manufacturing. After 6-7 years of stability and some of their markets recovering and stabilizing, he started getting pressure from his two p…

This is good then. The company with the cheaper but vulnerable supply chain suffers and the companies who paid a premium for robustness in their chain benefit. That's how capitalism is supposed to work I think.

Re: Is It Time to Rethink Globalized Supply Chains?

#170

Post by stormdennis »

bronipstid wrote: post #121
_jal wrote: post #76

Earlier quoted context omitted.

You might be right over the long term, we don't know yet. Related observations have been made - people used to talk about how countries with MacDonald's franchises never went to war. But it does open up avenues for conflict less intense than invasion. The term 'weaponized interdependence' has recently been coined for this. An exploration: http://henryfarrell.net/wp/wp-content/uploads/2018/05/Weapon...

Interesting. The McDonald's thing is sort of like saying that no two Soviet Socialist Republics have ever gone to war. It just means they aren't really sovereign independent countries acting on their own behalf.

Armenia and Azerbaijan had a war. Probably since the end of the USSR though.
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