The Global Supply Chain

We take so much for granted.  I am again surprised to find out how much our economy is dependent on materials or manufacturing halfway around the world.  Russia’s invasion of Ukraine is causing more supply chain problems.  Ukraine supplies about 50% of the world’s neon gas (and about 40% of the world’s krypton gas).  Neon gas is used in lasers for making computer chips. The two neon producing Ukrainian companies have halted neon production. Ukraine is also a significant exporter of wheat.  We live in an interconnected and global economy.

The global supply chain has been a wonderful blessing in many ways.  Take a look at all the fresh produce on our grocery shelves. I think of the bananas we have year round.  They are not local and usually grown outside of America. And the berries we can get anytime of the year.  Much of the produce in winter was grown thousands of miles away.  Some produce is local or from storage, but a lot of produce is shipped to us from far away.  The global supply chain has allowed us to enjoy some of these luxuries.  Our companies these days have greatly benefited from the global supply chain, and it has allowed our companies to become more efficient, but it also has created some vulnerabilities.

We were made acutely aware of these vulnerabilities during the covid pandemic and it showed how fragile the supply chain really is. To illustrate, I remember learning that when I ordered a new laptop, the order was sent to China and parts from various suppliers around the world were assembled according to my specifications before being shipped to me.  And in days I had the laptop.  It was a smooth fast process that was quite efficient. This is known as just-in-time or lean manufacturing. However, there were signs of supply chain fragility.  I remember in 2011 the floods in Thailand caused hard drive production to drop 28%.  That affected the delivery and price of laptops.

Today, the computer chip industry is still trying to get back to operating at full capacity, and now the Russian invasion of Ukraine will slow the recovery of the computer chip industry.  The supply chain, though quick and efficient, is fragile.  All that is needed is for one supplier or service provider to have problems and the rest of the supply chain is in trouble. The covid pandemic caused multiple failures to the supply chain and that ground everything to a halt.  I do not think it will be that severe in this case but there will be an effect on computer chip production.

Also with a global economy, prices tend to get set globally.  This is especially true of crude oil. The price of gas here depends on the global oil price, and this is why prices here have been soaring due to fears of a Russian oil shortage even though America does not import much Russian oil.  And I believe we have many other products whose price is based on the global market.  We live in a global economy.  Our economy depends on events that happen around the world. Some products are more affected by the global events than others, but one should expect supply chain disruptions to occur now and then.  

Companies need to be resilient and flexible to manage these disruptions. Toyota, after Japan’s 2011 earthquake and tsunami, put together a huge database of suppliers, suppliers’ suppliers and suppliers’ suppliers’ suppliers. They asked themselves what were the strategic items they needed to stockpile. They were trying to become more resilient.  I believe short term profit taking is what has made the global supply chain so fragile. There needs to be some longer term thinking to deal with these disruptions, so that there is a more robust and resilient response.

How flexible and resilient are you? How about the companies you depend on?

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