As Dr. Willy Shih from the Harvard Business School wrote in the Wall Street Journal, the supply chains that link producers of goods to consumers of goods can be intensely complex and difficult to understand. As long as supply meets demand, we don’t pay much attention to the supply chains whose function is to ensure that the basic principles of supply and demand exist. When, like they have for the past three years, things “gang agley,” we focus on those chains. Dr. Shih provides basic fundamentals for supply chains. To understand them is to succeed in the ever-more-complex science and art of logistics. Here’s Dr. Shih’s primer on the supply chain:
- Supply chains are complicated, with ever-increasing layers of intricacy and scope.
Supply chains have two phases—a production side, where the final assembly of a product takes place, and a distribution side, where it gets to the buyer. The production side can be incredibly complex. That’s because some products have lots of parts—3,000 or 4,000 for a smartphone and as many as 30,000 for a typical gasoline-powered car.
On the distribution side, a supply chain might have steps that connect a manufacturer to a retailer, overseas shipping, passing through a trucking link on the way to a distribution center, and then on to the store. Distance adds even more convolutions.
2. Because demand is hard to predict, many producers use to just-in-time parts inventories.
When parts suppliers are local, a condition Cleveland manufacturers experienced in the 20th century, this works. But we live in a global economy today with suppliers spread everywhere. The logistics of scheduling deliveries exactly when needed becomes much more complex. During and after the Covid pandemic demand spiked; bottlenecks disrupted international shipments of parts; gridlock hit continental logistics. Just-in-time was neither in time, nor just.
3. Ordering more than needed makes shortages worse.
Typically, a retailer or manufacturer only orders what is saleable or consumable until the next cycle begins. But sometimes a hot seller or short supply item appears, so the producer orders extra—just in case. Like Woody Hayes said about the forward pass, “three things can happen; two of them are bad.” Producers might succeed by carrying excess inventory, but it will probably contribute to even more shortages of key parts or more inventory than a producer can use.
4. Longer supply chains equal more logistical problems.
Many distribution supply chains are very long series of steps. Getting a television from China to Cleveland means truck transfers in Asia, long sea voyages, numerous rail and truck transport. More congestion takes capacity out of the supply chain system. The more things back up, the fewer things move through.
5. Bottlenecks are hard to spot because so few can see the whole picture.
People at different links in the chain only see problems upstream or downstream from them. A starkly visible problem of 100 ships idly waiting to unload – blame the Port of Los Angeles. The real bottleneck was in distribution centers close to the consumer, with labor and logistics shortages. Even when the port was running 24/7, there was no place for containers to go, no one to drive them, and no one to unload them.
Producing better products effectively and efficiently and offering those products to consumers at lower costs doesn’t work if you lack the logistical depth and support to collect the parts and distribute the goods.
