October 8, 2020
The Great (Supply Chain) Nap
I listened to a podcast this summer where it was contended that the current pandemic was the first material disruption to the world’s, but mostly America’s, way of life since World War II. This period between the last world war and the pandemic was generally void of widespread famine, pandemic, tyranny, war, poverty, economic depression, or suffering. Tragedies occurred, but they were short-lived and not felt globally while the general population was insulated from wholesale impact. This period of consistent levels of peace and prosperity was a historical anomaly and unheard of in human history. (Not to discount the impacts of various wars and social strife within this time period, but for the purposes of this article, let’s assume that their impact did not cross a specific global impact threshold.) It provided the ability for multiple generations of Americans to forget about the worst catastrophes that can befall humans and relegated these once commonplace disasters to the dusty corners of a museum housing relics of a history outgrown. A period that allowed us to become asleep at the wheel, thanks to overindulgence at the chalice of good fortune. Thus, the period bookended by these events was coined, “The Great Nap”.
The discussion turned to the impact of The Great Nap on America and Americans. The hypothesis was that within that window of time, we were repeatedly rewarded for inadequate crisis planning, failed risk mitigation, and grew fat and happy. We forgot about the need to prepare for the inevitable problems, disruptions, and suffering of the future. When an entire country has been free of material suffering for multiple generations, the civilization’s internal systems and behaviors designed to prepare for catastrophic events become punished for coming online and driving safe risk-averse behavior. (More on the behavioral impacts to supply chain later.)
The closest analogy I could come up with was that of the so-called ‘preppers’ here in America. While most view this specific group’s concerns about the need to build food stocked bunkers in preparation for the end of the world as trivial and unfounded, it would only take one serious crisis where all that preparation, planning, and expenditure of resources was vindicated and rewarded. They would be saved by the simple fact that their latent ‘catastrophe avoidance systems’ were still online. Conversely, if a prepper level event occurred once every generation, as it often did historically, we might all behave in such a manner.
While the pandemic has been nothing short of an utter tragedy for the millions that lost their jobs or their lives, it has not spelled the end of civilization. The discussion deemed this pandemic a wake-up call to the fact that civilization and our way of life is far more fragile than the last several generations have been led to believe, when viewed on a longer time horizon.
Let us explore The Great Nap’s behavioral impact within the supply chain.
The Effect on Supply Chain
We have not had a material global the supply chain incident for decades, even generations. This has rewarded organizations with the most aggressive globalized supply chain strategies while punishing those with even mild risk aversion. One must wonder if the incentive and reward structure of the economy over past 70 years has created at-risk supply chains lacking the resiliency and redundancy necessary to survive what the future may hold.
Let us compare two hypothetical US-based firms competing in the free market over the past several decades. One aggressive in its strategy, actions, and culture, while the other took a cautious, pessimistic and risk-averse strategy. The aggressive firm led the charge in outsourcing and offshoring to APAC, reduced on-hand inventory positions, and moved to a just in time inventory model. They chased the lowest production and inventory carrying costs around the globe, as many have done. While there may have been slight societal backlash in lost American jobs, the market ultimately rewarded their decision with larger profits if they kept prices static, or with larger market share if they cut prices in line with their reduced cost of production.
The risk-averse firm may have initially decided that local US-based production was safer, as it possessed less chance of supply chain, manufacturing, or shipping disruption. After years of experiencing no such disruption, not to mention getting beat in the free market, they would be forced to follow suit and offshore like the aggressive firm. Executives subscribing to the risk-averse viewpoint would be cast aside as foolish and branded the cause of lost profit and/or market share. The result is confirmation that the quest for the lowest production and labor costs across the globe is effective, profitable, and over time, built into and reinforced within industries and corporations across America. Risk-averse individuals in supply chain are cast out to make room for the practitioners that can implement a lean globalized supply chain during a period without catastrophe.
Imagine an alternate reality in the above comparison where at least once every 15 years, some type global disruption impacted the aggressive firm’s ability to produce and or distribute. In this scenario, the risk-averse firm would have been periodically rewarded for a more cautious approach to a globalized supply chain and a lean just in time inventory model. In fact, they may have been in a better position to learn from their competition and cautiously explore near-shore production in Mexico or similar. Reducing costs while still limiting the impact of import/export closure.
While we could model the frequency and size of disruption necessary for each firm’s decisions to win out in the example above, the idea that one side has won so heavily for so long is fascinating. One could argue that while we all knew a pandemic would occur at some point in the future, firms and their supply chains were caught wholly unprepared.
The response to the pandemic has been strong and decisive. Firms quickly realized the risk in harboring production so far, and across so many intermodal hops, from their customer base while simultaneously limiting on-hand inventory. Overnight firms began to discuss returning production back to the United States, or a nearby country. Warehousing space continues to tighten as inventory positions swell and the ability to house inventory in brick and mortar locations diminishes.
While these are expected outcomes in response to the Pandemic, at MacGregor Partners, we are most interested in what trends we can expect to see in the next five years.
Will Wall Street and the boardrooms of America forget about the pandemic five minutes after the population is inoculated and return to the globalized supply chain cost-cutting measures that served them well the past decades?
Will the memory of this disruption linger and if so, for how long, and to what extent?
How will corporations prepare for the next disruption and balance supply chain resiliency against cost?
Will firms that diversify and properly prepare be rewarded? Or will they lose out to the most aggressive actions, like in past years?
Regardless of your market position, know that the supply chain experts at MacGregor are here to help you analyze your specific risk profile and devise the most balanced and apropos solution. Reach out to start the conversation about how to balance the competing principles of supply chain resiliency and supply chain cost against the likelihood of future disruption events for your organization.Contact Us