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Global supply chains are facing a very chaotic crisis that only seems to get worse. While some bottlenecks ease others are just starting. With each passing day, new shortages emerge around the world due to delivery delays, shipping disruptions, and a record congestion of cargo ships at ports. The network of world trade is also being plagued by container backlogs, labor shortages, geopolitical tensions, energy shortages, travel restrictions, and lockdowns. The combination of these factors is creating a ripple effect all over the planet, but especially in the United States. For that reason, analysts at Capital Economics are predicting the supply chain crisis to last for at least another two years.
But have you ever wondered why supply chains have become so tangled up? Or what’s the root of the supply chain collapse? In an article brilliantly written by the economist and financial commentator, James Rickards, which was recently published in his blog, the Daily Reckoning, the analyst explains that there’s no simple answer for that question. In fact, he says that supply chains are so complex that the answer is essentially irrelevant. It is a very intricate network, whose scale and complexity can be compared to an ecosystem. That’s why paying attention to the exact cause and effect to get to the root of the problem can be a dead-end. The processing power needed to understand the entanglement of supply chains exceeds our logic comprehension.
Even though most of us have a notion of how supply chains operate, only a few people in the world truly understand how elaborate, extensive and vulnerable they really are. That’s why Rickards breaks down this complex explanation into a simple example to show us why one single failure can lead to a cascade of disruptions and cause unimaginable damages. Let’s picture a single loaf of bread. For that loaf of bread to arrive at the store, a truck driver has to pick it up from the bakery. The bakery needs one or more suppliers to get all of the ingredients needed to make the bread. The ovens used to bake it and the packing used to wrap it when it’s ready are also an essential part of the process that allows you to bring that loaf of bread home.
The manufacturer of the oven also needs its own supply chain to provide him with steel, tempered glass, semiconductors, electrical circuits, and other materials needed to build his product. The ovens can be handcrafted or mass-produced in a factory that requires production lines or manufacturing cells to assembly the product. For its part, the factory also needs its own supply chain of electricity, natural gas, heating, ventilation systems, and qualified labor to make its entire operation work. So the store that sells the bread needs only the receiver of a product that required numerous supply chains to exist. Every store requires warehouses or back rooms to keep their inventory, as well as loading docks, forklifts and conveyor belts to move their merchandise from truck to shelf
Now imagine all of the other items available at grocery stores: fresh produce, fruits, meat, pork, fish, poultry, canned goods, dairy, drinks, spices, and so on. Each of them requires the operations of several supply chains to be produced, processed, packed and transported to finally get to store shelves. Things are much more entangled than they seem.
The main turning point for the supply chain was the just-in-time model of production. The big problem is that the just-in-time model has made the whole system extremely fragile. One single disruption can compromise the operations of the entire global supply chain. The system is simply not prepared to handle external shocks. But those shocks are happening on an everyday basis. The health crisis, the Ever Given accident, trade conflicts, port shutdowns, financial swings and many more factors can weigh upon the system. That’s why supply chains have collapsed.
The bottom line, as Rickards concludes, is that if the supply chains collapse, the economy starts to collapse as well. Every item, product, and service that keeps our economy running requires a series of supply chains to exist. And when the economy starts to fall apart, our social order begins to fall to pieces just as well. And the price to pay for social disorder is far higher than any savings the just-in-time model can offer. Sadly, our leaders are failing to assess the severity of this situation, and we are already feeling the impact of broken supply chains and a slumping economy. The global supply chain crisis is far from over. And the chaos that is about to emerge goes far beyond our imagination.