Month: June 2021

2021 State of Logistics

For thirty-two years the Council of Supply Chain Management Professionals has sponsored an annual comprehensive review of the field. This year’s report was released on June 24. According to CSCMP, key findings include:

The K-shaped recovery of 2021 reflects changed consumer habits. Hospitality, restaurants and airlines struggled. Grocery retail, home improvement and e-commerce prospered.

E-commerce purchases (some of which was picked up in-store) grew by 33% to $792 billion, representing 14% of all retail sales.  

The control tower concept is taking on an added importance. Resilience is most effective when paired with visibility. Companies need knowledge to make quick decisions, and the control tower serves as an information hub to enable better planning and reacting. 

Sustainability efforts by the transportation sector are increasing. Consumers are considering environmental impacts in their purchasing decisions while governments across the globe are instituting more stringent regulations.  

Moving forward, supply chains must continue to provide goods and services to the American public while dealing with tight capacity and volatile rising rates; H1 2021 has the highest rates the market has ever seen.  

The U.S. economy is now expected to grow 7.7% this year with advancements related to increased vaccinations and a return to normal.

Nothing highlighted in the report is unexpected, but reading this concise synthesis is helpful.

I hope that economic expectation is accurate. I am increasingly concerned about the Delta variant’s impact — and even more concerned regarding the potential consequences of post-Delta mutations.

A too-quick cautionary comment regarding “control towers“: The benefits ought to be obvious. But I have noticed that the analogy can sometimes prompt those who are not supply chain professionals to neglect important aspects of the aviation analogy. Those in the control tower can see the whole system and are, as a result, a valuable source of credible guidance to the pilots who remain in control. Recently one CFO complained to the firm’s CSCO that after “buying your control tower, we seem to have less control than before.” Knowing that the CFO is a Tolkien fan, my contribution was to suggest the current technology is less a control tower than a digital Weathertop or Amon Sûl from The Lord of the Rings. Seeing farther can inform better decisions, but control remains elusive… even for Gandalf.

Moreover, it is substantive insight into the whole air traffic system that gives aviation control towers their value. Meanwhile, current supply chain management “control towers” tend to have tiered and partial views of the system: sort of like, everything that moves at 25,000 to 30,000 feet, but little above or below. Hmmm, maybe I’ll take the train…

Supply chain thinking at Cornwall

The Group of Seven joint communique gives significant attention to the vaccine supply chain then extends several anti-pandemic principles toward achieving greater economic resilience. Here is a long-quote that makes the pivot:

The COVID-19 pandemic has illustrated the risk to economic resilience posed by global crises and shocks. These can manifest from acute shocks, for example as a result of pandemics, and chronically, from challenges such as market imbalances and distortions. Our recoveries must ensure we build back more resilient. As we recover, these risks need addressing in a more coordinated way. We will collaborate more strongly between us and with allies on a new approach to economic resilience. We recognise climate change and growing inequalities as key risks for the global economy. We will consider mechanisms and share best practices to address risks to the resilience of the critical global supply chains, in areas such as critical minerals and semiconductors, reflecting on models used elsewhere such as stress-testing. We will also enhance our cooperation on investment security within our G7 Investment Screening Expert Group, to ensure we are resilient in our openness to all, able to tackle risks in keeping with our shared principles of open markets, transparency and competition. Our solutions will be built on our shared principles of openness, sustainability, inclusion, innovation and competition will help retain and reinforce the benefits of open markets; without them, we risk a future of normalised volatility and fragmentation in the global economy. 

In the communique there is a recurring reference to creating supply chains that are “secure, resilient, competitive, transparent and sustainable and diverse.” Each of these terms will soon appear as headings along an edge of an action matrix.

Having contributed to a few of these documents over the years, I am (overly?) sensitive to the appearance of specific examples after a comma that was probably a period in several prior drafts, such as this rather awkward bit in the quote: “… reflecting on models used elsewhere such as stress testing.” Someone was successful inserting stress testing and will now use the reference to push bureaucracies to action. I wonder if David Paduano was walking along Carbis Bay last weekend? For more, see page 20 of this recent report.

Supply chain thinking at the White House

The 100 Day Supply Chain Review delivered on June 8 is aimed at solving four big problems. Six much more comprehensive supply chain reports are due to be delivered in February 2022. The Executive Order framing these reports emphasizes, “The United States needs resilient, diverse, and secure supply chains to ensure our economic prosperity and national security.”

Beyond the specific problems being tackled, what do these 250 pages of dense text tell us about this administration’s predispositions regarding supply chains writ large? For any supply chain professional, this 100 day sprint of a report is less about supply chains, per se, than about the “industrial commons.” More than a decade ago Harvard Business professors Gary Pisano and Willy Shih articulated this framework for explaining the decline of — and way to reclaim — American manufacturing competitiveness. (More on the Industrial Commons at The Century Foundation.)

But it is still possible to discern some supply-chain-specific notions percolating through the lens and language of the industrial commons. For example, here are three disconnected, but mutually reinforcing quotes from the report:

Our private sector and public policy approach to domestic production, which for years, prioritized efficiency and low costs over security, sustainability and resilience, has resulted in the supply chain risks identified in this report… As the Administration sets out on a course to revitalize our manufacturing base and secure global supply chains, rebuilding for resilience at the national level requires a renewed focus on broad-based growth and sustainability...

A robust and resilient supply chain must include a diverse and healthy ecosystem of suppliers...

We also need to diversify our international suppliers and reduce geographic concentration risk. It is neither possible nor desirable to produce all essential American goods domestically….  The Administration’s approach to resilience must focus on building trade and investment partnerships with nations who share our values—valuing human dignity, worker rights, environmental protection, and democracy.

So… what I infer is that the White House is mostly concerned that too much important stuff is being produced outside the United States in places not necessarily friendly to the US. There is a need to adjust what proportions come from where. There is also some concern when too much of anything important is produced in any one place.

I do not perceive much concern related to issues of transportation, modes of conveyance, or even distance. As long as production is spread around in friendly places, there is an assumption that what is produced will be delivered to demand. Build the manufacturing capacity and the distribution capacity will come. There is some truth to this. But the attention deficit involving distribution — especially in the current context of trucker shortages, port congestion, high freight rates, and long-delayed deliveries — is surprising in what claims to be a supply chain report.

There is even less attention to demand driving supply. Production priorities given to efficiency and (often related) low costs are implicitly characterized as corporate choices, rather than consumer demands. The authors write, “All four reports make clear that current U.S. market structures fail to reward firms for investing in quality, sustainability or long-term productivity.” A major aspect of “current US market structures” is intense price competition. Quality and sustainability often involve higher consumer prices. Consumers are not always motivated to pay for these features.

Even where the influence of demand is acknowledged, it can rather quickly be discounted. Here is the set-up for the semiconductor element of the report:

The industry is currently undergoing a shortage due to multiple factors, including unexpected shifts in global demand following the COVID-19 pandemic and events that disrupted specific major semiconductor manufacturing centers, such as the early 2021 storms in Texas that caused a shutdown of several semiconductor manufacturing plants. This report examines the semiconductor supply chain through five related essential segments: (1) design; (2) fabrication; (3) assembly, test, and packaging (ATP) and advanced packaging; (4) materials; and (5) manufacturing equipment.

Which of those five segments is capable of shaping or managing demand? (None)

Sudden shifts in both consumer and producer demand created the current mismatch of supply and demand for semiconductors. There are good risk management and national security reasons to decentralize global semiconductor manufacturing. But a diversified and decentralized semiconductor industrial commons, faced with the same 2020 demand behavior would almost certainly generate shortages very similar to what we are currently experiencing. Contemporary high-volume, high-velocity supply chains are organized around demand. Meaningful Supply Chain Resilience requires careful attention to demand.

Tantalizing opportunities are teed-up for potential attention to demand, supply, and flows in between. Without a great deal of substantive justification or further explanation here are two consecutive recommendations:

We recommend that Congress enact the proposed Supply Chain Resilience Program at the Department of Commerce, to monitor, analyze, and forecast supply chain vulnerabilities and partner with industry, labor, and other stakeholders to strengthen resilience. We recommend Congress back this program with $50 billion in funding that will give the federal government the tools necessary to make transformative investments in strengthening U.S. supply chains across a range of critical products.

We recommend establishing a new interagency DPA Action Group to recommend ways to leverage the authorities of the DPA to strengthen supply chain resilience to the extent permitted by law. The DPA has been a powerful tool to expand production of supplies needed to combat the COVID-19 pandemic, and has been used for years to strengthen Department of Defense supply chains. The DPA has the potential to support investment in other critical sectors and enable industry and government to collaborate more effectively.

In my mind another 250 pages could easily be written on just these two recommendations. The Defense Production Act is referenced more than fifty times in the current report. But these are analogous to quick mentions of a scalpel without explication of surgical purposes or good practice. Spending $50 billion on a public-private capability to monitor, analyze, and forecast supply chain vulnerabilities could transform US and global supply chains as much as the Federal Reserve Act of 1913 transformed US banking. A bit later the report adds, “We recommend that the Commerce Department lead a coordinated effort to bring together data from across the federal government to improve the federal government’s ability to track supply and demand disruptions and improve information sharing between federal agencies and the private sector to more effectively identify near term risks and vulnerabilities.” This attention to supply and demand is intriguing. I wonder about why data aggregation is limited to federal government sources.

As noted, tantalizing — even treacherous.

I prefer the phrase “demand and supply networks” instead of the linear image of supply chains. I perceive that network science offers important insights into interdependent flows of demand and supply. I am especially interested in how Elinor Ostrom’s concepts of common-pool resources can be applied to demand and supply networks. But in most conversations, I keep talking about supply chains instead. I perceive that several of those contributing to this 100 Day Supply Chain Review are self-defined stewards of the industrial commons. But they recognize this framework is meaningless to most others, so they are using recent interest in supply chains to advance concepts of the industrial commons. I empathize. I am also intimately aware of the intellectual compromises and potential confusion spawned by this kind of policy/strategy cocktail.

My preferred cocktail is a Manhattan. To my taste, the current report is two parts vermouth to one part whiskey. Waaay too sweet, too much industrial policy and too little Supply Chain Resilience. I hope follow-on outputs reverse these proportions.

100 Day Supply Chain Review

On Tuesday, June 8 White House staff and cabinet agencies delivered a supply chain report to President Biden. Instructions for the report were set out in a February 24 Executive Order. This is the first of two related reports. This initial output focuses on current supply chain challenges involving semiconductors, high capacity batteries, critical and strategic minerals, and pharmaceutical/active pharmaceutical ingredients. Here is a link to the full 250 page report. Following is a visual capture of frequent words and phrases in the report. Soon to come will be a more considered exegesis of the text.

Some specific word counts from the report:

“Supply Chain” appears 739 times, “supply” appears alone 186 times. “Capacity” is used 240 times. “Demand” is referenced 234 times (“consumption” and “consumers” appear 21 times each). “Transport” appears 59 times, 27 as part of “transportation”. “Distribution” is used 40 times. “Concentration” appears 40 times, “concentrated” 35, and “consolidated” is used 7 times. “Ecosystem” is used 32 times. “Flow” or “flows” appear 25 times. “Network” appears 16 times in 250 pages.

Demand and Supply Disruptions

My month long hiatus is the result of too much demand and too little supply, especially of personal time and energy.

I was surprised by how surprised so many seemed to be by the Colonial Pipeline cyberattack. Anytime so much supply capacity for such a high demand product is so tightly concentrated, risk accumulates and will, one way or another, result in disruption. In this case the disruption was short-lived. Anxiety-driven consumer purchases prompted about as much disruption (even more?) than the shut-down of flow.

I was still involved in helping clients and others make-sense of the Colonial Pipeline event when a similar ransomware attack hit JBS, the world’s largest meat processor. Meat processing in the United States is a high volume, high velocity network featuring significant concentration. But once again, the specific disruption was rather brief.

Here’s the core of what I sent several clients and colleagues on June 5: From a Supply Chain Resilience perspective there are some key strategic factors to recognize:

1. The more consolidated/concentrated the flow, the more consequential the outcomes: JBS represents one-fifth to one-quarter of US meat production.  Colonial Pipeline moves the majority of refined fuel consumed between Atlanta and Washington DC.  Finding, understanding, and being in an active relationship with these concentrations can be very helpful.  [Fuel racks and Grocery Distribution Centers are other examples.]
2. The more high volume (like Colonial and JBS) and high velocity (like JBS) the supply chain, the more the network depends on digital inbound and outbound scheduling/sorting functions. These digital functions must be more widely distributed and accessible than most other SCADA functions to facilitate high volume, high velocity flow. This innate network characteristic increases vulnerability to cyber attacks. Finding, understanding, and being in an active relationship with the owners/operators of these key functions can support improved private-public mitigation preparedness and response. [Grocery store Point-of-Sale transaction functions and fuel rack scheduling/transaction are other examples.]
3. Failure of these key functions for these very concentrated, high volume, high velocity networks will almost always prompt sudden, unsustainable demand spikes… regardless of cause, cyberattack or otherwise. Mitigation and preparedness should include much more serious attention to demand management. In the case of the 2020 meat shortage and the recent Colonial Pipeline hack, consumer reaction was arguably the most troublesome factor.

In my opinion, cyberattacks involving these functions for these sorts of highly concentrated networks will recur again and again.

And… while the recent ransomware attacks sounded like a trumpet blast or timpani strike, the steady decline in covid vaccinations lends our late Spring supply chain symphony an anxiety-inducing thrum of dissonant violins. For meat, fuel, or vaccines preexisting demand shapes direction, speed, volume, variability — the flow — of supply. In each case — and in most cases — demand can be predicted and demand is susceptible to shaping. Since this time last year it has been widely recognized that vaccination rates above fifty percent of the population would be increasingly difficult and require increasing investments. This blog discussed these issues in fall 2020. The surge in demand for gasoline in markets served by Colonial Pipeline should have surprised no one. The last year has shaped demand for meat to anticipate spot shortages, as a result the consumer reaction to the JBS attack was muted.

High volume, high velocity demand and supply cannot really be controlled, but with knowledge, attention, and skill, demand can be shaped and supply can be targeted.