Month: October 2021

The supposed crisis in 550 words (and lots of links)

In the week prior to Halloween (before Amazon with Apple dramatically highlighted supply chain constraints), Tom Keene on Bloomberg Surveillance offered the best concise summary of supply chain realities that I have heard. He said, “It’s microeconomics and there’s ambiguity and there’s give-and-take and, frankly, there is an unknown and we are learning as we go in a natural disaster.”  (Please see below, start listening at about the 59:52 mark.)

Over the last several months I have written many more words. But TK seemed to spontaneously summarize what really matters.

Still, many want more detail than Mr. Keene provided, but more clearly and concisely than is typical of my method. So, as some of you have requested, here’s one more try.

Early in the pandemic US consumer demand fell hard and fast by about one-fifth. Then between May 2020 and about March 2021 overall consumption recovered. Since this March overall demand has increased by another half-trillion dollars per month.  This demand is usually being fulfilled.

But where consumers once purchased lots of services — like travel, entertainment, and eating out — over the last 18 months consumers have focused on a lot more stuff, even twice as much stuff (more).

Producing and delivering this much extra stuff this quickly would have complicated and congested flows in the best of all possible worlds.  But trying to supply this surge and shift during a pandemic has been extra tough.  Constraints on time and space intended to mitigate disease transmission have reduced production and distribution capacity. Disease penetration has been even more disruptive. Shifting upstream capacities created proliferating and unpredicted downstream gyrations 

Persisting supply chain friction has amplified human fatigue and frustration (and even fear) that has further constrained system capacity (e.g., workforce retirements, resignations, reimagining careers, non-participation, and more). Friday Amazon’s CFO explained, “For the foreseeable future, our capacity constraint is actually labor, which is new and not welcome.”

Supply chain constraints are promiscuous and breed additional constraints. Efforts to mitigate this proliferation of constraints (e.g. port congestion) have been complicated by issues of distance between supply and demand and over-concentration of channels (e.g. ocean shipping and port capacity).

These aggregated frictions (and complex feedback signals) are now constraining some fundamental flows, from food to fancy high-tech phones. Which products or categories are most at risk at this point seems to me more and more a betting proposition than anything else. Chop and wind in every channel are sufficient to threaten just about everything on offer. It is a mess. As previously outlined, I do not perceive the mess as an existential threat (except to some smaller retailers). But it is certainly an equal opportunity mess with the potential to seriously complicate economic outcomes for an extended period.

As consumers have less cash to spend and the proportion spent on services increases, overall pull is very slowly beginning to even out (more). Over-time (probably by March-April 2022, barring a more insidious virus or similar) this will result in noticeably improved equilibrium of demand and supply.  If and when volatility returns to something closer to pre-pandemic patterns is another Vegas bet.

This increasingly frustrating experience reveals the dangers associated with over-concentration of supply networks, especially when amplified by distance, and the current lack of effective structures for the exploration and exploitation of enlightened self-interest in managing the global ecosystem of demand and supply.

Demand management is not yet done

My supply chain — or better: demand and supply network — angle on the pandemic emphasizes the need to effectively manage demand for hospitalization. From a network perspective, supply of hospital care is the bottleneck that most often requires mindful exploiting (ala Goldratt). When hospitals are overwhelmed the network experiences more disease and death. When demand for hospital care remains within supply capacity, disease and death can be systematically mitigated across populations.

Hospital congestion is bad. Hospital flow is good. Local to regional demand is the flow factor most readily influenced. As is often the case, supply capacity is finite. Available medical staff is often the acute rate-limiting factor for hospital care.

Most people infected with covid-19 have not needed hospitalization or even much medical care. But a significant fraction of those infected have experienced severe illness (here and here and please see this caveat). The elderly, those with preexisting respiratory conditions, and the immuno-compromised are especially likely to require hospitalization. There have also been mysteriously deadly cases involving the young and seemingly healthy.

Vaccination, avoiding crowded interior spaces, social distancing, reduced circulation, and facial coverings are demand management techniques for slowing and containing transmission vectors across populations. The “consumer” often perceives these as self-protecting behaviors. But from a flow perspective, these are other-protecting measures, even network-protecting measures. Being vaccinated makes it much less likely that a person will transmit the virus to others. Encounters between vaccinated persons are much less likely to give the virus a mutation opportunity. Less transmission and less mutation equals less demand for hospitalization.

I have been tracking hospitalization rates in Israel, United Kingdom, and the United States. Obviously, these are three very different contexts. But each nation was early to make vaccines available and vaccination was well-along before or early-in the spread of the Delta Variant. Data quality on hospitalization can be a problem, but Israel’s small and sophisticated healthcare network may have the best data-integrity in the world. The British National Health Service is also data-savvy. The fractured US healthcare system creates plenty of data challenges, but overtime more accurate, real-time outcomes are being reported.

On October 19 Israel had at least 540 people hospitalized with covid, the UK (mostly England) had about 7000, and the United States had almost 52,000 people hospitalized with confirmed cases of covid. While the raw numbers are hard to compare, I find the logarithmic display (as below) — showing the rate of change — to offer something close to comparable demand curves for hospitalization. All three are doing better than late July or early August. But the numbers remain much higher than had been hoped when vaccination campaigns began. The UK’s persisting plateau is of particular concern.

According to The Financial Times (October 15):

The UK’s weekly death rate stands at 12 per million, three times the level of other major European nations, while hospitalisations have risen to eight Covid-related admissions a week per 100,000 people, six times the rate on the continent. The decision to end compulsory mask-wearing and to pause plans for vaccine passports in England has made the British government an outlier for its management of the pandemic and could account for the worsening trends, according to scientific experts. (More)

According to Reuters, “Four months into one of its worst COVID-19 outbreaks, Israel is seeing a sharp drop in new infections and severe illness, aided by its use of vaccine boostersvaccine passports and mask mandates, scientists and health officials said.

On October 18 the FT also reported:

Scientists are anxiously tracking a descendant of the Delta coronavirus, which is responsible for a growing proportion of Covid-19 cases in the UK, and could be more infectious than the original Delta variant, they say. This AY.4.2 subvariant has only recently been recognised by virologists who follow the genetic evolution of Delta but it already accounts for almost 10 per cent of UK cases. Its prevalence is increasing rapidly, though not as fast as the original Delta variant when it reached Britain from India early this year. (More and more and more.)

Israel has just confirmed its first case of AY.4.2. So far six have been confirmed in the United States. Waaay too soon to raise any alarms.

Quite the contrary, I will confess that my attitude toward covid has shifted in the last two or three weeks. I want to acknowledge that a combination of vaccination and natural immunity — assisted by modest behavioral adjustments — could reduce US viral risks to something akin to automobile injury and death (even less for vaccinated persons). Covid and car wrecks could even compete over bad luck and bad behavior as co-conspirators. (More)

But while my attitude is shifting, my considered judgment is not yet persuaded. It is waaay too soon to decide the next mutation (or two) will not be worse than Delta. As the contrasting accounts of Israel and the UK suggest, it is also waaay too soon to put aside behavioral cautions. Credible data does not (yet) signal anything more than continued uncertainty. So… if you can, get vaccinated if you are not; if you have been vaccinated, prepare to get your booster; avoid interior crowds; give other folks plenty of space; minimize travel; and cover your nose and mouth when you cannot avoid sharing interior spaces. When for practical or social reasons you cannot take all of these network-protecting, other-protecting steps, please do what you can whenever you can.

The Burdens of Abundance

Here are just a few of a recent flood of related headlines:

Port Gridlock Stretches Supply Lines Thin (Bloomberg)

America is Running Out of Everything (The Atlantic)

Global Supply Chain Problems Escalate (Wall Street Journal)

The Supply Chain Crisis and US Ports (The Financial Times)

The Global Supply Chain Nightmare is about to get Worse (CNN)

America’s Broken Supply Chain (Washington Post)

Grocery’s Biggest Players Seek to Reassure on Holiday Supply Chains (Grocery Business)

Despite the intense attention, none of this is new. Supply chain friction has been accumulating for many months — as well reported by each of the news organizations linked above. But the prospect of Santa’s supply chain failing for this Christmas has evidently become a source of civilizational angst. Accordingly last week the White House gave supply chains some sustained attention (and here and here).

Beyond this year’s fads (whether for children or not), what is really happening with our demand and supply networks?

On October 15 the US government reported August sales of $1.68 trillion (“the combined value of distributive trade sales and manufacturers’ shipments”), compared to 2020 August sales of $1.44 trillion and 2019 August sales of $1.50 trillion. Despite this strong spending, the US savings rate remains above nine percent, almost two percent higher than decade-long averages. US demand is strong and has the potential to stay strong for several more months.

Every product category tracked for the broadest sales indicator shows increases from August 2020, especially for food and beverages. The pandemic prompted significant growth in 2020 grocery sales. Just a bit above $72.5 billion in food and beverage sales for August of last year was more than $5 billion better than 2019. August 2021 sales beat 2020 by another $4 billion (now helped by expanding restaurant sales). There are currently spot stock-outs of some grocery items. Given the context, that should not surprise.

Stock-outs are, at least in my mind, different than shortages. We are producing and importing more than ever before. American (and other) consumers apparently want even more. Inventories are often lean or even anorexic. But is it more helpful to say supply is short or demand is strong? There is a disequilibrium of supply and demand. What helps us better perceive and potentially deal with the causes?

The delayed discharge of containers at the Ports of Los Angeles and Long Beach has received generous attention. There are dramatically obvious problems with dock density, operating hours, and overall port congestion. Still… in 2018 the Port of Los Angeles moved a record-breaking 9.45 million containers. In 2019, with trade-tensions constraining flow, this dropped to 9.33 million containers. The 2020 pandemic contributed to a further drop to 9.21 million containers (mostly due to loss of flow in February to May). Through August 2021, the port has moved 7.27 million containers — thirty percent more than by August 2020. The port of LA looks very likely to break its 2018 container record.

More broadly — and for better or worse — the United States is well on its way to importing more volume in 2021 than ever before. According to S&P Global:

Imports to the U.S. by volume grew 5.1% year over year in September, continuing the logistics surge that has caused congestion in ports across the country. This was slower than in previous months but 17.4% higher than September 2019. The comparison with 2020 is now exceptional for a different reason — this time, it is against a post-pandemic surge rather than lockdown-related lows. September also brings the growth rate for the third quarter to 10.2% year over year, or 15.3% compared with the third quarter of 2019. There was an average of 95,341 twenty-foot equivalent units per day in the third quarter. If imports remain at this level, the fourth quarter is expected to show a growth rate of 4.7% year over year, exceeding the record-breaking 2020 holiday season.

Demand is, well… demanding. To fulfill this demand, many flows moving toward demand have increased one-fifth to one-third above pre-pandemic baselines. This sudden and substantial increase creates problems. The number of docks with cranes has not increased nor has the number of trucks. Even comparatively rapid expansion of warehouse square footage has not increased as much as demand. There are also challenges hiring truckers and warehouse workers and many others on which efficient flows depend. But flow volume is still higher, not lower than 2019.

While demand is pulling hard and flow is pushing hard, what about upstream production capacity? As with flow, unusually swift shifts in demand have created several problems. The sudden slow-down in demand for older-version automotive semiconductors in the first half of 2020 has complicated serving increased demand ever since. The increased demand for cutting edge semiconductors in a wide array of high-performance electronic tools and gadgets has been tough to fulfill. There are other examples. There are serious constraints to growth in specific product categories.

But overall manufacturing production has soared in response to strong demand. In August 2021 (in the midst of the Delta variant’s worst effects) 18 of the G20 nations had increased manufacturing production over the same month in 2020. US manufacturing production remains above where it has been most of this century (see related chart below). There are forward going concerns about cost and availability of energy, especially in Europe and China. Disease penetration and/or disease mitigation measures have reduced productivity in some cases (examples here and here and here). Unreliable flow velocity can upset production calendars, even when sufficient volumes are available. In a system-of-systems distress in one place can complicate every place.

Nonetheless, unusually high demand is usually being fulfilled. Demand has effectively pulled more manufacturing forward. More manufactured products are being pushed toward demand. Preexisting capacity — for both production and movement — is not infinitely flexible. But in many cases, more than one-fifth more is being made and moved than in late 2019. In some cases, additional capacity is being developed.

Deficit and disequilibrium are different. Today’s most challenging supply chain problems are caused by many millions of consumers wanting more than ever before. Abundant demand has generated a flood of supply. This flood has overwhelmed some factory floors, ports, and preexisting freight capacity. A flood creates problems, but it should not be confused with drought.

China Manufacturing Production

Coda (October 20)

Derek Thompson concludes America is Running Out of Everything with, “The best solution to the Everything Shortage is to have a policy to make more of just about everything.” Given human desire and capitalist culture, his prescription is well-matched to context. But another possible angle is to want — or at least consume — less.  This too would facilitate enhanced equilibrium of supply with demand… and could even craft a more sustainable give and take between the personal and planetary.