Month: March 2022

Russian Invasion

A few readers are surprised by my silence so far on the supply chain implications of Russia’s invasion of Ukraine.

Perhaps my most constructive comment: Risk is tough to measure. Uncertainty cannot be measured. I remain profoundly uncertain regarding the scope and scale — space and time — implications of the current crisis. While I have sometimes been criticized for “getting ahead” of data, even I prefer to be confident of my subject before offering a predicate.

On February 24, I responded as follows to some specific questions:

Even before today, the Ukraine-Russia crisis was contributing to higher petrochemical and raw grain prices. There is also typically a price-multiplier between global energy costs and food costs… So, that will continue and, probably, accelerate with impacts on US fuel and food prices (but probably NOT much impact on actual US fuel and food supplies). Russia is a principal source of several strategic materials (e.g. nickelpalladium, and aluminum).  But it is too early (at least for me) to confidently project primary, much less tertiary supply chain consequences.  In terms of moving toward action, I will confess that I think this is, so far, a “reduced resilience” story for the United States. There are much more extensive supply chain implications for Germany, Poland, the Baltic States, and Finland (I hear mixed signals on the other Nordics.) I can imagine potential implications for China flows (inbound and outbound) and that could have more direct US impacts. But barring something similar to this morning being repeated across the Taiwan Strait, I think these China-related influences will be fairly gradual.  Happy to try to answer questions. But we are dealing with plenty of known unknowns and even more deeply hidden unknowns.

I could lengthen these early — obvious — comments. The big picture now has many more details, but the meaning and momentum for US supply and demand networks remains very ambiguous (at least to me). For what it is worth, to better discern meaning and momentum, I am trying to be especially attentive to how rapid price escalations may impact near-term US demand behavior. Well before the invasion, US flows have been complicated by what I have called excess demand. As Russia’s and Ukraine’s supply streams are stopped or diverted (especially for rare metals, fossil fuels, and agricultural goods), global prices will increase for remaining related flows. Will these price increases moderate — suppress — US demand?

Fuel Flows

This is the fifth post in a series examining the supply chain resilience reports released by the White House on Thursday, February 24.

The Department of Energy sectoral supply chain report gives less attention to current energy vulnerabilities than to transitioning from fossil fuels to clean energy. Achieving clean energy objectives is seen as enhancing national resilience to climate change, reducing US dependence on the global fossil fuels market, and more sustainably assuring energy resources for long-term US demand.  As the report states:

Global energy end-use continues to be highly dependent on fossil fuels. In the United States, as of 2020, about 79 percent of primary energy end-use and 60 percent of electricity generation came from fossil fuels, including petroleum, natural gas, and coal (EIA, 2021). Multiple countries, including the United States, have pledged to achieve net zero greenhouse gas emissions by 2050 to keep the global temperature change below 1.5 degrees Celsius and avoid catastrophic global climate change. Achieving this goal will require massive deployment of clean energy technologies and an accompanying scale-up in their supply chains, both domestically and globally (IEA, 2021). 

The DOE report acknowledges this transition will take several years. Meanwhile, there is a continued need for robust and resilient flows of fossil fuels.  This is a particular concern in case of a large-scale catastrophe (aka “My Problem“).  For example, how do we fuel water pumps, electric back-up (including telecoms), and trucking following an 8.0 plus seismic event involving a large population? 

There are plenty of other risks for which current fossil energy capacity is crucial. Yesterday, March 9, US Secretary of Energy, Jennifer Granholm, told a Houston energy conference:

We are on a war footing—an emergency—and we have to responsibly increase short-term supply where we can right now to stabilize the market and to minimize harm to American families. That means releases from strategic reserves across the world, like we’ve done. And that means you producing more right now, where and if you can… we’re serious about decarbonizing while providing reliable energy that doesn’t depend on foreign adversaries. That means we’ll walk and chew gum at the same time. So yes, right now, we need oil and gas production to rise to meet current demand (more and more and more).

Three relevant factoids:

Current US fossil energy production capacity is strong.  Before the pandemic dampened demand, US crude oil production was at a historic high and continues to be close to half-century highs.

Prior to the pandemic, US refining throughputs were strong.  This capacity continues to be available. 

U.S. gross inputs to refineries

National distribution capacity for fossil energy is constrained but sufficient for ordinary demand. Today there are — very roughly — 100,000 tank trunks operating in the United States. This compares to about 85,000 in 1980. Pre-pandemic the volume of gasoline being consumed was about one-third higher than in 1980. US pipeline miles for refined product have essentially not changed in this century (pipeline miles for moving crude oil have expanded). We are doing more with the same or proportionally somewhat less. In a pinch, our margin for error is also less.

The policy of the US government — and many private investors — is to accelerate clean energy capacity. There are good reasons to do so. It is also reasonable to recognize that this will be a treacherous transition, with or without WWIII. Supply Chain Resilience principles emphasize diversity, adaptability, and agile, creative self-organization.

Freight Flows

This is the fourth post in a series examining the supply chain resilience reports released by the White House on Thursday, February 24.

The US Department of Transportation’s supply chain assessment of freight and logistics includes the following concise consideration of recent (and systemic) problems (pages 10-11). Any three-paragraph explanation of something this complex can be critiqued, but this is a very constructive framing. USDOT gives demand deserved prominence:

The demand for consumer goods has surged during the COVID-19 pandemic as consumers have shifted their spending from services to goods. Many of these goods are imported or rely on parts or materials sourced from abroad. At the same time, the pandemic has created disruptions in supply chains, including for businesses and workers. Surging demand for imported containerized goods and supply chain disruptions are among the numerous factors that have contributed to unprecedented levels of congestion at ports and intermodal facilities. These short-term changes have been coupled with long-term, macroscale trends in the freight and logistics industry, brought on by deregulation of the ocean shipping industry, that have produced conditions that make the nation’s freight system more vulnerable to disruption than in the past. As one industry expert noted, “[this current supply chain challenge] is 40 years in the making.

Over time, increased international trade, rising demand for consumer goods, sustained macroeconomic growth, and other factors have increased demands on our transportation industrial base. U.S. manufacturers and retailers increasingly rely on global supply chains for products and resources. In recent decades, U.S. firms trying to lower their labor and inventory costs have turned to strategies such as outsourcing, offshoring, and “lean manufacturing,” which optimizes processes and limits waste. While these strategies have in some circumstances reduced prices for consumers and increased profits, contributing to economic growth, they have also contributed to increasing the vulnerability of supply chains to disruption. Rising e-commerce and increased consumer demand for rapid home delivery have led to significant changes in how supply chains operate, as retailers seek to increase the speed and efficiency of their networks to distribute goods directly to consumers.

The evolution of supply chain distribution has led to rising consumer expectations for rapid delivery, and this demand has put increasing pressures on logistics, warehousing, and last-mile delivery services. Retailers face steep competition to move goods efficiently to consumers at increasing speed. This dynamic is driving demand for land to support distribution centers for both retail and last-mile delivery, and for labor to stock warehouse shelves and make deliveries. At the same time, the labor force has aged, and parts of the logistics industry have increasingly struggled to recruit and retain new workers due to challenging working conditions and reductions in take-home pay, especially in industries like trucking. In addition to demographic and economic changes, climate change—particularly the increased frequency and severity of extreme weather events—has increased the potential for disruptions to supply chains.

Lots of moving parts. Lots of interdependencies. Lots of potential trade-offs: intended, unintentional, predictable, surprising. The USDOT report does not shy away from the tensions.

Not infrequently an offered outcome can be both good and bad, depending on context or angle of observation. But good or bad, this report gives particular attention to three structural consequences: concentration, consolidation, and congestion. Moving enormous volumes in a cost-effective manner usually rewards those with a velocity advantage. Enhanced targeting and optimum speed tends to push developing economies of scale at particular places (hence concentration of flows). The investments needed to achieve economies of scale are usually easier to secure for those with more cash-flow, so the capital requirements to effectively manage concentration tends to result in greater consolidation of industry participants. Organizing and operating these planned bottlenecks usually maximizes volume and velocity — unless something “unexpected” (outside design parameters) disrupts flow or suddenly demand much more flow. Congestion is the predictable result. When the unexpected happens, well-planned bottlenecks can become extremely messy chokepoints.

The USDOT reports outlines several policy approaches and recommendations intended to reduce the likelihood and mitigate the consequences of congestion. In another concise summary of a much more complicated bill of particulars, the report notes, ” The pandemic and the supply chain challenges that have resulted from it are a reminder that “perfect storm” events can occur and cause enormous, sustained disruptions. America’s supply chains must be able to respond and adapt to future disruptions more quickly and flexibly. To ensure supply chains remain resilient in the future, the United States must invest in freight infrastructure, promote competition and fair markets, and enhance cooperation and information sharing across stakeholders, modes, and firms.”

Starting on page 49 of the report USDOT briefly details sixty-two policy steps either underway or recommended. There are five policy action staircases, sometimes merging in Escher-like confluences: 1) Infrastructure Investment, 2) Planning and Technical Assistance, 3) Research and Data, 4) Rules and Regulations, 5) Coordination and Partnerships. That last staircase is mostly federal interagency coordination and partnerships with states. Of the sixty-two recommendations, I perceive that six or seven involve conversation and collaboration with the private sector outside a regulatory context. I am sure lobbyists will insert themselves, but the public sector predilection is powerful.

Fours days after the White House released these supply chain reports the Biden administration announced potential legal and regulatory action focused on consolidation of ocean shipping (more and more). The announcement claims, “three global alliances, made up entirely of foreign companies, control almost all of ocean freight shipping, giving them power to raise prices for American businesses and consumers, while threatening our national security and economic competitiveness.”

Concentration can present serious problems for supply chain resilience and adaptation. Consolidation can be be both an effect of and contribution to concentration. In a high volume, high velocity demand and supply network, congestion will often be contagious. Once it starts, it tends to both accelerate and spread. Regulation may well be necessary to extract pernicious causes of concentration and related negative behaviors.

But if freight flows are part and parcel of a complex adaptive system, regulation will usually tend to lag outcomes. This will especially be the case when congestion is emerging from disaster or swift shifts in demand. In such contexts, to prevent congestion and mitigate concentration, a much more forward-learning strategy is voluntary collaboration among key players in the freight system. The public sector can often play a crucial convening and brokering role in fostering voluntary collaboration. According to Elinor Ostrom, empirical outcomes have demonstrated six prerequisites for resolving treacherous problems of over-use, congestion, and related:

  1. Communication is feasible with the full set of participants. When face-to-face communication is possible, participants use facial expressions, physical actions, and the way that words are expressed to judge the trustworthiness of the others involved.
  2. Reputations of participants are known. Knowing the past history of other participants, who may not be personally known prior to interaction, increases the likelihood of cooperation.
  3. High marginal per capita return (MPCR). When MPCR is high, each participant can know that their own contributions make a bigger difference than with low MPCR, and that others are more likely to recognize this relationship.
  4. Entry or exit capabilities. If participants can exit a situation at low cost, this gives them an opportunity not to be a sucker, and others can recognize that cooperators may leave (and enter other situations) if their cooperation is not reciprocated.
  5. Longer time horizon. Participants can anticipate that more could be earned through cooperation over a long time period versus a short time.
  6. Agreed-upon sanctioning capabilities. While external sanctions or imposed sanctioning systems may reduce cooperation, when participants themselves agree to a sanctioning system they frequently do not need to use sanctions at a high volume, and net benefits can be improved substantially.

The USDOT report accurately diagnoses a complex dynamic of pull and push freight flows. It then prescribes a rather narrow set of interventions. It is analogous to an ecological analysis of a big river’s rich watershed being followed by engineering recommendations for a certain set of flood protection districts. The recommendations are not wrong, but the problem to be solved — the opportunity to be engaged — is of very different proportions.

Public Health Supply Chain Resilience

This is the third post in a series examining the supply chain resilience reports released by the White House on Thursday, February 24.

The Department of Health and Human Services report released last week is in many ways an update on the July 2021 National Strategy for a Resilient Public Health Supply Chain. That strategy document sets out three goals:

Goal 1: Build a diverse, agile public health supply chain and sustain long-term U.S. manufacturing capability for future pandemics;

Goal 2: Transform the U.S. Government’s ability to monitor and manage the public health supply chain through stockpiles, visibility, and engagement; and,

Goal 3: Establish standards, systems, and governance to manage the supply chain and ensure fair, equitable, and effective allocation of scarce resources.

While the food supply chain is a high volume, high velocity network that in a crisis needs to adapt preexisting flows to new conditions, the public health supply chain is conceived as a system to urgently surge supplies that were not flowing strong or fast before the emergency. Thus conceived, the National Strategy and the “One Year Report” prompted by Executive Order 14017 do a good job of engaging the problem set.

For most commercial supply chain professionals, the need to allocate is a sure sign of failure. Supply chain thinking, plans, and execution work hard to avoid allocations. But in the public health context allocation priorities and processes are fundamental. Demand can suddenly surge multiples more than preexisting capacities and flows. There is a draft national framework for allocation of constrained public health resources currently being circulated. Given the potentially catastrophic and specifically unpredictable character of public health risks, anticipating the need for surge and allocation is pragmatic strategic realism.

The National Strategy and related policies and plans give particular attention to structural issues, “such as the lack of on- or near-shore manufacturing and sourcing for raw materials and finished medical products.” Last week’s report accurately notes, “improvements in domestic manufacturing must occur across the entire supply chain; the companies involved want to know there will be enough demand now and in the future to sustain these expansions.” The highly variable demand for personal protective equipment (PPE) and medical counter measures MCM), including testing and diagnostics, vaccines and other pharmaceuticals, and more, set up challenges that, in my judgment, are quite different from the priorities of most commercial supply chains.

Supply chains, worth the designation, organize around organic, broad based effectual demand. This is distinct from need. Effectual demand is the recurring pull of something the supplier finds motivating. This demand may be seasonal or contingent or otherwise variable, but it recurs with sufficient regularity, scope, and scale to justify incurring costs and undertaking other risks involved in creating and managing capacity to push when a pull signal is received.

Early in the pandemic the federal government facilitated the development of voluntary agreements under Section 708 of the Defense Production Act (more) to address the manufacture and distribution of critical healthcare resources. This process continues to operate. The National Strategy anticipates “that the DPA 708 engagements will transition from the Federal Emergency Management Agency (FEMA) to HHS and be co-administered by ASPR and FDA. The Section 708 process provides a conduit to engage across the entire supply chain, enabling the U.S. Government and industry stakeholders who volunteer to participate to share information, build a common operating picture, perform analysis, and solve problem sets necessary to ensure a resilient domestic public health industrial base.”

The absence of effectual demand for sufficient flows of public health goods persists, but the DPA provides a potentially powerful public-private process for working through the risks of insufficient effectual demand.

There is another demand-oriented aspect of the public health supply chain that is not engaged by the One Year Report or National Strategy for a Resilient Public Health Supply Chain. I expect there are public health efforts underway to address the issue, but they are not categorized as “supply chain” efforts. In November 2020 the Kaiser Family Foundation reviewed state and territorial plans for vaccine distribution. This review found:

Less than half (19 of 47, or 40%) of state plans reviewed include a numerical estimate of the number of individuals in different priority populations; the majority of states report they are still developing their data sources and methodology to calculate the number in their priority groups. A majority of states (25 of 47, or 53%) have at least one mention of incorporating racial and/or ethnic minorities or health equity considerations in their targeting of priority populations. Some states expect to make racial and ethnic minorities an explicit priority population group, while others report using more general or indirect methods to do so, such as through use of the social vulnerability index (as was recommended by the NAM) and/or a Health Equity Team or Framework.

There was — still is — a fundamental absence of demand-oriented planning and targeting for public health. This absence has complicated both non-pharmaceutical interventions and medical counter measures across the entire pandemic period (more and more and more ). Vaccine hesitancy predated this pandemic. Pseudo-scientific beliefs and practices are long-established. Non-scientific and anti-scientific attitudes are not new. For prevention, mitigation, and response purposes, public health supply chains need 1) a much more robust understanding of current whole-population “demand patterns”, 2) identification of strategic opportunities to influence these demand patterns, and 3) public health investments, professional development, and intervention programs to shape and manage demand for the public health supply chain. In many ways the public health profession already engages in this work through disease surveillance, population-based health care, and more. These existing competencies should be recognized as fundamental to public health supply chain strategies, plans, and operations.

In the late-Twentieth Century Walmart gradually displaced Sears by revolutionizing how supplies are procured, managed, and delivered. In more recent years Amazon (and others) are attempting to displace Walmart (and others) by a focus on fulfilling demand (sometimes creating demand) as much as moving supplies. Walmart is fighting back hard (and, so far, effectively) with its own demand-oriented strategies. The public health supply chain documents reflect late-20th Century thinking.

Especially when supply volumes are constrained, supply velocity can ensure maximum benefit of volumes available. Supply velocity requires a substantive understanding of current and emerging demand. Much more attention to the interdependencies of demand and supply will enhance strategic preparedness for public health challenges known to be heading our way, but we can’t quite predict what or when or where.


March 7 Update: A report in today’s New York Times suggests how deciphering and delivering demand is fundamental to sustained and sufficient supply: Why American Mask Makers are Going Out of Business.

Food Supply Chain Resilience

The USDA report attempts to focus on several systemic vulnerabilities related to supply networks for food. Six priorities are identified for sustained attention, mostly through federal policy, regulation, and government investment: 1) Concentration and Consolidation in Agri-Food Production, Manufacturing, and Distribution, 2) Labor Needs, 3) Ecological and Climate Risks to Crops, 4) Livestock and Poultry Disease Threats, 5)Transportation Bottlenecks, and 6) Trade Disruptions.

While labeled a vulnerability analysis, I perceive at least three of the six priorities are oriented to rather specific threats… and potential bad actors are implied in all six. This threat-oriented perspective is even more prominent as each priority is analyzed and recommendations are offered.

There is modest attention to demand. To the extent demand factors are included in the analysis they are addressed as market distortions caused by the purchasing power of a few domestic processors, distributors, and retailers or any impediment to international agricultural sales. I am surprised by lack of attention to SNAP, WIC and other USDA program beneficiaries as sources of demand. Consumer behavior — especially new trends in food consumption — are not addressed.

This is a very upstream angle on food flows. For example, following is a quote from pages 14-15 of the 47 page report. Midstream and downstream structures and behaviors are assessed principally in terms of accommodating current upstream characteristics. Given this angle, the assessments outlined are valid. A wider angle of engagement — especially of nodes, channels, and functions between upstream and downstream — would unveil additional opportunities for achieving resilience.

Consolidation and concentration related vulnerabilities threatening specialty crops supply chains include:
• Erosion of traditional wholesalers toward direct marketing contracts between growers and retail chains due to increased centralization of food procurement systems.
• Increasing concentration in food retailing, especially among the largest grocery retailers.
• Consolidated distribution infrastructure in freight rail and ocean shipping, all of which are required consistently and timely due to the perishable nature of specialty crops.

There are also non-competition related factors in the specialty crops sector, particularly significant due to crop perishability and reliance on local growing conditions, that pose additional risks especially when paired with these consolidation and concentration issues. These factors include:
• Access to a workforce, which is typically seasonal in nature and shifts geographically over time.
• Climate change and the increased frequency of extreme weather events such as frosts in Florida and the recent mega-drought in the western U.S. pose significant threats, which are exacerbated when market players are concentrated or consolidated geographically or within a subsector…
[more examples are included]
• Market and trade shocks which may impose barriers on imports or reduce opportunities for exports, such as when countries impose trade restrictions in response to domestic food price inflation or enter into trade agreements that exclude the United States.

Every report like this has to choose its angle(s) (and exclude others). Within the aperture selected, I don’t disagree — and often enthusiastically agree — with the USDA report’s findings. The problems identified are real. Implementation of the report’s recommendations would mitigate several threats to the US food system.

This is not, however, an assessment of the US food system’s supply chain resilience.

The Executive Order that prompted this assessment includes, “The Secretary of Agriculture, in consultation with the heads of appropriate agencies, shall submit a report on supply chains for the production of agricultural commodities and food products.” [My italics.] This is what the report has done, this is the origin of the upstream angle. Given this point of origin and explicit target, it is possible to appreciate how much attention to midstream and downstream factors have been creatively included in the report.

Below is a visualization of the demand and supply network for food developed as part of “A Framework for Assessing Effects of the Food System” (National Academies of Sciences, 2015). In many ways the USDA report is, intentionally, limited to that green box labeled “Farm Production.” More is needed.

Demand for food is in considerable turmoil. Climate change is imposing significant structural shifts on global demand (and supply) for food. Consumer needs and expectations outside the United States have important implications for US agricultural production, processing, pricing, and more. The pandemic has accelerated dramatic shifts in US demand for food and, at least temporarily, reversed some important patterns of US food consumption. Upstream, midstream, and downstream players are competing, collaborating, and creating to adapt to these changes in demand. These adaptations are usually pragmatic, even opportunistic. Some enhance resilience. Some diminish resilience. The Department of Agriculture was not asked to consider these factors in this report.

There are other factors that need to be considered and strategically triaged, if we want to enhance the resilience of the US food system.