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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.

Post-Colonial Challenges

How long Friday’s shutdown of the Colonial Pipeline persists is the critical issue. Most news reports indicate this infrastructure carries “roughly 45% of gasoline and diesel fuel consumed on the East Coast.” This is accurate, but significantly understates market dependence between Atlanta and Washington DC. In many local markets dependence for some fuel categories is closer to (even more than) seventy percent.

Alternative sources and routes are not readily available. The smaller Plantation Pipeline parallels Colonial, but has recently been running at capacity. Northeast refinery capacity cannot replace lost connections to Gulf Coast refining. Importing refined product into the ports of Baltimore, Philadelphia, and New York could help fill-the-gap, especially on the northern edges of Colonial’s distribution area. But this will not happen overnight. As the map below indicates, local refinery capacity (black boxes) is non-existent between Philadelphia and Birmingham.

Even if North Atlantic and Midwest refinery capacity is ginned-up, transportation and delivery capacity from fuel racks to retail was already estimated as being at least one-quarter below pre-pandemic levels. The US currently has a nationwide shortage of drivers appropriately trained and licensed to handle hazardous materials (e.g., gasoline and diesel).

At most Colonial discharge locations and at wholesale racks that depend on Colonial there is stored inventory. In most years, this inventory would be approaching maximum in preparation for Memorial Day and the summer driving season. I don’t know (yet) if this is true today, but until I see it disproved, it is a reasonable bet. So, the driver shortage is actually a more immediate constraint on flow than a short-term cut-off of supply. [UPDATE: As of the end of April Central Atlantic gasoline stocks were slightly above the same level for the same week in April 2019. Lower Atlantic stocks were slightly lower than in 2019. A quick conversation with one distribution insider suggests that delivery delays caused by the driver shortage have modestly increased the buffer supply available.]

But if mid-May consumer demand is not fulfilled in a timely way (for whatever reason) and this prompts widespread anxiety buying , the interplay between Colonial’s shutdown and the lack of drivers for fuel tankers could create a treacherous and time-extended demand-supply disequilibrium between, say, the Potomac and Chattahoochee watersheds.

Below, petroleum pipelines and refineries (US Energy Information Administration)


The headlines tend to bounce between semiconductor chips and vaccines. But mismatched supply and demand extends into many more channels, nodes, and products.

Each mismatch has its own tale to tell. Yet similar protagonists and antagonists are shared: disrupted production, congested transport, and shifting demand are each and all implicated, even when differentiated as cause or effect.

A recurring storyline: During the first half of 2020, Non-Pharmaceutical Interventions (or less often, disease penetration) interrupts flows of raw materials needed to produce X. Demand for X either plummets or sky-rockets, sometimes each in a matter of weeks. There is a sudden reduction in the number of container ships, air cargo “bellies”, and truckloads available to carry X.

When prior demand resurfaces and unexpected demand surges, re-jiggered production is complicated — especially if product adaptation is required. New inputs are ordered. Some prior orders are canceled. Carriers from macro-maritime to micro-trucking practice prudent self-protection. What once was slick is now sticky. Friction accumulates. Each delayed or rejected load creates more congestion at some critical node and many edges in-between.

Variable (not-predicted) demand plus volatile supply (not Just-In-Time) equals lower velocity flows. Lower velocity reduces overall volumes. More stock-outs emerge. Upstream stock-outs generate wider — sometimes deeper — experiences of volatility. Velocity further declines. Volumes are reduced. Downstream stock-outs proliferate.

Some — enough? — are willing to pay higher freight rates. But many veteran operators have retired (more), their problem-solving skills departing with them. The pandemic has reduced the number of new operators being trained and licensed. Trucks are parked. Many bellies are still grounded. Maritime flows have been snarled for lack of dock space and/or drayage, not to speak of Ever Given’s sudden slant.

Disequilibrium delivers uncertainty, injecting further variability where many already are feeling vertigo. Network theory suggests that in non-linear systems equilibrium ultimately resurfaces through spontaneous and widely shared self-organization around a “strange attractor“. This is often a factor reflecting the system’s abiding preferential attachments. In this case: Profit? Market Share? Survival? Further functional concentration?

India: Biology or Behavior?

Of course it is each, both, and the push and pull in between. It will be months or years before we can accurately deconstruct the interplay and proportions behind the exponential surge in disease and death across the subcontinent.

More contagious variants are implicated. Some of these variants may be innately more lethal. It is also possible that as demand for healthcare overwhelms supply, more people die because quality of care declines.

The explosion of confirmed daily cases — about 80,000 per day on April 1 to over 400,000 today (both undercounts) — provides the virus a very fertile evolutionary seed-bed. This is a threat to all of us, even those already vaccinated on the other side of the planet.

The virus seeks to thrive. Many people make choices that are expeditious for the virus. The virus has a biology adept at exploiting behavior that facilitates viral density and circulation. This is why crowds are a problem and interior crowding is an especially bad choice.

Many more us need to make choices that contain and slow the virus.

The Next Year: Diagnosis, Prognosis, and Prescription

Last week an earnest well-intended political leader said, “All it takes to beat this virus and return to normal is getting shots in arms.”

It is tempting to make this claim. Mass vaccinations are making a positive difference. The closer we get to or beat 80 percent vaccination rates, the less our risk of wide-spread recurrence of deadly disease.

But if “normal” is meant to suggest a near-term context where coronavirus is no longer a risk, this claim is over-stated.

In April 2020 tight containment and even eventual eradication of SARS-CoV-2 might still have been possible. But since then the virus has had too much opportunity to spread, strengthen, and diversify. Today it has hundreds-of-millions of use-cases for evolutionary test-drives. Most mutations will be minor and meaningless. But the virus now operates at a scope and scale where supercharged evolutionary tweaks cannot be discounted.

Given this risk it is not prudent to promise a return to normal even with the recent rate of US vaccinations, and unfortunately the recent rate is slowing.

We can credibly claim much lower risk by preparing Americans for another year — probably two — featuring five fundamental risk-management practices:

Vaccinate: As of April 25 just over 42 percent of all US residents (53 percent of those over age 18) have been vaccinated. This is already slowing viral flow in the United States. But for sustainable impacts on transmission and to slow mutations we need vaccination rates above 70 percent, the higher the better. We are still not making enough targeted and systemic investments — financial and otherwise — to encourage and facilitate vaccinations. We should also anticipate the need for booster shots on some yet to be determined cycle.

Test, trace, and contain: If twenty percent of US residents remain unvaccinated that is more than 60 million mobile mutation manufacturers scattered around the country. Among the vaccinated, demonstrated efficacy ranges from 72 to 96 percent depending on which vaccine and the profile of the vaccinated person. As a result, entirely domestic transmission and evolution of the disease will continue. These risks can be mitigated if local outbreaks (especially of new variants) are identified and effectively engaged as early as possible. This requires a much more robust multimodal testing and tracing capacity than the United States has so-far developed. South Korea continues to set the pace for testing/tracing. For cultural and constitutional reasons the South Korean model is problematic for the United States. But plenty of more targeted methods have been proven effective.

Support global mitigation: In addition to plenty of native-born variants, the B.1.1.7 variant, first identified in the United Kingdom, has accelerated transmissions and increased covid cases in the United States. Other variants have (and will) spread. The more the United States can do to suppress viral flames elsewhere, the less risk of heat-stroke or much worse here.

Reduce overall circulation: The coronavirus thrives on meeting new people in new places. Even vaccinated people — given significant but less than 100 percent viral suppression — are potential sources of transmission. Until vaccination rates exceed 70 percent and testing/tracing is much more extensive we should minimize our circulation. (Please see this and this and this.) I am guessing we need about 25 to 35 percent below pre-pandemic circulation to have a substantive impact on viral transmission. Today the United States has a national average of about 15 percent below pre-pandemic mobility levels.

Avoid interior crowds: Hand hygiene, physical distance, and masks help. But the most fertile sources of virus transmission have been over-crowded, badly ventilated, interior spaces. The more time spent with more people in any enclosed space, the higher our risk. Less time, fewer people, better ventilation (more), or staying outside is the healthier choice.

The risk of covid-related disease and death will persist. As we are seeing in Brazil and India — and can vividly recall from Wuhan, Bergamo, Queens, and perhaps your hometown — there is a very real — sometimes sudden — risk of healthcare systems being overwhelmed. In the next few years we are unlikely to eliminate the risks of covid. But we can now limit these risks to a level that will not threaten the US healthcare system. This will ensure quality care for those hospitalized and reduce wider health and economic effects.

The five fundamentals outlined above require continued investment in public health, shared discipline, and some personal restraint. Systemic failure to observe these fundamentals is likely to result in unnecessary disease, death, economic dislocation, and social turmoil. As always, we make choices.

Demand Management in Action

From a supply chain perspective, pandemic response can be conceived as a local-to-global effort to manage demand for health care. Supply chain professionals typically work to deliver more faster. But in this case, we want to deliver fewer covid patients to hospitals and slow overall deliveries.

To do this, various methods have been deployed to slow transmission and reduce virulence in case of transmission. Since January 2020 several non-pharmaceutical methods have been attempted.  Since December 2020 a handful of vaccines have started to be used.

Non-pharmaceutical practices have been applied inconsistently.  But there is evidence that transmission velocity for the virus is reduced when people circulate less overall and per-capita time spent in crowded, non-ventilated, interior spaces is reduced. 

The interaction between human circulation and viral transmission is implied by chart below.  More localized results often suggest tighter correlations.  The CDC mobility site allows data-display at the state and county level.  For even more localized analysis and mitigation possibilities, please see this report from the journal Nature: Mobility Network Models for Covid-19.


Reduced circulation is a passive way to give the virus fewer options to reproduce, slowing overall transmission.  Vaccines are an active means of fighting the virus when an individual is exposed to the contagion.  Once a large proportion of the population — or a crucial sub-population — is vaccinated, the velocity of viral transmission (and disease consequences) can be substantially reduced.

Since mid-December the US vaccination campaign has focused on health-care providers and those over age 65.  Today roughly 80 percent of the older age cohort has been vaccinated.  Hospitalization rates for this population demonstrate the efficacy of vaccinations to reduce demand for health-care.  (Please see more from The Financial Times.)

The virus will continue to evolve in order to maximize its reproductive options.  Mid-April saw more new covid cases confirmed — 5 million plus — than any prior week.  The more human circulation, the more opportunity for viral evolution. The challenge is to evolve our pharmaceutical and non-pharmaceutical practices to minimize covid’s flow.  Until we achieve at least 70 percent local-to-global vaccination rates, interior crowds give the virus fertile incubators for finding ways around our best demand-management efforts.

Patterns suggest principles to inform practice

On April 19, the Wall Street Journal published a substantive, concise piece on the semiconductor supply chain. Please read: Why the Chip Shortage is so Hard to Overcome.

Several generalizable Supply Chain Resilience principles are articulated (but not headlined) in the WSJ piece. I bet I could find a WSJ piece from the second-quarter of 2020 reporting on the canned soup supply chain with similar language and examples. We have experienced similar patterns with sterile saline bags to pork chops to viral vector vaccines to diesel fuel to cargo containers to nitrile gloves…

In the WSJ story several principles are glossed. Three are prominent:

  • Demand Variation: Significant shifts in volume and/or velocity of demand — especially in a short period of time — will disrupt flows, usually with amplified network effects.
  • Concentration Risk: Flow channels (aka nodes, links, edges, bottlenecks, hourglass structures) both empower and constrain flow capacity.
  • Differentiated Financial Margins can decisively influence the distance and interdependencies of flow (lower margins almost always result in more fragile networks).

There are exceptions, but they tend to prove the rule.

Unfortunately, these (and other) shared patterns and related principles are not obvious to many — perhaps most (even most readers of the WSJ). There is a persistent tendency to focus on supply chain “species”, rather than shared ecosystems of demand and supply. This is an understandable, but insufficient angle on reality. It is an approach that often reduces interventions to versions of whack-a-mole. Species abide in ecosystems. Fitness requires attention to specific and system-level characteristics.