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.