Why Global Supply Chains Remain Vulnerable

Journalist Peter Goodman delves into the persistent problems with supply chains and how to fix them his new book, “How the World Ran Out of Everything,” in conversation with the Institute for New Economic Thinking

Are the supply chain issues that emptied your grocery store shelves and left your business scrambling during the COVID-19 pandemic fixed yet? Don’t count on it.

In “How the World Ran Out of Everything,” journalist Peter Goodman takes the reader on a fascinating journey through global supply chains, uncovering their intricate logistics and the harsh realities – exploited workers, shipping cartels, Wall Street greed — that leave us relying on a fragile network for the things we need.

Highlighting the vulnerabilities that left medical workers scrambling for PPE and millions without life-saving medications during the global spread of COVID-19, Goodman argues that critical problems persist due to decades of prioritizing cost-cutting and Wall Street profits. He warns that we’re still just a natural disaster or global conflict away from another supply chain crisis.

In a discussion with the Institute for New Economic Thinking, Goodman traces the evolution of supply chains since World War II, spotlighting game-changing moments like the rise of shipping containers and China’s WTO entry. He shows how these advancements shifted supply chains globally, putting efficiency and cost-cutting at the forefront, often to the point of vulnerability and practices that defy common sense.

Goodman breaks down how the Just-in-Time manufacturing principle, beloved by McKinsey consultants for its promised efficiency gains, can leave supply chains wide open to catastrophic disruptions. He’s adamant about how prioritizing shareholder returns has compromised essential supply chains, posing risks to both lives and communities, with human beings sacrificed to fatten corporate wallets.

Goodman urges an overhaul, championing resilient supply chains that protect human welfare and environmental sustainability in our interconnected world. Achieving a better, safer, and more humane supply chain, he argues, is not beyond our reach if we can think differently and change the corporate incentives that drive practices that don’t serve us.

Lynn Parramore: Let’s start with a look at how the global supply chain functioned from the end of World War II until the late 1970s. Say, I’m running a U.S. company manufacturing toasters during the 1950s. What would the global supply chain have looked like?

Peter Goodman: It was much more dependent on domestically made parts and raw materials. Imported things were generally finished goods. Now, so much of the supply chain is so-called intermediate goods: parts that become parts of other parts. Famously, we know that a single auto part could move across borders dozens of times before reaching its final assembly.

The turning point, as I lay out in the book, was the development of the shipping container in the early 1950s, which enabled supply chains to jump across oceans. Suddenly, you could depend upon factories very far away. And then, of course, there were international trade agreements. I spent a lot of time on the Chinese entry to the WTO in 2001 under Clinton, but NAFTA is certainly a landmark. CAFTA [The Dominican Republic-Central America Free Trade Agreement] as well. These were huge regional and global trade deals that opened up markets all over the place.

LP: You discuss shifts in economic and business philosophy, particularly the “Just-in-Time” concept, which minimizes inventory and production waste by ensuring goods are produced or acquired only as needed. Could you talk about how this concept has influenced supply chains?

PG: Sure. Just-in-Time is a wonderful idea. It goes back to a time when Japan had limited capital. They’re dealing with the devastation of the war. Unlike the United States, they don’t have that much developable land, so they can’t just build ships. In comes the idea called “Just-in-Time,” which later became known as lean manufacturing. Instead of having as much product as you possibly can, à la Henry Ford, let’s just make enough vehicles to replenish those that we’ve sold. Let’s work with our suppliers, too, to make sure that they’re only delivering the parts that we need on our assembly lines as we need them, so we don’t have to waste lots of space and money tying up parts in warehouses. This works very well for Toyota. They become, by many measures, the world’s most successful auto company. The concept of Just-in-Time is embraced widely around the world, especially in the ‘80s.

Unfortunately, it doesn’t mix nicely with the rise of shareholder-led profit maximization. The issue is really about shareholder interest trumping everybody else’s interest. In the book, I tell the story of McKinsey. McKinsey figures out that a good way of using the Just-in-Time fascination and the obsession with lean principles is to cater to their clients – for example, executives who just want to make their share prices go up.

Just-in-Time becomes this kind of crude imperative to slash inventory and take the savings and give it to yourself — for the corporate CEO, it’s a reward for being smart enough to hire McKinsey. You give the money saved to your shareholders through buybacks – hat tip to INET’s Bill Lazonick for his heroic work on this — and your dividends. The result is that cutting inventory becomes a key means of driving up your stock price.

LP: You highlight that human beings came to be viewed as inventory in a certain sense. Could you elaborate on the challenges workers faced as this concept gained widespread adoption?

PG: Yeah, I appreciate you picking up on that. So McKinsey fixes on “lean” as this mantra for every form of cost-cutting, and also flexibility. It’s all about cutting waste — but waste includes wages, and so humans become costs to be contained and scheduling becomes all about what’s best for the company. If you’re operating a warehouse, you need people when you need them. Never mind that your workers need some more reliability in their schedules, that they have kids and elderly relatives to care for, or need time for sleep and leisure. Now they can’t schedule their own time, and their wages are constantly a target. All of this is done under this mantra of “lean” and Just-in-Time.

LP: “Scale” and “efficiency” are highly esteemed principles in business. Could you discuss the pitfalls that arise when they’re pushed too far?

PG: Yeah, it’s a really important question. Take the case of precision-scheduled railroading, a fancy term for Just-in-Time on the rails. What it really means is that you fire lots of workers, reduce rail service, and generate savings that you’re going to hand to your shareholders, again, in the form of share buybacks and dividends. Meanwhile, you prove to Wall Street and institutional investors that you really get the need to deliver numbers that show that you’re ruthlessly efficient. The one that I focus on is “dwell time,” which is how much time a given rail car sits somewhere as opposed to moving along the rail.

I talked to this engineer in Idaho for Union Pacific, who tells me that he’s horrified to discover in the middle of the pandemic that he’s actually pulling cargo to the wrong places! He’s doing that not because somebody screwed up, but because somebody took this mantra really seriously.

A rail yard in Nebraska is pressured to minimize dwell time. So somebody says, ok, I’ll just attach these cars to whatever train’s moving out of here next. Never mind that it’s going to Oregon and that lot of this cargo has to go to California. The result is that some factory in California is waiting for chemicals that are supposed to be there by now, but instead they’re making their way back from Oregon through Idaho to artificially lower dwell times on a spreadsheet. That’s not efficient.

LP: So businesses fixated on implementing these principles can end up with highly inefficient practices that completely undermine what they’re trying to achieve.

PG: Right. I also emphasized that in terms of inventory, reducing your inventory by definition boosts your return on assets. It’s like a magic metric for Wall Street. Cutting inventory means you have fewer assets to divide into your revenue. So the metric of return on assets just went up. I talked to a business school professor who made the point that, ok, that’s fine, but if you can’t make a ventilator in the middle of a public health catastrophe, you don’t get to say, well, at least my share price is high!

LP: In the book, you really shine a light on how these principles can directly affect people’s lives, like your example of the Minnesota company making backup generators for hospitals in the event of a power failure. In such cases, delivering a product can literally mean life or death.

PG: Yes. McKinsey shows up at this factory in Minnesota — it’s a bunch of young, fresh Ivy League graduates in slick suits led by one older guy, and they come to a meeting talking about going lean, slashing inventory.

I talked to a guy, Jerome Bodmer, who’s like a 20-year veteran in this company. He’s got a business school degree, he’s worked at this company for two decades, and he knows a thing or two about the business. He says, hold on, you’re telling us to slash inventory? And the McKinsey guys say, yes, slash inventory, including your $5 sheet metal brackets. It’s all about Just-in-Time.

The company veteran says, wait, we’re making these generators that require installation by crane at hospitals. If we blow the delivery window because we don’t have enough inventory to make our product, that’s kind of a problem! He wants to keep extra parts on hand. But the company actually ends up listening to McKinsey, and all the focus on lean and burnishing quarterly results creates a situation where the factory ends up having to pay out hundreds of thousands of dollars in expedited delivery costs because it doesn’t have enough $5 sheet metal brackets—all to satisfy the demand to go lean.

LP: So production gets held up, money is wasted, and the company can’t serve its customers —- and when we’re talking about hospitals, these are customers who can’t wait. Who actually wins in this situation?

PG: For corporate executives, cutting inventory gives them cash they can use to give themselves hefty pay packages. They can distribute the money to shareholders in buybacks and dividends. I was told that within McKinsey, those who weren’t sufficiently with the program were in danger of getting turned over to what became known as the “Lean Taliban” in the firm [McKinsey consultants fanatically devoted to lean principles].

LP: So as the pandemic began, we found ourselves with an incredibly fragile global supply chain, as you’ve detailed. What steps could have been taken to better mitigate this chaos?

PG: Well, in a rational world, we would have dealt with the shortages by apportioning the goods as needed instead of just according to whoever could pay.

Take the computer chip shortage. I tell the story in the book of this medical device manufacturer in San Diego that can’t make devices to help people with sleep apnea because of supply chain issues. I’m talking to this guy who’s a waiter in Southern California who’s in danger of not waking up every time he goes to sleep, and he waits six months for this device.

Meanwhile, the CEO of that company, ResMed, was trying to persuade the suppliers of his suppliers of his suppliers — that’s how complicated the semiconductor supply chain is — to deliver the product they need so he can get the chip that he needs. What he learns is that even auto companies can’t get computer chips. They thought they were pretty important, but it turns out they’re really not. If Google and Apple can’t get enough inventory, nobody can. And sure enough, you know, Google and Apple are having a difficult time making as many smartphones and tablet computers as they want. So we have no rational way to distribute what capacity we’ve got. And that’s a serious problem.

LP: In terms of the pandemic response, what position is the government in after years of deregulation, market concentration, and this emphasis on leanness and efficiency vis a vis the supply chain?

PG: The government, of course, had to engage in industrial policy to get vaccines made because we have a system where whoever can pay gets what they need and everybody else goes without. But, you know, there’s just been so much engineered scarcity in our economy. We do have a market concentration that would make the robber barons blush.

And the problem is about more than what the government didn’t do or couldn’t do. It’s what the government actually did. There’s a woman I profile, Tin Aye, an immigrant from Myanmar who’s working at this slaughterhouse in Greeley, Colorado, owned by JBS Foods, the world’s largest meatpacker. The company is controlled by these two convicted felon brothers in Brazil who raised tens of billions of dollars in capital through fraudulent means to buy up the meatpacking capacity all over the world, including the state where Tin Aye works. In the early part of the pandemic, her daughter was begging her not to go to work because of the COVID cases. And the mom says, if I don’t go to work, I don’t get paid.

And what action does the government take? The Trump administration delivers an executive order to force slaughterhouse workers to keep going to work, specifically contravening local public health ordinances, because, at this point, public health authorities figured out that slaughterhouses are perfect super-spreaders of COVID. I’m being told this story by the daughter who’s holding her 20-month-old infant, who’s looking at the picture of the grandmother he’s never going to meet because Tin Aye is one of five people who dies in the first wave of the pandemic at this slaughterhouse.

But here’s the worst part. This executive order was delivered in the name of feeding Americans. The Trump administration parroted industry talking points that said that if the slaughterhouses aren’t able to keep operating, Americans are potentially going to go hungry. Well, as I reveal in the book, at the time this order is dropped, the meatpackers are in control of record volumes of frozen meat. They’re boosting exports. So essentially, the government gets involved in the name of feeding Americans while actually sacrificing people like Kim Ai for the sake of fattening profits for monopoly companies.

LP: During the Biden administration, what has been done to create a more resilient supply chain? And what hasn’t been done?

PG: I think it’s useful that the Biden administration has revived trust enforcement. And I think it’s a hopeful sign that Lina Khan at the FTC is very serious about competition policy. It’s hopeful that at the worst of the pandemic, Biden, the president himself, was calling out monopoly shipping carriers, and meat packers, as part of the cause of these product shortages. But let’s face it, these are not issues that are going to be resolved quickly. It took decades to essentially defenestrate American antitrust authority. It’s going to take some time to bring it back. In the meantime, we’re all still vulnerable to the next shock to the system.

LP: If you had to pinpoint one critical obstacle hindering a more resilient global supply chain, what would it be?

PG: I think we need to address the international shipping cartel. As we speak, shipping carriers have increased shipping prices roughly fivefold in less than a year.

LP: Wow. That’s a lot.

PG: The most immediate cause is that the Houthis are opening fire on container vessels and other ships heading into the Red Sea towards the Suez Canal in solidarity with Palestinians in Gaza. But we have no idea how much of these increases are recouping real costs and how much of this is profiteering, because there are three alliances dominating the key trade routes across the Pacific and from Asia to North America, with a market concentration of 95 percent among three companies. They can do whatever they want, and we’re all at their mercy. We’re approaching a presidential election here in the States with inflation at the center of economic concerns, and we’re again threatened with shortages in the holiday season. My book isn’t just a history book; it’s about the present and the future if we don’t figure this stuff out. The shipping cartel is very much with us.

LP: Looking ahead, we face numerous challenges—from escalating global tensions and climate change to the looming threat of another pandemic, like bird flu. Could you say a bit both about the promising shifts in philosophy and practice that are underway, as well as the substantial progress still required?

PG: I think it’s positive that we’re now talking about supply chains.

LP: Right. It was kind of this invisible thing before the pandemic.

PG: Yes. There was this unseen army of people responsible for making all the stuff and bringing it to our doors. We were invited to participate in this fantasy that it didn’t matter if a factory was down the street or across the ocean. That it didn’t matter what we believed about economic policy or fair play. You can go on Amazon, click a button, and maybe in just hours, something shows up at your door. And now that’s broken, it has revealed that our sense of normalcy rests on the continued exploitation of working people all throughout the supply chain.

I think we should welcome labor mobilization. Labor mobilization is bumpy for the supply chain. We’re talking during a time when dockworkers are threatening to strike at ports on the East Coast of the U.S., and rail workers are threatening to strike in Canada, with serious repercussions globally. Dockworkers are staging wildcat strikes in German ports. All of this stuff is very disruptive and can lead to inflation. If you go back to Henry Ford — a seriously problematic character not worth lionizing, but certainly one who knew something about mass assembly and supply chains — he doubled working people’s wages in 1914 to five dollars an hour. Some people call him a communist, but he said, I’m a capitalist who wants to make products reliably and I want to make them cheaply, and I understand that any business that’s dependent upon low-wage labor is inherently unstable.

LP: I’m glad you mentioned Henry Ford. In your book, you highlight a story that seems to underscore a big obstacle to progress today. You reference the 1916 lawsuit where investors (the Dodge Brothers) sued Ford for wanting to reinvest money for expansion rather than prioritizing immediate dividends. Ford argued for “reasonable” profits over “rapacious” ones, but the court sided with the investors. Do you see overcoming this pervasive short-termism on Wall Street as crucial for meaningful transformation?

PG: If we’re in the hands of profit-maximized publicly traded corporations that are obsessed with the next quarter, then we’re constantly going to be facing this tension between common sense business practices and the voicing of societal interests for the benefit of very narrow investor class interests. That’s how we got here, and that’s where we’ll be. It’s hopeful that even giant publicly traded companies like Walmart are now spending serious money to figure out how to diversify their supply chain. They’re not abandoning China — China’s still got this unbeatable combination of low costs and very sophisticated infrastructure – but they’re looking to move some of their production to Mexico, to India, to Vietnam, to Turkey. That’s healthy, but we should be somewhat suspicious that this will last because what recent history tells us is the further away we get from trouble, the more this kind of short-term imperative to go to the lowest cost provider, to go lean, the more those rise to the floor.

The basic incentives are unchanged. If you’re the CEO of a company arguing that you should spend a lot more money to put parts in warehouses to build redundancy in the supply chain, you’re at risk of getting thrown out of your job because you’re diluting earnings. If you’re the CEO saying, let’s just make everything as cheaply as possible, let’s squeeze our people as much as possible, inevitably there will be a shock that will reveal that to have been a bad way to run your company — but with any luck, that’ll happen on somebody else’s watch, and you’ll be lying in a hammock on some beach hoisting a cocktail.

LP: How might consumers need to adjust our expectations and philosophy if we want to have a global supply chain that’s both more resilient and fairer to the people who work in it?

PG: Well, consumers are obviously hugely important, but I don’t put a lot of stock in the idea that consumers are going to save us. We’re all busy, with children to look after, and jobs to do. We’re not all going to become supply chain geeks. But a general acknowledgment that we’re depending upon the labors of people we were invited to not think about is healthy. The re-emergence of place — I don’t know how you can really divine from the “Made in Whatever Country” label on your shirt, but there’s something to the old adage, try to buy locally, try to support local businesses, especially smaller businesses. That’s certainly more to the good than not, even with the complexities of emissions and climate change.

LP: I’m glad you emphasize that this goes beyond what any individual consumer can influence. These are massive forces at play, necessitating transformative thinking and policy. One last thing: If Just-in-Time was the dominant philosophy that led us into trouble, what should be the mantra for a healthier future approach to running the global supply chain?

PG: Well, the new mantra from the consulting class is Just-in-case [emphasizing maintaining larger inventories].

LP: Is that good enough?

PG: You know, I’m not big on corporate mantras. But the idea that we need to think about resilience and acknowledge the serious costs that go into ultra-low costs at our local superstores is important. It’s good for us to be thinking about those costs, and for people making policy to be reckoning with those costs, so we get something truly efficient and reliable, dependent, and decent for the people who are engaged in the work.

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