Excerpts

Chapter One The Shelves Are Bare One of the bedrock characteristics of disruptions is that they are almost never the result of a single failure. A large-scale disruption is usually the result of a confluence of several factors. . . . There are typically many signs that a disruption is about to take place. -Yossi Sheffi The Resilient Enterprise The Endless Supply Chain Supply chains are not part of the economy. They are the economy. It's impossible to think of any commodity, process, or finished product that's not part of a supply chain. This precept applies to natural resources and human artifacts. It applies to objects and intangibles. It applies to goods and services. We are immersed in supply chains. The irony is that we scarcely see them. The term "supply chain" is just a name we give to a nexus of logistics, inputs, processes, transportation, packaging, distribution, marketing, customer relations, vendor relations, and human capital that in the aggregate supports the supply and demand for every physical, digital, intellectual, or artistic artifact on the planet and in space. The supply chain is everywhere. Supply chain management has come so far in recent decades and resulted in such efficiencies that consumers take good delivery for granted. Amazon and Walmart are leaders in the efficient delivery of high-quality, low-cost products, yet they are hardly alone. Supply chain efficiencies have trickled down to the boutique retail level, where a proprietor can go online and easily track a shipment of carved trays from Thailand arriving by container cargo on its way to a regional distribution center. When we enter her store, we expect the trays to be available. When we shop at Amazon we expect next-day delivery to our door. We don't think any of this is special. We take it for granted. Behind the scenes from the retail buyer's perspective is not only a long, complex supply chain but an army of assembly-line workers, dockworkers, crews, drivers, warehouse managers, and other logistics experts working to keep the supply chain moving. Links in the supply chain do break, but professionals prepare for such events with backup suppliers, alternate trucking lines, safety stock (extra inventory kept in case of disruptions), and other techniques to keep goods on shelves. Most of this is invisible to consumers. That's why supply chains are not well understood. Still, most consumers have only rudimentary notions of how supply chains work, and few understand how extensive, complex, and vulnerable they are. If you go to the store to buy a loaf of bread, you know the bread did not mystically appear on the shelf. It was delivered by a local bakery, put on the shelf by a clerk, then you purchased it, carried it home, and served it with dinner. That's a succinct description of a simple supply chain-from baker to store to home. That description barely scratches the surface. What about the truck driver who delivered the bread from the bakery to the store? Where did the bakery get the flour, yeast, and water needed to make the bread? What about the ovens used to bake the bread? When the bread was baked it was put in clear or paper wrappers of some sort. Who made the wrappers? When we ask those questions, we move from a simple supply chain to what's called the extended supply chain. This concept includes the suppliers to the suppliers, all the way back to the source of agricultural and mineral commodities. Even that description of an extended supply chain is somewhat simplified in terms of a complete chain. The flour used for baking came from wheat. That wheat was grown on a farm and harvested with heavy equipment. The farmer hired labor, used water and fertilizer, and sent the wheat for processing and packaging before it got to the bakery. The manufacturer who built the baker's oven has his own supply chain of steel, tempered glass, semiconductors, electrical circuits, and other inputs needed to build ovens. The ovens are either handcrafted (engineered to order) or mass produced (made to stock) in a factory that may use either assembly lines or separate manufacturing cells to get the job done. The factory requires inputs of electricity, natural gas, heating and ventilation systems, and skilled labor to turn out the ovens. The store that sells the bread is on the receiving end of numerous separate supply chains. It also requires electricity, natural gas, heating and ventilation systems, and skilled labor to keep the doors open and keep merchandise in stock. The store has loading docks, back rooms for inventory, forklifts, and conveyor belts to move merchandise from truck to shelf. In the case of big-box stores such as Home Depot or Walmart, the store is a warehouse. The point of big-box stores is to cram so much merchandise under one roof that the seller can eliminate actual warehouses and distribution centers, thereby lowering supply chain costs to deliver what Walmart calls "everyday low prices." Every link in the extended supply chain requires transportation. The farmer relies on trucks or rail for deliveries of seeds, fertilizers, equipment, and other inputs. The oven manufacturer also relies on trucks or rail for deliveries of its inputs of oven components. The bakery and the store rely mainly on trucks for deliveries of their ingredients or foodstuffs, including finished loaves of bread. The consumer relies on her automobile to go to the store and return home, to solve what logistics experts call the last mile problem. These transportation modes have their own supply chains, involving truck drivers, train engineers, highways, railroads, rail spurs, and energy supplies to keep trains and vehicles moving and keep deliveries on time. This entire network (farms, factories, bakeries, stores, trucks, railroads, and consumers) relies on energy to keep working. The energy can come from nuclear reactors, coal-fired or natural gas-fired power plants, or renewable sources such as solar modules and wind turbines fed into a grid of high-tension wires, substations, transformers, and local lines to reach the end user. Everything described above sits somewhere in a complex supply chain needed to produce one loaf of bread. Now, take everything else in the grocery store (fruits, vegetables, meat, poultry, fish, canned goods, coffee, condiments, and so on) and imagine the supply chains needed for each one of those products. Then take all the other stores in any shopping center (home goods, clothing, pharmacy, hardware, restaurants, sporting goods) and imagine all the goods and services available from those vendors and the supply chains behind each and every product. This thought experiment is not an exaggeration. In fact, this description of an extended supply chain is a grossly simplified description of an actual supply chain. A full description of the loaf-of-bread supply chain would reach back further (where do the seeds for the wheat come from?) and branch off in tangential directions (where do the bread wrappers originate?). A full description of the loaf-of-bread supply chain would also include choice of vendor analysis, quality control tests, and bulk purchase discounts, among other decision-tree branches. A full description could easily stretch to several hundred pages. Supply chain management manuals in large corporations are that long. Another way to understand the complexity and pervasiveness of supply chains is to put yourself at the center of your own personal supply chain. This approach was suggested by Massachusetts Institute of Technology scholar Yossi Sheffi in his book The Resilient Enterprise. Sheffi's thought experiment goes something like this: You wake up in the morning to the sound of an alarm clock. The clock may have been purchased at Walmart and made in China. You roll out of bed (rising from a Casper Wave mattress with individual layers made in Georgia, Belgium, Indiana, and Canada) and make some coffee (from Brazil or Costa Rica). You prepare a nice breakfast of eggs (trucked in from a local farm), toast (from a local bakery), and orange juice (moved in refrigerated railcars from Florida). Once breakfast is done, you check your email and news (on a computer made in China and powered with processors made in Taiwan), then hop in your car (made in Tennessee by a Japanese-owned company) and do some shopping. You buy new fashions (made in Thailand and Vietnam), pick up your eyeglasses ready at the optometrist (with German lenses and Italian frames), and fill up your car with gas on the way home (with gasoline refined in Houston from oil pumped in Mexico, shipped to the refinery on tankers owned by Bermuda-based Frontline Ltd, and delivered by truck to your local gas station). Your day goes on and so do your personal points of contact with global supply chains. You are surrounded by physical goods and services sourced from all over the world and delivered by truck, rail, or vessel to regional distribution and fulfillment centers and delivered to your local stores or to your door. You are the center of your own human supply chain. Next we apply our extended supply chain analysis to your one-person supply chain. Your alarm clock made in China has parts from vendors all over the world (semiconductors, copper cords, plastic moldings, LED displays). Your morning coffee is made in a percolator or drip-style coffee maker manufactured from stainless steel, tempered glass, semiconductors, and other components supplied by vendors in Germany, Taiwan, and Mexico. The coffee beans were roasted abroad, packaged, and delivered by container cargo on vessels owned and operated by Maersk (Denmark), COSCO (China), or Hapag-Lloyd (Germany). The vessels themselves were built in South Korea. The automobile you take shopping relies on semiconductors from Taiwan Semiconductor Manufacturing Company (TSMC). The clothes you purchased were made from cotton grown in Egypt and fastened with buttons fabricated in Malaysia. We can continue this analysis indefinitely. The plastic resins used in the Malaysian button factory came from a chemical firm in Germany. The fabric dyes were produced by Yamada Chemical Co. in Kyoto. That's the point. The supply chain really is endless because every output has one or more inputs, which have their own inputs all the way back to basic industries such as mining and steel. Of course, those industries have their own inputs of machinery and electricity. Making it all work is human capital, from technical expertise to manual labor. The supply chain never ends. Scenes from a Supply Chain Debacle A supply chain is not an object, it's a process. There's no one right way to build a supply chain-it's a matter of developing a process that meets the goals of low-cost operation and customer satisfaction. Those goals are not always complementary. At times you incur added costs in order to keep customers happy and to earn their trust and repeat business. At other times you may have to disappoint customer expectations about selection in order to achieve significant savings that satisfy a customer's desire for low prices. In those cases, sellers emphasize communications that steer expectations in the right direction. Dell Computer was widely praised for their handling of this technique. They offered limited bundles of laptop features, but they more than made up for this with quick delivery, reliability, and low prices. The customer may be at the end of the supply chain, yet they are still part of the supply chain and need to be managed like any other part. Extended supply chains are not necessarily spread among numerous suppliers and logistics providers. In fact, one of the most extensive supply chains in history was confined to a single firm-the Ford Motor Company between 1927 and 1940. Even casual students of business history know that Henry Ford is credited with inventing assembly-line manufacturing. He took that innovation much further. Ford did not want to rely on outside suppliers if they could be avoided. He ran what is described as a vertically integrated company, beginning with the introduction of the mass-produced Model T in 1908. Ford's efforts culminated in the construction of the River Rouge Complex in Dearborn, Michigan, completed in 1928. River Rouge covered over two thousand acres and when opened was the largest industrial plant in the world. Michael Hugos offers a succinct description of Ford's integrated production methods in his book Essentials of Supply Chain Management: In the first half of the 1900s, Ford Motor Company owned much of what it needed to feed its car factories. It owned and operated iron mines that extracted iron ore, steel mills that turned the ore into steel products, plants that made component car parts, and assembly plants that turned out finished cars. In addition, they owned farms where they grew flax to make into linen car tops and forests that they logged and sawmills where they cut the timber into lumber to make wooden car parts. Ford's famous River Rouge Plant was a monument to vertical integration-iron ore went in at one end, and cars came out at the other end. Henry Ford . . . boasted that his company could take in iron ore from the mine and put out a car 81 hours later. Of course, the vertical integration model is widely derided today. Modern supply chain managers pride themselves on outsourcing as much as possible and confining their direct processes to what are called core competencies. Still, as supply chains break down and Chinese decoupling gains momentum, the Ford model is a good reminder that complex supply chains do not necessarily require a legion of outsourced suppliers. For an example of a twenty-first-century supply chain with far-flung suppliers, manufacturers, and distribution networks, we have this description of Whirlpool Corporation's supply chain from a consultation performed by experts Paul Dittmann and Reuben Slone: Whirlpool made a diverse line of washers, dryers, refrigerators, dishwashers, and ovens, with manufacturing facilities in thirteen countries. It sold those appliances through big and small retailers and to construction companies and developers that build new homes. The logistics network . . . consisted of eight factory distribution centers, ten regional distribution centers, sixty local distribution centers, and nearly twenty thousand retail and contract customers. To top it off, there were several thousand SKUs. [An SKU is a stockkeeping unit, a distinct product identifiable by a scannable bar code]. Of course, this description, as complicated as it sounds, can still be regarded as a simple supply chain. The extended supply chain includes sourcing for all the manufacturing inputs, as well as transportation logistics providers for deliveries from sources to manufacturers to distribution centers and finally to retail outlets. As noted, the goals of supply chain management are to cut costs and provide customer satisfaction. These goals are usually combined under the heading of efficiency. If you can make your supply chain more efficient, savings will accrue and customer satisfaction will result from quick delivery of high-quality goods that meet expectations. There are hundreds of ways to increase efficiency. Many of these are described in what follows. The greatest single driver of efficiency is accuracy in supply-and-demand forecasts. This sounds obvious. Don't all economic decisions boil down to supply and demand curves intersecting at a point that produces the greatest supply at the lowest price? In theory, that's true; in practice few goals are more difficult to achieve than accurate supply-and-demand forecasts. Excerpted from Sold Out: How Broken Supply Chains, Surging Inflation, and Political Instability Will Sink the Global Economy by James Rickards All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.