Everyone is talking about supply chains these days. Ever worsening weather, a global pandemic, and a labor shortage have generated a perfect storm that has pushed global supply chains to their breaking point. I propose that the problem has been building for some time and this perfect storm may just be the reset we need.
How did we get here?
We got here by getting better. Arkieva uses complicated, yet elegant, optimization models to manage integrated supply chains that encompass procurement, inventory management, production planning, and distribution for manufacturing companies, over time and physical locations. We can do this in large part because of George Dantzig, who developed the first technique to solve these optimization models, called the Simplex Method, in the 1950s. Back then, it was done by hand. The introduction of computers enabled the technique to be automated. Following Moore’s law, growing computing power has given us the ability to tackle bigger and bigger problems. Between the 1990s, when I started building models for a living, and today, models have increased tenfold in order of magnitude. In the 1990s, we were able to manage very complicated supply chains, but like a fish that grows to fit its tank, supply chains have gotten bigger, messier, and as we are seeing recently, more precarious.
Suddenly, there is a slew of articles about broken supply chains. Whatever will we do?? Better supply chain modeling won’t help. We’ve been getting better at that for the last three decades, from demand forecasting to supply planning. Maybe more technology is needed. Machine Learning! Artificial Intelligence! Bigger computers!
As we scratch our heads, I can’t help but think of what Wikipedia calls the Great horse manure crisis of 1894 (I love that title!). As city planners struggled to find a solution to a stifling onslaught of horse manure in the city streets due to the preponderance of horse-drawn carriages – a result of a growing and thriving economy, out of the blue comes Henry Ford’s automobile. Problem solved. The moral of the story is that often a solution comes along that doesn’t solve the problem; instead, it makes the problem go away.
We don’t need to figure out how to better manage massive global supply chains for millions of products and components. (Ok, I mean, yeah we do, but just go with me here for a minute.) We need to rethink the underlying framework of our supply chains…
Why are our supply chains broken? Here are 3 reasons:
Manufacturing moved to Asia because it was cheaper. There were some other minor drivers, but that was the main one. There was some pushback about American jobs, but hey, capitalism & free markets!
Manufacturers were willing to put up with extra transportation time; shipping was cheap, and a little extra inventory is worth it, they rationalized. I had a client who began production of their products in California and then sent it to Ireland for the next phase, followed by Singapore, and finally back to California for finishing. It didn’t make sense to me then, and it sure doesn’t make sense to me now.
With so much uncertainty regarding weather, the economy, global tensions, and politics, as well as just sheer volume, we are forced to rethink this strategy. Unforeseeable events, like the labor shortage at the California ports, the blockage of the Suez Canal, and of course Covid, cannot be managed with extra inventory or expedition. The money saved is quickly absorbed by lost sales and massive disruption of operations. The lead times are simply too long to respond adequately.
Meanwhile, the bickering continues over what “they” should do (or not do) about restoring manufacturing jobs and raising wages in the US. We debate endlessly over policies, tariffs, and taxes and get nowhere. But something else is also happening. A massive shift is underway; instead of fixing the problem, what if the problem went away? The money saved by offshoring manufacturing is no longer justified considering the growing frequency of disruptions and the associated costs. I predict that manufacturing will gradually be re-shored, and wages will rise. Companies will end up in a better place than before – more control, better responsiveness, less volatility, shorter lead times, less inventory, and yes, better financial success. And to give this story an even happier ending, our societies and the planet will be better off, too!
Expanding Product Lines
What do companies do when demand starts to level off? They create more! They do this by offering more bells and whistles, more choices, a new shiny object to catch our eye. It doesn’t matter if consumers ask for it; very quickly they want it. Nay, they need it! Just look at the latest in fast fashion, new flavors of favorite foods, new and improved cell phones, etc. Have you ever noticed how many varieties of mascara there are??
Companies continually expand their offerings to increase revenues. And it usually works (cannibalism notwithstanding), at least for a while, but are they truly increasing profits in the long term? Now, these companies must manage more and more SKUs, which translates into more inventory, more changeovers, more obsolescence, and the potential for more disruptions.
Companies are beginning to see the value of “less is more.” McKinsey & Company has an insightful article on product simplicity for CPG companies. And if you don’t want to reduce the number of choices for your customers a variety of products, standardizing components will still reduce the number of items you need to manage, not to mention making repair and re-use more attainable.
Jason Hickel said, “If your economy requires people to consume things they don’t need or even want, and to do more of it each year than the year before, just in order to keep the whole edifice from collapsing, then you need a different economy.”
The biggest problem the growth economy mindset has is that it ignores externalities. Externalities are called that for a reason. They don’t show up on a balance sheet. They don’t affect share price or GDP. And so, they are easy to ignore, up to a point. What are externalities?
- Impact on the climate and the environment
- Impact on employee standard of living
- Impact on the community
Not all externalities are bad (e.g., a farmer grows apple trees, which provide nectar for a nearby beekeeper), but for this discussion, we’ll stick to the negative ones. As the adage goes, “What gets measured, gets done.” If GDP and share price are our markers, we will continue this downward spiral. Post-growth models use Triple Bottom Line, absorbing the traditional externalities and yet driving mutually beneficial outcomes. That’s where we need to go.
As I’ve said before, the only solution that will work is one that is a win-win. Companies need to do better financially if they are to get on board. But it must benefit society and the planet as well. There needs to be an equilibrium.
Companies can achieve this by shortening their supply chains. Stop shipping products around the globe to produce them. Reduce your product lines. Customers don’t need so many choices. Marketers have done a very good job of making us think we do, but we really don’t. And finally, abandon the profit mindset. Acknowledge and take responsibility for the externalities you generate. Once you’ve done all that, then let’s talk about technology. Of course, there is a place for artificial intelligence and machine learning, but you’ve got to fix the fundamental problems first. And we do that by simplifying.