November 3, 2021
ASU supply chain expert talks about how to mitigate future risks
Empty shelves, products on back order — and all of a sudden, supply chain management has become the buzzword. But the process has long been important in the way the world distributes goods and services. The recent disruptions, as a result of the COVID-19 pandemic, better illustrate the importance of re-evaluating supply chain models and strategies to avoid massive ripple effects and reduce the impact of an unpredictable disaster.
ASU News spoke with Hitendra Chaturvedi, a professor of practice in the Department of Supply Chain Management in the W. P. Carey School of Business at Arizona State University, about the short- and long-term impacts on our economy and what the future of supply chain management looks like globally.
Question: The supply chain is strained at the moment due to high demand and low supply. As suppliers try to remedy the issue and buy more products, how likely is it that we’ll see a bullwhip effect next year?
Answer: Very likely. Bullwhip effect means a small change (flip of the wrist that holds a bullwhip) causing large variations (in the tip of the whip). On average, inventory-to-sale ratio hovers around 1.5 (i.e. businesses typically have 1.5 times more inventory than what they sell). In April 2020, it peaked to 1.67, but today it stands at very close to 1.0 due to supply chain disruptions, meaning inventories are extremely depleted. As holiday season approaches, this ratio may go down even further, and with supply chain problems, there is no guarantee when they will be replenished. After the holiday season, businesses will order much larger quantities (the "whip" effect) as they would want to be “safe” (remember hoarding of toilet paper due to panic?), and we will see this play out during summer months as businesses will be planning for the next holiday season. What if the expected consumer demand does not materialize? What happens to the excess inventory that retailers ordered?
Q: U.S. ports are extremely congested with container ships waiting to get offloaded. What is the solution to these jams? Should we consider onshoringMoving production or business operations back to one's country. or nearshoringMoving production or business operations to a nearby country, rather than a distant one. to better streamline the supply chain?
A: These jams at the ports have been caused by many factors across the supply chain, and all this started by a sudden surge in demand from the U.S. consumers when the COVID restrictions were lifted. As we started to emerge from COVID, the global supply chain had started to iron out the kinks by aligning shipping capacity, moving containers to the right location and aligning workforce (imagine a four-lane freeway with two lanes under construction), and then suddenly the U.S. consumer demand overwhelmed this supply chain (imagine rush-hour traffic, plus holiday traffic on the under-construction freeway with only two lanes functional).
Short of U.S. consumers curtailing demand (ha!), there is no immediate solution and we will have to suffer these supply chain challenges through the holiday season. In fact, these problems will get worse before getting better. A supply chain that brings in $2 trillion in imports ($1 trillion from Asia) will take time to correct itself because there are many weak links in this chain — from COVID-related factory and port shutdown in Asia, lack of raw material for factory productions, lack of vaccination across seafarers who are mostly from developing countries, to realigning misplaced shipping containers, to labor shortages at our ports, trucks, warehouses and retail. All this will take time to fix.
This is not a political statement so, yes, just like any good business mitigates the risk of a single supplier/partner, we as a country need to strategically start the thought process of how we mitigate the risk of excessively heavy reliance on Asia for everything we consume. This is not only necessary for consumer goods but also for national security concerns. Nearshoring and onshoring are topics that need to be put on the table and seriously debated and explored on a war footing. COVID and subsequent supply chain disruption has exposed our Achilles heel. It is time we pay attention to this.
Q: Labor shortages have also contributed to supply chain disruptions. Why aren't we giving more visas to foreign workers to fill those immediate needs?
A: This is a tricky one. We typically give visas to skilled foreigners as they fill the skill gap (ideally) that cannot be found here. The less skilled you are, the longer the visa process. So, even if we took this route, we will not be able to solve our immediate problem of labor shortage. Moreover, unfettered immigration will depress wages, which opens up another can of worms. In a normal year, we welcome about a million legal immigrants, roughly three-quarters of whom participate in our labor force. This pipeline was disrupted last year when we brought legal immigration to a halt. Some of the labor shortage that we are seeing is also a fallout of this human supply chain disruption. Research has shown that bringing in low-wage foreign workers has little to no impact on native-born wages and employment. Industries that are facing the biggest labor shortages are construction, transportation, warehousing, hospitality and local service businesses like salons, dry cleaners, etc., which are staffed over 20% by immigrants.
In my opinion, we have a great controlled system of worker and student visa that was complementing our workforce by filling in the skill gaps. We should reinvigorate this supply chain and prime our student, worker visa and green card, which is seeing huge backlogs due to restriction from last year. We should further increase our cap on H2 visasThe H2 visa is a nonimmigrant work visa that allows an U.S employer to hire foreign employees for temporary jobs. so the seasonal labor issues are resolved, for now. Yes, we should absolutely prime the channel that built this country in the first place.
Q: How will supply chain disruptions impact the balance of trade? Will this lead to a larger trade deficit with Asia?
A: This has already reached alarming proportions. Our trade deficit in September was a record $96.3 billion, where exports fell by 4.7% while imports rose by 0.5%. Having a large trade deficit is strategically and economically bad for us, but historically, when imports increased, the dollar left our country and weakened, and thereby our products were more affordable and it increased exports, thereby balancing the deficit. Unfortunately, the current situation is becoming more alarming because with increased imports, with a hamstringed supply chain, our exports are getting hampered. There is also a reduced demand overseas for our goods. This does not bode well for the dollar, and we as a country need to very carefully look at this widening trade deficit as this one is unlike what we have experienced in the past.
Q: Is the supply chain too interconnected, and should the current model be reevaluated?
A: Supply chain, by its nature, will always be interconnected. It is called a “chain” for that reason only. It draws its strength from the strength of interconnectedness. The question that should be asked should be: How do we mitigate the risk of our interconnected supply chain? This should include discussions around geopolitical risks, pandemic risk, onshoring/offshoring risk, dependency/redundancy risk and national security risk. I believe that looking at the problem with the lens of risk should get us a clear answer on the best strategy.
Q: After a tumultuous year, what does the future supply chain look like? Have we learned enough to mitigate unexpected challenges like the COVID-19 pandemic?
A: Have we learned enough about challenges from a pandemic like COVID? I would say, yes. Are we willing to do everything to mitigate that risk in the future? I would say, no. I say this because most of us have very short memories and we are destined to repeat the same mistakes.
Let us fast-forward to three years where COVID is now a small red dot (no pun intended) in our rear-view mirror and Asia factories are humming and our demand is growing. As a consumer, let us say, you are given a choice to two identical iPhones — one that was made in China with Just in Time (JIT) inventory management, and the second, made in the U.S., that had mitigated inventory risk by carrying safety stocks, leading to the final cost to you that was 40% higher. Most will choose the cheaper iPhone. This consumer demand will force locally made, inventory-carrying business models to become economically untenable.
In the end, I believe that companies will do something to mitigate future risk of a pandemic, but that will not be enough. Revenue, growth, profits and competition will end up trumping everything else.
Q: What does the supply chain practitioner of the future look like?
A: In the early 1900s, the typical CEO profile used to be an inventor/creator. This profile changed to a sales/marketing profile in the 1950s. In the 1970s, the CEO profile shifted to a numbers person, someone with a finance background. In the 1980s and 1990s, the typcial CEO profile was a people person, shifting to a strategist profile in the early 2000s.
Today, we see a typical large-company CEO profile to be that of an integrator, and in my opinion, this is ripe for change post-COVID. In my opinion, the future CEO is going to come from supply chain and be a “renaissance person." This person will be an orchestrator at a global scale, technically adept, always thinking ahead and mitigating risks. Apple CEO Tim Cook has demonstrated this, and there will be many more to come.
Q: Once we are able to replenish supplies, what about the workers? Will the “Great Resignation” have a lasting impact on the workforce?
A: I believe that the "Great Resignation" was a knee-jerk reaction to many years of pent-up frustration, and COVID made us realize that we need a change. Unfortunately, in my opinion, after the pandemic relief runs out and forbearance (postponement of mortgage payments due to COVID) benefits are exhausted, there will be bills to pay and then there will be a “great homecoming.” It is just a matter of time. I give it another six months before we start to see this happen. I do not see all workers coming back, as some will join the gig economy and some have taken early retirement; but most of the rest, unless they have won a lottery, will be coming back to work.
Top photo courtesy of Pixabay