Issues and Remedies for Our Efficiently Broken Supply Chain

May 30, 2023
Astrid F. Kowlessar

Exploring Financial Strategies and Economic Insights

In "Issues and Remedies for Our Efficiently Broken Supply Chain," Astrid F. Kowlessar addresses the significant vulnerabilities exposed in global supply chains by the COVID-19 pandemic. The article examines the widespread economic concerns stemming from these disruptions and proposes solutions to mitigate future risks.

Supply Chain Vulnerabilities

The pandemic highlighted the fragility of the just-in-time inventory system and the overreliance on outsourcing. These strategies, while cost-effective in stable conditions, failed to withstand prolonged disruptions. Industries like food, fuel, and automotive faced severe shortages and cost inefficiencies.

Food Industry

Labor-intensive agricultural processes were severely impacted by COVID-19 restrictions, halting production and processing. This led to long-term price increases and supply chain disruptions, exemplified by the skyrocketing cost of eggs.

Fuel Industry

The conflict between Ukraine and Russia has significantly affected global oil and gas markets, increasing transportation costs and fuel prices. Diversification within the supply chain is critical, advocating for increased U.S. oil production to reduce dependency on foreign sources.

Automotive Industry

Semiconductor shortages, rising ocean freight prices, and port congestion have plagued the automotive industry. The shortage of essential raw materials like silicon and lithium exacerbates these issues, further strained by increased global military spending.

Proposed Solutions

Contingency Planning: Implementing robust supply chain and logistics planning, moving beyond just-in-time inventory to include adequate management reserves.

Data and Risk Metrics: Tracking vendor and production capacity, using simple quantitative metrics like accounts receivable ratios.

Monitoring Systems: Developing weighted risk metrics that consider various economic, environmental, and socio-political factors.

Cloud-Based Platforms: Utilizing secure, centralized data systems for real-time tracking and cost-effective updates.

Investment Opportunities

Investing in sectors like technology (Oracle), transportation (CSX Corporation), manufacturing (Intel, TSMC, Samsung), e-commerce (Amazon, Walmart), agriculture technology (Deere & Company, Trimble Inc.), and renewable energy (NextEra Energy Inc.) can capitalize on improving supply chain resilience.

Conclusion

Kowlessar calls for public and private sector collaboration to bolster supply chain resilience. The Financial Policy Council (FPC) plays a pivotal role in advocating for economic policies that enhance supply chain efficiency and support free enterprise.

For more information, visit Financial Policy Council.

We currently subsist in a world that is built on a ‘new normal.’ And this new normal is fraught with supply chain vulnerabilities that avalanched from the COVID-19 pandemic. Interruption to supply chains across all industries is now widespread and a primary factor of economic concern. We are a sum product of our supply chain¹. We start with material in the raw and go through a systemized network of processes to a finished product to be transported, sold and consumed. Here, the whole is a sum of all its accurately moving parts. Our entire global supply chain diminished during the pandemic due to lack of foresight and contingency planning from top executives in both private and public sectors.

Business as usual tramples foresight, usually with dire consequences. Global commerce depended mainly on just-in-time inventory² and outsourcing along the supply chain to have goods shipped in lead time for the lowest price. This strategy works well without disruptions along the supply chain and may withstand short term disturbances but would not stand up to long term pandemics. Who could have seen it coming? Demand shifting with remote work, trade restrictions, human capital deficiencies, rising transportation and input costs, component shortages and the upward swing to food, fuel, automotive and construction prices over a three-year period that now has a structural and systemic affect that may last for decades and would absolutely worsen if another economic shock occurs. While all industries had adverse supply chain shocks, the food, fuel and auto industries were truly slammed by shortage and cost inefficiencies, with high impact to the US and global economy. Let us examine the issues faced for these top three industries, and then present overall solutions to mitigate risks within the supply chain.

Industries

Food & Beverage

The current cost of eggs tells us almost everything we need to know about what has happened to the food industry. All jokes aside, food costs have doubled or tripled in price over the past three years. According to FTI Consulting, the food supply chain has five stages: production, harvest, processing, distribution, and end consumption. Agriculture will always have a strong lean towards labor, especially during the early stages of a food supply chain. Labor intensive restrictions due to the contagious nature of COVID-19 curtailed harvesting for all food types which curtailed both sowing and harvesting. And although food processing may be capital intensive, mandated factory closures from the federal government also halted the processing component thus curtailing food supply with long term price repercussions.

Fuel

Oil and gas markets have been adversely affected by the current European conflict between Ukraine and Russia, with many countries moving away from Russian oil. Demand shits have led to increased transportation costs with intense increases to retail and wholesale prices. FTI Consulting suggests that diversification within the supply chain is critical to fuel supply chain resilience. The US above all should desist from concentrating on few sources of foreign oil and look inward to US oil production and refinery to control and expand the US fuel supply chain. Resource diversification will always be accepted while at-home industry cultivation is very much applauded when it comes to oil and gas.

Automotive

Semiconductor chip shortages³, ocean freight price increases and port congestion pummeled the auto industry during the pandemic, with slight improvement to date. The chip shortage has not suddenly solved itself, and it would be asinine of risk management executives to check this one off the list. The growth of mass-produced digital technology across industries has led to raw material shortage of silicon and lithium to name a few. And we expect a worsening of the shortage with US and global government spending on increased military spending for the Ukraine-Russian conflict which would need digitized chip parts for the machine of war. The automotive and corresponding IT supply chains are geared to be volatile while the European conflict ensues.

Supply Chain Risk Solutions

Contingency Planning⁴

Supply chain planning may be a capital-intensive process overall but it is based on executive decision making. Supply chain disruptions across all industries is a C-Suite problem that needs solutions from the Board to the Managerial level. Implementation of technological tools without clear insight into unique industry issues will not solve supply chain challenges. The pandemic has depicted a need for a deeper dive into supply chain and logistics planning. While just-in-time inventory is very efficient and cost-effective in a business-as-usual environment, we need to move back to having adequate management reserve planning for the unknown-unknowns. Plan for war, hope for peace.

Data and Risk Metrics⁵

The devil is in the details for supply chain management components. The pandemic and European conflict brought to light that at least 150 industries that may seem unrelated are affected by semiconductor chip shortages, especially in an increasingly digitized age. Vendor and supply production capacity data is a must to track, along with price disparities for inputs within specific phases of the supply chain (assembly to production). I firmly believe in simplicity when it comes to quantitative metrics. Calculus isn’t necessary: tracking accounts receivable ratios for both internal financial health and supplier behavior is a great start.

Monitoring Systems

Metrics are no good without monitor and control. Weighted scoring of risk metrics that consider economic factors, industry specific trends and unique measurements to the company’s own operational and logistical processes are a must have. Adequate reporting tools and stakeholder access to these reports are also integral to monitoring supply chain risks. Risk categories are numerous, but should include environmental, socio-political, internal production & delivery capacity and supplier capacity.

Cloud Based Platforms⁶

MaRS Discovery District, a leading authority on supply chain management recommends integration of metrics and monitoring through a single cloud-based supply chain management platform that provides cyber protected centralized real-time data that integrates with logistics partners. In-house servers may not have Zero Trust architecture as does cloud platforms and may be more expensive and time consuming in the long run. Cloud platforms provide more streamlined data backups and are more cost effective to update data applications vs stand-alone servers.

Monetizing the Solution

When it comes to investment in supply chain management, economies of scale⁷ win the day. Here we present specific sectors companies that could be potential investment opportunities:

Technology Sector: In the game of supply chain management, management reserves and accurate data predictions are necessary tools for success. Companies that provide cloud-based supply chain management solutions are poised for growth. Oracle (NASDAQ: ORCL) is a key player in this space with its suite of cloud solutions designed to enhance supply chain efficiency.

Transportation Sector: With the ongoing supply chain disruptions, companies that offer logistics and transportation solutions are crucial. CSX Corporation (NASDAQ: CSX), a leading rail-based freight transportation company, could be a potential investment.

Manufacturing Sector: Companies that are investing in diversifying their supply chains and improving their manufacturing processes to mitigate supply chain risks could be potential investments. For instance, companies in the semiconductor industry that are investing in expanding their manufacturing capabilities to address the current chip shortage. These include companies like Intel, TSMC (Taiwan Semiconductor Manufacturing Company), and Samsung, among others.

E-commerce Sector: Companies like Amazon (NASDAQ: AMZN) and Walmart (NYSE: WMT) have shown resilience amidst the supply chain disruptions due to their robust logistics network and inventory management systems.

Agriculture Technology Sector: Companies that are leveraging technology to improve agricultural supply chains could also be potential investments. This includes companies that are working on precision agriculture, farm management software, and agricultural marketplaces. These include companies like Deere & Company (NYSE: DE), Trimble Inc. (NASDAQ: TRMB), AGCO Corporation (NYSE: AGCO), The Climate Corporation (a subsidiary of Bayer AG), and Granular (part of Corteva Agriscience), all of which are leveraging technology to improve agricultural supply chains.

Renewable Energy Sector: With the ongoing transition to cleaner energy sources, companies in the renewable energy sector that are working on diversifying the energy supply chain could be potential investments. These include companies like NextEra Energy, Inc. (NYSE: NEE), Ørsted A/S (CPH: ORSTED), Enphase Energy, Inc. (NASDAQ: ENPH), Vestas Wind Systems A/S (CPH: VWS), and SolarEdge Technologies, Inc. (NASDAQ: SEDG).

However, the current transitions in sectors such as renewable energy are just one piece of the puzzle. Another crucial component lies within the realm of policy and regulatory systems, areas where the Financial Policy Council (FPC) plays a pivotal role. The FPC is steadfastly committed to the advancement of sound public policy rooted in the principles of free enterprise and wealth creation, as envisioned by the founding fathers of the United States. Their mission is to ensure that the economic and regulatory systems facilitate wealth creation, economic growth, and prosperity.

The Financial Policy Council (FPC) with whom I am an active member, is steadfastly committed to the advancement of sound public policy rooted in the principles of free enterprise and wealth creation, as envisioned by the founding fathers of the United States. Their mission is to ensure that the economic and regulatory systems facilitate wealth creation, economic growth, and prosperity. They advocate economic policies that enhance supply chain resilience and efficiency, especially those that put the US supply chain first. Furthermore, the FPC promotes free enterprise as a key driver of economic growth and supports business strategies and innovations that enhance supply chain resilience, such as vertical integration within e-commerce, incorporating in-house warehousing and freight forwarding in overall operations.

Engaging with the FPC, I’ve had a chance to understand how intertwined economic policies and supply chain resilience really are. This leads us to an important question: what does the current supply chain landscape look like, and what can we expect moving forward? Many analysts and investment pundits are confident the supply chain issues faced are temporary and will clear over time. However, this viewpoint could be seen as overly simplistic and shortsighted, especially when we take a closer look.

Construction, chicken farmers and car manufacturers could have never imagined having a common denominator of semiconductor chip shortages along their unique supply chains. The need for the global community to return to ‘normalcy’ makes us forget to account for unknown unknowns. We need to have more public and private sector spending on cultivating the raw materials and infrastructure needed nationally to become less dependent on foreign inputs and outputs. Our oil and gas, manufacturing, agriculture and construction sectors need to have more supplier concentration domestically. We need continued investment in US freight of all types. Jack Buffington, Professor at the University of Denver, calls the US and global supply chain as ‘efficiently broken’ and that it is. The US and the world cannot withstand continued inefficiencies in supply chain planning.

Call to Action

I encourage each and every one of you to do more – and here’s how you can!

Join the conversation: We invite you to share your thoughts and experiences on the supply chain issues discussed in this blog. Comment below or engage with the FPC on our social media platforms.

Stay informed: Subscribe to newsletters to receive the latest updates on supply chain trends, investment opportunities, and solutions.

Get involved: Join the Financial Policy Council and become part of a community dedicated to promoting economic growth and wealth creation. Participate in our events, webinars, and roundtable discussions.

Invest wisely: Consider the investment opportunities discussed in this blog. Do your research, consult with a financial advisor, and make informed decisions that align with your financial goals.

Spread the word: Share this blog post with your network to raise awareness about the current supply chain issues and the potential investment opportunities.

Learn more: Explore the FPC’s other resources and blog posts to deepen your understanding of the supply chain and other economic issues.

References

Buffington, Jack. 2023. “Reinventing the Supply Chain: A 21st Century Covenant with America,” Georgetown University Press.

Curry, Rachel. 2023. “What Should Investors Know About The Supply Chain.” Public Investments Online. https://public.com/learn/what-should-investors-know-about-the-supply-chain

Evans, Ian. 2022. “How To Fix Our Broken Supply Chains.” MaRS Discovery District Online. https://www.marsdd.com/news/how-to-fix-our-broken-supply-chains/

O’Maera, Graeme. 2022. “Supply Chain Disruption: the Risk to Global Economic Recovery. FTC Consulting Online. www.fticonsulting.com

Rigby, Darrell et al. 2022 “5 Lessons from Automakers in Navigating Supply Chain Disruptions” HBR Online. https://hbr.org/2022/11/5-lessons-from-automakers-on-navigating-supply-chai n-disruption

Footnotes

1. Supply Chain: This is like a big conveyor belt that takes a product from its beginning stages all the way to the customer. It includes everything from getting the raw materials, making the product, and delivering it to the store or the customer.

2. Just-in-Time Inventory: This is a strategy where companies try to keep as little inventory as possible. They order exactly what they need, just when they need it. It’s like going to the grocery store every day to buy just what you need for that day’s meals.

3. Semiconductor Chip Shortages: Semiconductor chips are tiny parts that make our electronics work. They’re in everything from our phones to our cars. Right now, there aren’t enough of them to go around, which is causing problems for a lot of different industries.

4. Contingency Planning: This is like having a backup plan. Companies do this to prepare for unexpected events, like a natural disaster or a pandemic, that could disrupt their normal business operations.

5. Risk Metrics: These are measurements that companies use to understand how risky their business activities are. It’s like a weather forecast for business – it helps them predict if there might be any “storms” (or risks) on the horizon.

6. Cloud-Based Platforms: These are services that store data on the internet, rather than on a computer’s hard drive. It’s like keeping your important documents in a safe deposit box at the bank, instead of in a drawer at home.

7. Economies of Scale: This is the idea that the more of something you produce, the cheaper it becomes. It’s like buying in bulk at the grocery store – the more you buy, the cheaper each item is.

Disclaimer: This article discusses certain companies and their products or services as potential solutions. These mentions are for illustrative purposes only and should not be interpreted as endorsements or investment recommendations. All investment strategies carry inherent risks, and it is imperative that readers conduct their own independent research and seek advice from qualified investment professionals tailored to their specific financial circumstances before making any investment decisions.

The content provided here does not constitute personalized investment advice. Decisions to invest or engage with any securities or financial products mentioned in this article should only be made after consulting with a qualified financial advisor, considering your investment objectives and risk tolerance. The author assumes no responsibility for any financial losses or other consequences resulting directly or indirectly from the use of the content of this article.

As with any financial decision, thorough investigation and caution are advised before making investment decisions.