Insights and Impact

3 Minutes On... Supply Chains

Ayman Omar, dean for graduate programs and student services, Kogod School of Business, explains the source of our shipping woes

Ayman Omar

A supply chain is a network of activities that sources, produces, and distributes goods, information, or services.

We tend to think of supply chains in a linear fashion: source to supplier to distributor to wholesaler to retailer to customer. That might have been true 200 or 300 years ago, when supply chains were much more localized, but the modern framework is an exponentially expanding hub and spoke system. A single car has 2,000 different components and 30,000 parts. A supplier might have hundreds of sources. And each supply chain has a reverse chain to handle defective or end-of-life products.

Supply chains are not a novel concept. (One transported limestone blocks from southern Egypt to Giza in 2500 BCE.) The term dates to a 1905 article in the weekly New York magazine, the Independent, and British logistician Keith Oliver popularized “supply chain management” in the Financial Times in 1982. What’s new is their global scale, due partly to lower transportation costs, and the use of existing (radio-frequency identification tags) and emerging (blockchain) technology to better predict demand, improve transparency, and track and trace commodities from raw materials to retail.

Supply chain performance can be measured in a few ways. Cost is critical. So is security. That includes both the supply chain’s physical integrity—counterfeit drugs, for example, contribute to a million deaths and $21 billion in losses annually—and its information security infrastructure. Ransomware attacks soared 62 percent between 2019 and 2020, and two-thirds of data breaches happen through third-party vendors rather than within companies.

Efficient, sophisticated supply chains also demand sustainability twice over: a smaller carbon footprint and strategic sustainability, or adaptability in the face of inevitable disruptions. The magnitudes, events, and peaks might differ, but disruption is ever-present: as natural disasters wreaking havoc on shipping patterns, freak accidents like the Ever Given clogging the Suez Canal and 12 percent of global trade, and pandemics impacting our daily lives.

COVID-19 has exposed the fragility of many supply chains, often through the bullwhip effect. A universal reality of demand forecasting is that it’s always wrong, but typically in one direction. But the bullwhip effect hits firms on both ends. Demand surges and production disruptions and import restrictions lead to supply shortfalls—from paper goods to cleaning supplies to liquor. Firms scramble upstream to find materials and increase production, then experience overstock once distribution catches up and demand wanes. 

Extended West Coast port congestion—problematic becuase the ports of Los Angeles and Long Beach account for 40 percent of shipping containers entering the US—is the result of a perfect storm of economic forces. Demand for products from abroad has increased rapidly during the pandemic, but port capacity did not increase at the same rate. Also, port operations remain inefficient, a truck driver shortage has worsened, and end-to-end supply chain visibility is lacking.  

In some cases, COVID has merely accelerated trends already in the works, like the demand for computer chips exceeding supply. In 2019, global semiconductor sales reached $412 billion, nearly double compared to a decade prior. Factory closures and ongoing transportation lags experienced early in the pandemic have deepened the gulf between supply and demand, all while Gartner projects industry revenues to balloon to $627 billion in 2022. Supply will catch up at some point, but not before firms face severe consequences. Nissan, for example, produced half a million fewer cars in 2021 than in 2020.

Companies are regulated on their supply chain journeys by not only a vast web of safety, emissions, and privacy laws, but also consumer expectations. In the aftermath of the 2013 Rana Plaza factory collapse in Bangladesh that killed more than 1,100 workers, for instance, customer pressure forced garment retailers like Target, H&M, and Walmart to confront their dangerous labor conditions.

Individuals have the power to shift companies’ practices by not purchasing, and if there’s something that consumers want and companies can’t provide, new firms can step in and deliver.

Supply Chains at a Glance:

  • The average retailer had 33 days' supply in July, down from 44, pre-pandemic.
  • Ninty-four percent of Fortune 1000 companies have experienced COVID-related supply chain distruptions.
  • Lumber prices rose 89.7 percent between April 2020 and April 2021.
  • The Port of Los Angeles processed a record 10.8 million shipping containers in FY 2020-21.
  • Americans spent $1.2 billion on toilet paper in April 2020. 
  • The March Suez Canal blockage cost an estimated $400 million per hour.