Jim Rickards has done us all a great favor by explaining the supply chain crunch in a way that anyone can understand, putting it in clear, unambiguous terms that can’t be misunderstood. Here’s an excerpt.
What’s at the root of the supply chain breakdown? That’s a critical question but the answer is almost irrelevant. The supply chain is a complex dynamic system of immense scale. It is of a complexity comparable to the climate as a system.
This means that exact cause and effect cannot be computed because the processing power needed exceeds the combined processing power of every computer in the world.
Most people have some notion of how supply chains work, but few understand how extensive, complex and vulnerable they are. If you go to the store to buy a loaf of bread, you know that the bread did not mystically appear on the shelf.
It was delivered by a local bakery, put on the shelf by a clerk, you carried it home and served it with dinner. That’s a succinct description of a supply chain – from baker to store to home.
Yet 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. Where did those come from?
Even that expanded description of a supply chain is just getting started 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 hires labor, uses water and fertilizer and sends his wheat out for processing and packaging before it gets to the bakery.
The manufacturer who built the oven has his own supply chain of steel, tempered glass, semiconductors, electrical circuits and other inputs needed to build the ovens. The ovens are either hand crafted (engineered-to-order) or mass produced (made-to-stock) in a factory that may use either assembly lines or 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 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 its merchandise from truck to shelf.
Every link in these supply chains 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, including oven components. The bakery and the store rely mainly on trucks for deliveries of their inputs and the finished loaves of bread. The consumer relies on her automobile to get to the store and return home.
These transportation modes have their own supply chains involving truck drivers, train engineers, good roads, good railroads, rail spurs and energy supplies to keep moving and keep deliveries on time.
This entire network (farms, factories, bakeries, stores, trucks, railroads and consumers) relies on energy supplies to keep working. The energy can come from nuclear reactors, coal-fired or natural gas-fired power plants or renewable sources fed to a grid of high-tension wires, substations, transformers and local connections to reach the individual user.
Everything described above sits somewhere in a complex supply chain needed to produce one loaf of bread.
. . .
There’s only one problem. The system is extremely fragile. When things break down, everything gets worse at the same time.
There’s more at the link. Go read the whole thing. You won’t be sorry.
Mr. Rickard’s article should be required reading for every politician and every administrator who’s trying to “govern” or “manage” the supply chain crisis (and – it goes without saying – failing miserably). It should also be required reading at first-year level in every college and university, to enlighten students as to the real world and how it works. It would get rid of all sorts of weird socialist handwavium about how centralizing everything in a managed economy would sort out all the problems.
Truly, I think this is a seminal article, one that should be circulated as widely and as quickly as possible. A whole lot of people simply don’t understand the situation, and blame “profiteering” or “capitalism” or whatever for the problem. After reading this, they’ll have no excuse not to realize that it’s far bigger than that, and there is no easy or quick solution.
Highly recommended reading.