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.
Sounds a lot like the "I, Pencil" essay from back in the 50's or so, just updated a little.
"I, Pencil" also mentions the support parts like the restaurants that serve the lumberjacks who cut the wood used as part of the pencil, the towns, governments, schools, families, etc that all support the lumber harvest, the mining for the metal, and so on. Basically all a massive interconnected web.
Here's a link to that essay also — https://fee.org/resources/i-pencil/
You beat me to it…great essay
Supply chain is definitely a chaotic system – in a mathematical sense. That means that it is definitely non-deterministic outside of a relatively narrow area of parameters. In other words, just-in-time works as long as there is nothing disturbing the normal workflow. As soon as even one of the environmental parameters gets out-of-bound the whole system becomes chaotic and thus unpredictable.
All complex systems are chaotic systems: climate, economy, star systems, etc. They are somehow predictable only when the environmental parameters remain inside a clearly defined boundary. As soon as even one of these parameters fluctuates outside the "attractor boundary condition" the system goes chaotic – our current reality…
Chaos in action is a 'good' definition of the supply chain. 'One' thing can bring the entire system to its knees, as we have seen.
One thing he is incorrect about is "made-to-stock" industrial equipment. No one builds industrial manufacturing equipment for stock…it is just to expensive. It's all made "Order-to -stock". You tell them what you will buy, of the available options, and then they will build.
As mentioned the movement to just In Time everything has made the supply chains more fragile than ever before. In the 90's I was a plant manager for a manufacturing company outside of Seattle. The management group decided we needed to adopt the Toyota methods of manufacturing. It was a painful process and on the floor we actually had to adapt and keep inventory in store off the books to pull from to keep production running.
In the late 1990's I started a start up company in SC with a partner and with common sense and our own version of Better Methods we were able to compete with the company that I had previously worked for and several other large producers. Within 3 years we were bought out by a large multinational corporation and I had a 4 year contract to fulfill from the buyout. Once again I was forced down the road of Lean Manufacturing which despite the good parts of the process there are many aspects of it that just do not work in every situation and die hard "lean Gurus" always take the all or nothing approach.
When every aspect of everyday commerce and production have Just In Time/Lean
Manufacturing methodology added to an already complex supply chain eventually there is a very large break down. growing up my Nana (mother'smother) was always tossing quotes and quips of wisdom at us. "For the want of a nail the shoe was lost, For the want of a shoe the horse was lost…" was just one of many.
There are a lot of good things in lean techniques but man they are very depended on every one and everything working perfectly. They offer no flexibility.
The issue with gurus is that they work at wat isn't working and often igonor what is. They also don't take into account the culture of the company or the culture that developed what they are pushing. Asians, and Japanese specifically, have a deferential mentality, culture, ethic, etc than Americans, and Europeans are different still. All have good aspects, but expecting to take the whole from one and drop it into another is never, and has never really worked
Charles Hugh Smith discussed supply chain complexity…
I have to smile. I submitted a similar post last week to the members section of Urgent Agenda about a box of crackers. It started in the store and progressed backwards through the system to the farmer's fields.
Sixty years ago when the price of bread rose, my Grandfather, a wheat grower in Eastern Washington, pointed out that the cost of the bread wrapper was more than he got for the wheat in a loaf of bread. Sometimes the biggest cost is not in the original product, but in the in-between services.
He gets a few things wrong, such as the source of the glass for the iPhone (it's actually made in Harrodsburg, KY and that's always been the case). But it's a decent overall description of the complexity. I do think "I, Pencil" is better for teaching the basics.
….and the average car has 30,000 parts!! So there's that.
And there's Bastiat's famous "How Paris gets fed"
"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."
I sometimes doubt that this is still the case. It's certainly not being taught in our oh so very modern school systems these days.
Far too many, if they think at all, embrace a concept of consumer goods appearing as if by magic on store shelves with no Earthly clue as to the supply chain that makes that magic happen.
I'm put in mind of a recent story about a young, mid to late teens, girl riding in a car through cattle country excited by all those moo cows. She was gob smacked when someone in the car remarked, "just look at all that hamburger on the hoof!"
She broke into tears to discover that the burger she'd recently enjoyed actually came from her precious moo cows.
"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."
Eh, no… I'm quite confident that our "betters" will still believe that they are the repositors of the ability to do communism the right way.
Actually, the system is normally pretty robust, with lots of redundant capacity built in. The many many Soviet 5 year plans did not fail because they wanted them to. They failed because no one can gather all the complexity into one comprehensible whole and figure out where the redundant capacity is required for the statistical variation. Hell, just figuring out what the variation is for any particular segment of the chain is damned near impossible without computers….and then when you have a million segments, how long to model? By the time you have a reasonable model…all the variables have changed. Hell, look at hurricane path models. You get 20 different models, and they are all over the place. And the worldwide production/trade/transportation makes a hurricane look simple. But even a robust system, which is how we have overcome the complexity in the past, fails under a big enough stress. And covid turned out to be that stress. Not because of it's actual effect, which turned out to be pretty minimal, but because of the panic of all the world's governments. Talk about your mass panic attack.