Jessie Miller CMC '23 interviewed Dr. Stacey Frederick on November 15, 2021.
Can you briefly describe the extent of the disruption of the global supply chain and identify its most important causes?
The COVID pandemic is the first-time globalization has impacted everyone. The world has been aware, but it’s something most people knew without really understanding what it meant. We’ve now seen that what happens in one country or even one city can impact the entire world. No country was fully prepared, and there was no way to prepare for how every other country would react. There was no global plan, and even though most of the world shutdown temporarily, countries quickly began charting national courses of action. The reality is national strategies won’t be enough.
Under normal conditions, people take supply chains for granted. For example, governments and firms became interested in global value chains during the economic recession (2008-09) when global trade declined. Awareness around where products were made and value was added came to the forefront, and companies started talking about back-up suppliers beyond China. However, countries found that there were not readily available back-up options to China and most alternative sourcing was to nearby Asian countries. A human tendency is to ignore a problem until it hits you directly, and then forget when things get back to normal.
Prior to the pandemic, purchasing patterns were relatively stable and seasonal. During the pandemic, Americans with disposable income had a lot more time to buy things and have justified buying more tangible goods because during the shutdowns they spent less on service industries like going to restaurants, movies, or taking trips.
Global supply across all industries is based on lean, low inventory, just-in-time models that rightfully focus on maximizing supply and demand and minimizing inventory and surplus. Holding inventory leads to a higher likelihood of waste, which is both economically and environmentally undesirable.
COVID is impacting countries at different times. Countries that received the most international travelers were hardest hit in the beginning. However, as new variants emerge, travel starts to resume, and vaccines continue to be unavailable in developing countries, new places are experiencing the issues others faced a year and a half ago. Many Americans think COVID is over because things are normalizing for them, and media has shifted away from constant coverage of global cases. In reality, the people making goods in other countries have been hit the hardest over the last few months leading to new shutdowns and delays. This is one reason why national strategies won’t be enough.
International and national logistics are another cause of disruption. Different products require different inputs from various countries, but they are often transported on the same ships or planes that run regular routes based on non-pandemic supply and demand patterns. During the pandemic this changed, but reconfiguring these routes is not easy. Goods are produced from products made in multiple countries, so a delay in getting a component can cause delays further down the chain. International shipping schedules and routes are based on predicted supply and demand. During the pandemic, very little has been predictable. New and different products need to be shipped to different places and ports and airports have experienced closures or labor shortages. Furthermore, it’s not just a matter of getting the product into the country, but also getting that product to the geographic area that needs it. And lastly, unpredictable labor availability is a cross-cutting issue across industries and countries.
How serious is the disruption of the supply chain to exporters in Asia?
Unfortunately, the disruption is likely stressing out companies in Asia and making them consider actions that are not good for the wellbeing of their workers due to fear of shifting global supply. Not working during the pandemic is lost profit, so factories want to stay operational, even if it may not be the best idea from a health perspective. Americans are continuing to buy things that are only or primarily manufactured by suppliers based in Asia. This puts pressure on Asian exporters to produce because they don't want to lose a customer.
The reality is that manufacturers in Asia will likely be fine. In the short-term, supply bases for many products do not readily exist outside Asia and a new supply chain cannot be built overnight. There are a lot of pieces of every different industry that need to have capabilities in a particular part of the world to make the backup viable and right now most of those pieces are in Asia. There's just not this magical place companies are going to shift to in the current mass production model. Longer-term, even if the US and Europe were to shift, growth in global demand is largely within Asia. Companies there should be able to shift to supply domestic and regional end markets. Global brands know that a growing number of consumers are in the region and want to maintain a supply base there to sell to them in the future.
What should governments and policymakers take away as lessons from the current snarling of the global supply chain?
Governments play distinct roles as purchasers, protectors, and policymakers. As purchasers, governments need to know the sources of the products they buy and, like any other firm, they need to have a backup plan for procurement. In some industries, the government is a competitor to private enterprises. At the onset of the pandemic, countries found they did not have reserves of some key products, and they also did not know how to procure such products. Governments must realize that they are a competitor to private enterprises for some products and can disrupt supply chains even more by making unplanned short-term purchasing and policy changes.
Being prepared does not mean countries need to, or should, stockpile supplies or develop domestic sources of all key inputs – it is not necessary or feasible. What it should signal to countries, however, is that it is important to understand where key products are produced, and to have a strategy to procure key products should a situation arise.
It’s not realistic to produce everything. Securing supply or increasing output is not as simple as building a factory in your country. Vertical integration for mass production is a thing of the past and increasing supply of any product requires coordination among multiple firms and countries across industries. There is a lot of research and prototypes for smaller, more flexible production systems that could enable more local production in the future, but right now we still live in a world that revolves around mass production. Final assembly of most products is a bit more labor-intensive and could theoretically occur in more locations around the world if needed. Component products across industries, however, are capital, energy, scale, and knowledge-intensive with far fewer global suppliers. This is the case for products as diverse as textiles and electronics. Whereas nearly every country around the world produces some form of apparel, very few have textile industries and different types of yarn and fabric are needed to make apparel, linens, fabrics for furniture and cars, and facemasks. For electronics, different products require different types of chips, and companies and countries specialize in different types. Certain suppliers tend to have relationships with specific brands and building and running a fabrication plant requires scale economies to be economically viable. Furthermore, technology-intensive industries require highly skilled professionals to set up and monitor production and ensure that safety protocols are being followed.
What are the feasible short-term solutions to addressing the disruption of the global supply chain? What are the feasible long-term solutions? What might the global supply chain look like after the effective containment of the pandemic and resumption of travel and other commercial activities?
It depends on the country, the industry, the supply chain, and the perspective of members of the value chain versus consumers. Solutions should be viewed in terms of critical and non-critical products. For non-critical products, supply chain disruptions are an inconvenience and could lead to positive environmental outcomes. For critical products, disruptions and lack of supply will prolong global impacts.
Supply chain disruptions have caused prices along the chain to increase and resulted in low availability. This has led more people to purchase used products. This is needed from an environmental standpoint for non-critical goods such as cars, clothes, appliances, or TVs, at least until we figure out how to recycle these products. We need a mental reset on what we view as durable versus disposable, and better networks and incentives to reuse things and build more durable products. It’s unfortunate that it took a global pandemic for this to start to happen, but hopefully these trends continue. Going back to an earlier point, the reality is that people are unlikely to make changes until they are forced to. What will hopefully emerge are new supply chains based on environmental impact along the entire supply chain taking into consideration the optimal production levels and locations.
Manufacturers and brands are likely going to start thinking about forming supply chains that require less of an international footprint if they want to avoid future disruptions. However, there will always be aspects of getting a product through the supply chain and to the final consumer that are beyond the control of any single company.
Critical products, such as medical equipment and supplies and pharmaceuticals, should be readily available and affordable, but regional chains do not readily exist. All countries should have an emergency or backup regional supply base for critical products if needed. Governments and industry should work together to understand where and how select products could be produced if global transportation breaks down. For some products, equipment and machines typically used to produce car parts or textile products can be modified to produce medical equipment or facemasks. Other products such as vaccines and pharmaceuticals are more specific and complex. Development of these products is controlled by firms headquartered in the US and EU, with a significant portion of production taking place in these countries as well. These countries have driven R&D for vaccines and also absorbed supply. It is neither practical nor possible for most countries to develop domestic capabilities in such an advanced scientific field and build their own supply base. In the long-run, networks and institutional collaboration is needed to help countries build regional capabilities.
In the short-term, governments must protect their own citizens, while recognizing that doing so relies on protecting people around the world. We're not going to see a drastic change until we start seeing the need to help bring up other countries that simply don't have the resources, the knowledge-intensive workers, or the production capacity to protect themselves at this point. In the long-term developing a regional supply base is a smart idea, but in the short-term the world needs to recognize that disruptions will continue until we can eliminate the spread of COVID globally and much of the world does not have the capacity to do this on their own.
In much of your work, you emphasize global value chains (GVCs) rather than global supply chains (GSCs). Can you clarify the distinction between the two concepts, and explain why you choose to focus on GVCs in your work?
Three points: organization, theory, and modern use of terms. First, it is important to understand supply chains and value chains as constructs used to describe industrial organization—how people, places, and activities are organized in an industry. A value chain includes all activities involved in taking a product or service from concept to creation and beyond. A supply chain includes the tangible processes and logistics required to get products along the chain from one step to the next. To the average person, the concepts seem the same because it’s not important to think about exactly which activities different actors play. Most people use the terms interchangeably. The importance really comes out in the next distinction, namely the theorical/applied aspects.
GVC research emphasizes the role that important global ‘lead firms’ play in determining the countries that participate, the products that are sold, and the price at which they are sold. Increasingly, these lead firms have no ownership over any of the manufacturing stages in the chain. For example, nearly all the clothes we wear bear the name of a company that owns a brand and retail channels but has no ownership over factories. Research carried out using the GVC framework started in the 1990s and focused on helping developing countries understand how they can participate in global production networks led by key firms largely headquartered in the US and Europe. However, developed countries and lead firms both impact and are affected by global dynamics as well, and the GVC approach is equally useful for developing economic, social, and environmental upgrading strategies for both groups
The final important point worth mentioning is that for better or for worse, the term GVC was also adopted by international organizations, economists, and other agencies around the time of the economic crisis to describe a myriad of topics that pertain to industrial organization, international trade, and value-added along chains. While this has popularized the field and garnered interest, it has also left us with no mutually recognized definition of what the terms mean. Adding to the problem, products and services no longer neatly fit within existing classification systems or notions of industries.
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