Guest essay by Eric Worrall
According to Yale, companies are rediscovering component inventory keeping and supply chain redundancy, but there are concerns that this will increase costs.
How climate change is disrupting global supply chains
The impact of the Covid pandemic on the global supply chain has been widely reported. But extreme weather, from floods to wildfires, is increasingly affecting ports, highways and factories around the world, and experts warn climate-induced disruptions will only worsen. should be worse.
VIA JACQUES LESLIE • March 10, 2022
The Covid pandemic has largely been blamed on fluctuations in global supply chains over the past two years. However, academics and experts say the less publicized threat to supply chains posed by climate change is a much more serious and already felt threat.
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Such climate-related disruptions are certain to increase in the coming years as the world warms, scientists say. In addition, ports, railroads, highways, and other transportation and supply infrastructure will be threatened by an estimated 2 to 6 feet of sea level rise – and possibly more – by 2100. about 90%The world’s freight travels by ship, and according to Becker, flooding will eventually threaten most of the 2,738. Coastal, wharf ports are usually only a few feet to 15 feet above sea level. But for most port managers, the threat is still far away. Future rate of sea level rise is uncertain and solutions are so elusive that there are only a few Port managers have acted to combat the threat, and only a small fraction have attempted to assess it.
As the ripple effects of what is likely to increase and increasing climate-related disruptions spread in the global economy, price increases and shortages of all goods — from agricultural goods to advanced electronics — are possible consequences, says Mims. The jump in the cost of shipping a container across the Pacific as a result of the pandemic – from $2,000 to $15,000 or $20,000 – can suggest what is in store.
Report 2020 in Maritime Policy and Administration even asserts that if current climate science holds true, “global supply chains will experience massive disruptions beyond what can be adjusted while maintaining current systems.” “. The paper argues that supply chain managers should accept the inevitability of economic upheaval at the end of this century and adopt methods that support rebuilding thereafter.
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In essence, a supply chain is a chain of potential bottlenecks. Each stop is a node in a tree-like system that transmits raw materials from the furthest reaches of the system to sub-assemblies along its roots to the manufacturers, who are central. of the system. Products such as smartphones have hundreds of components whose raw materials are shipped from all over the world; The cumulative miles traveled by all of those sections will “be able to reach the moon,” says Mims. These supply chains are so complex and opaque that smartphone manufacturers don’t even know the identities of all their suppliers – making them all adapt to climate change will hit marks a great achievement. However, each node is a vulnerable point where failure can create damaging ripples up and down the chain and beyond.
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To cope with the growing risk of supply chain disruptions, manufacturers are considering expanding inventories or developing “dual supply chains” – supply chains that supply the same goods across two different routes, so that if one side fails, the other side avoids a shortage. But both solutions would increase production costs and would conflict with the still dominant “just-in-time” manufacturing approach, which relies on robust supply chains to eliminate the need for companies to Keep many parts in stock in stock. American companies can shorten their supply chains, moving production facilities to the US or a neighboring country, but in many cases they will remove their factories from the group of major suppliers. around them in countries like China and Vietnam.
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Read more: https://e360.yale.edu/features/how-climate-change-is-disrupting-the-global-supply-chain
It is not necessary to invoke climate hobgoblins to explain what happened. And there are other problems with the U.S. supply chain, which can be summed up with the words “California” and “Biden.” But let’s explore the problems that the Yale 360 presents.
Go back a century, and supply chain disruptions of non-perishable goods, at least in peacetime, would never have been such an issue. People are used to supply chain disruptions, so they keep large inventories in place and a large address book of alternative suppliers, to ensure resilience.
Then computers came along and people started using computers to create just-in-time delivery systems.
I will never forget the head of the IT department in an Australian heavy-duty manufacturing plant showing me through an empty warehouse, explaining that he was the reason the warehouse was empty. By determining exactly what parts were needed for each order, his company no longer needed to keep large quantities of parts in stock, knowing in advance exactly what would be needed and when. .
Keeping component inventories is also likely to create significant tax problems. Tax laws are complicated, so I could be wrong, but my understanding is US warehouse tax prevent companies from deducting the cost of purchasing parts inventory from their taxable profits. This is potentially a powerful Federal incentive to keep parts inventories small, and to keep redundancy and resiliency to an absolute minimum.
Those same computers also run huge accounting programs to find out who the cheapest supplier is and recommend that you place all orders for critical components with the same cost supplier. short. Since everyone runs the same software-based searches, using the same data, all reaching the same conclusions, the entire manufacturing world now depends on single points of failure. .
Certainly these computer models have reduced capital costs. From an accounting point of view, the parts and components above the price are dead capital, impacting shareholder return on investment. But parts inventories are also resilient against supply chain disruptions.
However, this insanely focused level of vulnerability, and razor-thin redundancy, is always going to be, as soon as this practice becomes widespread and starts to cause problems.
Companies have eliminated extreme zero inventory methods, as long as OTHER companies keep inventory.
The inventory held by others disguised the downside of the no-stock approach, allowing non-stock companies to act like vampires, allowing them to eat away at the resilience of others. Other, capital and inventory holdings of companies do not implement strict zero inventory.
But now that the non-repository implementation is nearly universal, now that almost everyone is a vampire, there isn’t any cache or redundancy left in the system to feed on. The entire supply chain system is very brittle, like a fragile glass sculpture. Even the smallest disruption causes painful ripples and cracks in the entire global manufacturing and manufacturing system.
Dismantling will be difficult – building a component inventory unequivocally means accepting lower profits, possibly paying more taxes, until the next disaster hits. There will be a lot of resistance from management to anything that threatens the size of their annual bonus. Managers will need the courage to challenge their own accounting software and the confidence to face accounting departments obsessed with their model. But it’s never a good idea for companies to put all their eggs in one basket, nor assume delivery at the exact agreed-upon time, with virtually zero chances of delays or failures.
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