I would have never imagined a time when I’d be queuing in front of Costco on a weekend morning for toilet paper, but COVID-19 upended life as we know it in record speed. Moreover, best-selling items in my Etsy store are constantly on “Sold out” status because of an unstable supply of fabric. As orders rolled in for holiday gifts, I found myself fretful, praying that ships and assembly lines would pick up their speed. Unfortunately, mine is just one of the hundreds of thousands of businesses thrown into disarray from pandemic-induced global supply chain disruptions. 

Production chain disruptions ricocheted across the economy. The automotive industry was hit especially hard because of its extensive dependence on just-in-time (JIT) manufacturing systems. JIT, adopted and pioneered by Toyota in the 1970s, aims to manage inventory optimally by producing a quantity of goods that aligns exactly with customer demand. Owing to its emphasis on minimizing excess stock, a delayed deliverance of a single component can halt the whole production system. One vehicle consists of dozens of chips, so with factories either shut down or operating at partial capacity as is the case with semiconductor assembly lines in Southeast Asian countries like Malaysia and Vietnam, many of the world’s leading automakers such as Ford and General Motors were forced to lay off workers en masse and cut production despite soaring demand. In addition to factory shutdowns, shipping blockages are another contributing factor to the supply chain crisis. The country’s busiest twin harbors, the Los Angeles-Long Beach ports, are facing unprecedented backlogs of vessels that contain electronics, furniture and apparel worth millions of dollars. The supply chain bottleneck slowed the delivery of raw materials to warehouses that will stall downstream production and the manufacturing of all sorts of goods, leading to increased prices, fewer consumer choices, and lost revenue for businesses. 

In the automotive industry, plant closings and port congestion have made buying new or used cars more difficult and expensive. Ford claimed that it is countering the decline in sales by counting on pricier vehicles to turn a solid profit. What does this mean for consumers who want to buy a new car? Avoid bestsellers at all costs and find forgotten corners of the industry for deals. Unfortunately, the “scarcer and pricier” phrase describes not only cars, but most big-ticket items from houses and bikes to meat and cheese. The Consumer Price Index (CPI) rose 6.2 percent from October 2020 to 2021, its sharpest increase since 1990. High inflation can entail significant hardship especially for those least able to meet increased costs for essentials such as housing and transportation. At the very least, the principle of scarcity will induce consumers to adjust their consumption and saving decisions. For example, doubled gasoline prices at my downtown Shell station have forced my friend to cease her nightly rides through the city and my aunt to reduce the frequency of her visits to LA. Coupling a loss of manufacturing and logistics capacity with the increase in demand from cooped-up consumers has proven to be truly catastrophic for individuals, businesses and nations alike. 

Fiscal policies can alleviate the effects of supply chain disruptions if enacted effectively. The Federal Reserve, to its credit, has finally promised to raise interest rates in 2022 to combat inflation, ending its decades-long zero interest rate policy. Higher interest rates means higher borrowing costs, so consumers spend less which decreases the demand for goods and services, leading to lowered supply chain induced inflation. Another form of government intervention comes in the form of fiscal policies to regionalize supply bases. Though COVID-19 exposed the vulnerability in concentrating them in one general region, the allure of overseas markets’ cheap labor and low resource costs are simply too great to deny. The effort to end the era of reflexive offshoring started with the Trump Administration and continued with President Biden’s Executive Order (E.O.) entitled “Ensuring the Future is Made in All of America by All of America’s Workers.” This plan reinforces practices concerning financial federal assistance awards and procurements that provide a preference for the acquisition of goods made in the US. Incentivizing businesses to move manufacturing back to home turf with benefits and rewards will reduce the effects of supply chain disruptions by facilitating the production and delivery of products, which also entails improved customer service. 

If the COVID-19 economic turmoil has taught us anything about supply chains, it is that the next major disruption is inevitable. Therefore, companies should take steps to strengthen their models and systems now in order to be prepared to not only weather the storm, but to capitalize on it. The challenge will be finding the balance between accuracy and agility. How can companies make their supply chains more resilient without simultaneously weakening their competitiveness? Tesla opted for signing exclusive deals with China’s supplier Ganfeng Lithium Co. to gain better access to raw materials. Maintaining a tighter grip on production partners’ activities elevates the level of transparency necessary to deal with emergency situations such as pandemic outbreaks, but it may not be enough. Bigger changes necessitates higher risks but also higher rewards. 

One such change is diversifying the supply base by finding alternate sources. The cliché but useful proverb “don’t put all your eggs in one basket” became the new motto for many companies during the pandemic. COVID-19 served as a harsh reminder that reliance on a single region or production partner to provide key supplies can be lethal in economic upheavals, subsequently triggering a trend towards geographical diversification of suppliers. The “China plus one” strategy is one well-known attempt at spreading production between China and other Southeast Asian countries such as India, Indonesia, and Thailand. It is an “attempt” because building new supply bases is not easy. A very important risk factor to consider is how flexible the manufacturing capability is. Highly specialized products require specific resources and technologies that are hard to replicate. For example, the most advanced smartphone chips are concentrated in three facilities in Taiwan owned by the Taiwan Semiconductor Manufacturing Company; they simply hold too much technological and economical influence to be replaceable. So, companies must ask themselves this question: are investments in building a new supplier infrastructure in a different country or region worth combating all the costs of a disruption? 

A less drastic but essential step that every company ought to take is to start holding intermediate inventory (of the most popular items), especially for those who utilize JIT manufacturing systems. Given the unpredictability of critical scenarios such as COVID-19, it is better to be safe than sorry. In other words, even though holding safety stock reduces available cash flow, creates storage problems, and carries with it the risk of obsolescence, these disadvantages are not worth enduring the full wrath of a supply chain disruption. Besides, businesses would never have to worry about empty shelves again; they can also take advantage of lower wholesale costs when they buy a large quantity of materials. 

The semiconductor chip shortage became catastrophic because the automotive industry was unable to foresee the scenario and take the necessary precautions. But what if there was a way to predict these kinds of situations? Specifically, utilizing artificial intelligence, and more specifically, digital supply chains. A digital supply chain is a set of processes that increase transparency and control along the steps of that coordinated network by using advanced technologies such as the Internet of Things (IoT). By attaching sensors to physical devices, the IoT can monitor storage conditions, authenticate the location of goods at any time and track and predict the traffic flow of products. Real-time shipment and inventory visibility makes it easier for stakeholders to monitor supply and demand, plan how much inventory to produce and where to distribute that inventory across locations accordingly. 

In a traditional supply chain, items travel linearly; each step in the manufacturing process depends on the completion of the previous one. Thus, a delay in the subassembly or transportation may delay the final production by days or weeks, resulting in missed deadlines and disappointed customers. A digital supply chain, on the other hand, integrates internal systems with external information so businesses can collect and analyze data to anticipate problems and respond proactively. One specific technology that can help make this happen is the digital twin, a virtual model of a physical process that can model what-if scenarios and run simulations that can predict future problems.  Though COVID-19-like crises can not be fully avoided, advanced analytics can serve as a useful warning bell. As AI continues to develop and evolve, the reliability of digital supply chain technologies will only improve; its potential is limitless. 

I hope that one day my small Etsy shop will warrant the use of a digital supply chain, but, for now, there will always be an extra pile of fabric in the corner of my workroom. 

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