A Supply Chain-splainer

President Biden complained nobody had explained the supply chain, so I gave it a try.

First off, you might want to read “I, Pencil” (Wikisource: “I, Pencil”), an essay that’s quite popular with the libertarians. It gives a good idea how making anything is actually quite impossible. You see, to make anything would require making some thousand other things, which themselves would require making even more things. And that, children, is why we do not even exist!

Oh, of course we exist, and we can make things, but we require other things to make them. And so we have a supply chain. Raw materials are grown, gathered, mined, or stolen, and they are shipped to others who use them, refine them, misplace them, curse them with ancient evils unspeakable here. And they ship them on to others who repeat that step. Until you buy them and find they are terrible and throw them away, at which point they are shipped to big places filled with other terrible things that were made, and they are shoved around while crazy birds try to find anything in there to eat.

Ah, too harsh. Some of the things we buy are useful, like trash cans! Ahem.

Take the wad of gum you stepped on in the subway. It didn’t get there by magic, and there is no chewed-gum-tree growing in the subway. It got there through a series of lucrative transactions. Someone made the trees and aluminum and sugar and artificial flavor, someone else built a machine to form sheets of gum, another machine that cuts it into strips. A machine packaged it, stacked the packs in cartons, the cartons in boxes, the boxes on pallets, the pallets on trucks which got delivered to distributors who unpacked them, repacked them in shipments to retailers. The retailers unpacked the cartons and sold the individual packs. Someone bought a pack, chewed it, saw a guy trying to argue with his reflection in the subway window, which caused his jaw to drop, the gum fell out, and you stepped on it at the next stop.

The main points to understand about the supply chain:

  1. Stuff exists.
  2. It’s the wrong stuff.
  3. It’s in the wrong place.

When you think about it, life is really all about supply chains. How much of your day involves putting things in the right place? You put yourself in the right places, you put food in your mouth, which transforms it into goop and sends it on to your stomach. Your stomach breaks it down into even weirder goop and sends it to your guts, which absorb the bits of goop you need (with the help of gut workers, bacteria). It gets in your blood, and your blood distributes it out to all your cells. The waste comes out into your blood, gets filtered by the filtery bits like your kidneys. You do the other bodily functions involving moving stuff where it should be. Putting on clothes, taking them off, washing them, all these tasks, everything we do is about moving things around.

The supply chain is pretty intuitive. We know about traffic jams. We know about running out of clean clothes and needing to do laundry. We can understand economics, smart humans that we are.

So let’s talk about problems in the supply chain. The recent trouble started with the early phase of the pandemic, when most people had to stop doing their normal activities out of fear of death. That caused two problems:

  1. They weren’t at their jobs to make stuff.
  2. They weren’t buying what they normally buy.

Those two things are big problems for a supply chain. Businesses need to know how much to make. Only when they know output can they decide how much to order. But they weren’t at all sure how much to make (or if anyone would be there to make it), so they didn’t know how much to order. (A third problem, less important here but still important, is that more waste gets created.)

But things have improved a bit since then. We have vaccines. We have some treatments. Why is the supply chain still a mess?

Because now people want different things than before, the people to make things still aren’t all in the right places at the right times, neither is the stuff they need to make the things, and we have backlogs that make it harder to figure out what needs to be made.

Equilibrium is the idea of balance. Given unlimited pizza, how much will you eat? That’s one kind of equilibrium. But the kind we usually deal with is, given that pizza costs a dollar a slice, or five dollars a slice, how much will you eat? Only rich people will eat pizza at $50 per slice.

But equilibrium depends on information. It depend on knowing how much you’ll make at some price, and how much your pizza ingredients cost, and when they’ll get there, and all of that.

Most businesses try to minimize risk, which is the gap between the information you have and the information you need. If the power grid is generally reliable, you’re only making a small bet that you’ll have power to cook your pizzas. You know you need power, and you’re pretty sure you’ll get it. But if you’re in Texas and it’s cold out, you’re taking a bigger risk to try to sell pizzas. You might end up delivering pizza-cicles.

The less you know, the bigger the risk. You’re betting you can sell enough pizzas at a price to make it worth it to stay open. You’re betting your ingredients show up. If the supply chain is gummed up, you’re less certain, so your risk is larger.

And that’s what’s going on right now with a lot of businesses. They’re taking on some risks with their businesses that they aren’t used to. Before the pandemic most businesses operated on a just-in-time supply system. They would get as much of what they need with as little time to spare as possible. Think of it like the flour mill and the tomato squisher are right next to the pizza parlor, and you can hear the grinding and the squishy-sound from next door while the pizza gets made.

They did that because it saved time and money, saved space in not having to store a bunch of materials for later. They did it because the risk was small when things operated smoothly. But now, the flour takes forever to arrive. The tomato sauce gets bored sitting and waiting to be ladled out.

It’s as much a transportation problem as a supply problem. A true supply problem is when the needed material can’t be gotten. In this case, the goods exist, but getting them there on time is the problem. So what do businesses do? They order more! They plan to store material and use it over time. That means more stuff needs to move than before, and under already-clogged conditions that extra demand makes transport even more clogged!

Part of the reason just-in-time worked was that orders were smaller, which meant the leaner transportation system could manage the needs. But larger orders all around mean that the transportation system itself is too small.

Okay, so how do we fix it? There are several ways. One is for businesses to write stricter contracts with customers. This decreases uncertainty: instead of letting them cancel orders close to production or place orders on short notice, they lock them in so they know what exactly they need to fulfill the order when it’s due. That’s already happening in many sectors.

Other fixes include improving the transportation systems, adding more trains and ships and so on. Hiring more truck drivers is a big push right now, which the whole trucking industry is pretty screwed up in terms of you got one person driving a whole day and they really should be using a kind of relay-race system but there’s a lot of inertia in how industries operate so they don’t want to.

But the main fix is time. Libertarians aren’t all wrong about everything. Capitalism does work if you have reasonable regulations and enough time for information to propagate. But the libertarian instinct is to have no regulations, which means that important information may not propagate at all. Smooth move, libertarians.

Information, like other goods, takes time to be delivered. It’s faster than most things, but still it isn’t instant-delivery. So it will take some time for all the businesses to figure out the new markets, to adjust. That’s part of the cause of price inflation, where people expect that tomorrow’s prices will be higher, so they raise them today to try to get ahead, which of course brings the very inflation they expected.

(Certain things have had inflation for a long time, like drugs, healthcare in general, and higher education. The inflation in those areas are mostly about lack of competition and inelastic demand. Lack of automation plays a part in the latter two, and prestige and luxury mostly in the lattermost. It’s why we should all be skeptical of any government (Democratic) plan that basically says, “We’ll pick up the tab,” rather than, “We’re going to move some things around to make the market work properly.” (It must also be noted the latter-day Republican plan has always been, “Be rich or suffer.”))

The other cause of inflation is the shift in supply and demand. Goods are harder to come by, and yet demand is very strong. So many goods will sell for more, as people are stuck in the mentality of “Screw it, it’s a pandemic, I need it.” That general sense that we’re in a very hostile and grabby world takes some time to abate, particularly when you add some of the politics that took hold. That’s especially true of the unrelenting Me-me-me! politics of latter-day Republicans.

The best answer to that part of the story of supply chains is pluralism. It’s the best part of “I, Pencil:” that we do all depend on one another to make anything, to exist.

Anyway, hope this helped you better understand what supply chains are, and why they aren’t President Biden’s fault.


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