Supply chains are a marvel of modern commerce. The links of a supply chain can span tens of thousands of miles, traversing whole continents and crisscrossing the globe.
Supply chains are also fragile and vulnerable to disruption. Under adverse circumstances, a supply chain can easily get backlogged or broken. The lack of a part from a single factory, or the shutdown of a single processing plant, can wreak havoc far down the chain (and half a world away).
The inherent fragility of supply chains is a byproduct of their design. That design, in turn, is focused on maximizing profits.
The ultra-maximized Just-In-Time (JIT) supply chain puts an extreme emphasis on efficiency over resilience, which means one key supplier, one key processing plant, minimal back-up inventory (or no inventory at all), and so on. All these innovations emphasize speed and reduced cost.
Measures to increase supply chain resilience would go in the other direction: Multiple suppliers instead of just one; processing plant redundancy with ample spare capacity; a large stockpile of inventory and spare parts, and so on.
Nearly all the measures taken to make a supply chain more resilient — and thus more resistant to shocks — would also make the end product more expensive or less profitable to produce (or both). So, the world embraces the JIT model instead.
We are now seeing the risks of a profit-maximized (and thus vulnerable and fragile) supply chain approach. Coronavirus fallout is shutting down plants, driving up prices, and threatening to create a permanent inflationary backdrop for basic foodstuffs.
This new reality hit the Sunday papers on April 26 in a very literal way. Tyson foods — the largest meat company in the U.S. and the second-largest chicken, beef, and pork processor in the world — took out full-page advertisements in the New York Times, the Washington Post, and the Arkansas Democrat-Gazette.
“The food supply chain is breaking,” said John Tyson, the company’s executive board chairman, in the text of the ad. “We have a responsibility to feed our country. It is as essential as healthcare. This is a challenge that should not be ignored.”
The text further noted that “millions of pounds of meat” could be lost due to plant closures, and called on the government for help in addressing COVID-19 issues.
The trouble is that it’s extremely hard — if not impossible — for workers to practice social distancing inside a meat processing plant.
The biggest of these operations handle tens of thousands of animals per day, with working conditions on the lines described as “elbow-to-elbow.” Due to the low-paying nature of these jobs, plant worker families also tend to live in small dwellings or share a single-family home with another family — which means no social distancing at home, either.
As a result of all that close-quarter proximity, some of the largest new COVID-19 outbreaks have been in meatpacking plants and prisons (another notoriously cramped environment). According to the United Food and Commercial Workers International Union, 13 plants around the U.S. have experienced COVID-19 closures since March.
Then, too, when a processing plant shuts down, it creates a nightmare situation for suppliers.
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The farmers and ranchers who raise chickens, cows, and pigs need a working supply chain to receive their livestock and process it for the market.
When the plants are closed and the supply chain is down, farmers and ranchers are faced with the prospect of continuing to feed livestock they can’t sell — an added cost they can’t afford — or finding a way to euthanize or otherwise destroy the animals, a brutal process they aren’t equipped for.
The plant shutdowns have already created food-price inflation. “U.S. wholesale beef has surged to a record,” Bloomberg reports, “and wholesale pork soared almost 30% last week.”
Eventually the plant managers will figure something out. The meat industry can adopt best practices for social distancing and keeping workers safe — as soon as it’s determined how that will look.
In the meantime, though, certain aspects of food-price inflation could be structural and thus permanent.
Say, for example, that meatpacking plants in the age of COVID-19 have fewer workers per square foot and handle lower product tonnage per day (as a result of fewer workers).
This could mean a permanent bottleneck in the meat supply chain, barring heavy rounds of capital investment in new plants and new automation procedures (replacing workers with robots).
And the meat industry is just one high-profile example of supply chain fragility.
Other supply chains are not as directly exposed to COVID-19-related shutdowns, but highly fragile in other ways.
The automotive industry, for example, is deeply concerned not just by COVID-19-related plant closures — which can delay an entire assembly line for lack of a single part — but the possibility of geopolitical fallout and trade-related shutdowns across borders.
These factors and others combine to create new risks of supply shock inflation, a phenomenon where supply shortages (or a loss of supply entirely) can lead to price spikes, even in a gloomy economic climate. There are no easy solutions here, as the two most logical answers are “make supply chains COVID-19 proof” and “make supply chains more resilient.” The first could prove extremely expensive on a short-term basis — think reduced output along with new capital expenditure investments — and the second would require a long-term structural shift, with more of an emphasis on robustness than profit margins.