Fixing Chains

“Shipping costs have finally slumped,” the Financial Times asserts. Bloomberg affirms that trend, contending that container shipping rates are past their peak. With retailers like Walmart and Target now taking charge of their supply chains by chartering ships to move some of their goods across the Pacific (albeit at extremely high cost), the supply-chain crisis may be starting to fade from the headlines.

That’s not entirely a good thing, because many manufacturers and retailers still haven’t drawn the correct lessons from the past year’s confusion.

Three factors caused international supply chains to seize up in the summer of 2020. First, starting early last year, governments and central banks everywhere stoked their economies to avert a pandemic-related depression, giving consumers massive amounts of money to spend. Second, COVID-19 forced a major shift in spending patterns in much of the world; with restaurants closed, vacation destinations off limits, and easy money burning holes in their pockets, consumers binged on the sorts of goods that move in shipping containers. Third, as I’ve written in Outside the Box, companies persistently misjudged the risks of long, complex value chains, focusing almost entirely on the production-cost savings of making shoes or dining tables in Asia without adjusting for the risk that the goods might not arrive as promised.

The first two of those forces are how history: the economic stimulus that drove the consumer spending boom is gradually being withdrawn. The third, however, is still very much with us. There is surprisingly little evidence that major companies are moving to create redundant sources of parts and raw materials, to assemble their finished goods in multiple places, and to find multiple paths to move their goods to market. Even the threat that recurrent tensions between China and its trading partners will disrupt the flow of trade doesn’t seem to be making much of an impression on executives concerned about maximizing this quarter’s profits.

The onus now is on investors. Careful questions are in order. How are firms building redundancy into their supply chains? How are boards overseeing supply-chain risks? Inattention to the risks of globalized manufacturing holds dangers for shareholders, and falling freight rates and diminished port congestion won’t make those risks go away.

Tags: risk, supply chains