Supply Chain Blues, the Bullwhip Effect

   Los Angeles Ports are the Most Congested Major Harbors in the US

“So ‘bullwhip’ comes from the analogy of… if you crack a whip, the part of the whip is close to your hand, you know, maybe there's a little fluctuation. But if you go toward the end of the whip, then it fluctuates wildly. So, what happens in typical supply chains, especially the supply chain that's decentralized, meaning a lot of different entities compose the entire supply chain, is that little tiny disruption that might happen at the end of the supply chain, so downstream part of the supply chain, has a tendency to be amplified as you go to the upstream.” 

 Sang Kim, Yale Professor of Operations Management

In plain English, if you are a cog in the supply chain system, you may be part of the whip hand, but if you are consumer, you are much more likely to be on that violent, wildly fluctuating side. Normally, supply chain disruptions have a singular, usually short-term, causation – e.g., the Fukushima tsunami meltdown in Japan in 2011 – and occur either on the supply-side (Fukushima) or the demand-side (like the pent-up and unexpected demand that unleased as COVID subsided). Welcome to 2022, where disruptions have pancaked one-atop-the-other, on both supply and demand… globally. There are lots of whip-hands… the “butterfly effect” with giant butterflies… and global consumers are facing the aggregate effect. Lingering shortages, delays and high prices.

Indeed, the world has lumbered under the above-noted events, exacerbated by the Russian invasion of Ukraine (resulting in a massive exchange of sanctions) which exploded the cost of oil and gas as well as a litany of foodstuffs, strikes and threats of strikes (like the recent, narrowly averted major rail strike in the US over working conditions), labor shortages, chip shortages, port congestion, serial central bank interest hikes belatedly aimed at countering inflation, severe political infighting punctuated with violence, rising autocracy, and heat waves/wildfires/massive flooding/droughts from uncontained climate change. Each of these factors has squeezed supply and demand realities like we have never experienced before. Lots of suffering along the way.

One of the best analyses of the push-pull/demand-supply conundrum facing the global supply chain came from a podcast from the Yale University Office of the President – Talk: Conversations with Peter Salovey (President) Episode 30: Repairing the global supply chain Guest: Sang Kim, Yale Professor of Operations Management Publish Date: September 13, 2022. Indeed, all of the above realities have “started a lot of pressure to global supply chains, to the extent that now a lot of us are experiencing shortages of some items. So, in some sense, many of us are somewhat spoiled. In the past decade or so, with the emergence of e-commerce, you click on a website on Amazon, you're expected to get something the next day or maybe within a day. So, somebody has to make these products, somebody has to move these products, and deliver that to your doorstep. And this complex process of enabling the delivery of the products is the supply chain management. Now, the practice of managing supply chains has really changed a lot in the past decades.”

The Talk notes how the standardization of containers, the cranes that lift them, the ships designed to hold them and the final mile of trains and trucks to deliver them was the first massive step to managing the global supply chain… but even as robotic loading and unloading intensifies, the world’s major ports are still severely decentralized with limited coordination, particularly as ships, trucks and trains deal with unanticipated back-ups and bottlenecks.

The Ports of Los Angeles and Long Beach are by far the busiest in the country (see above photos), and they have become horrific bottle necks. Massive waste as full containers sit on docks waiting for the “next.” “As a result, a lot of the companies redirected their ships to the ports in the East Coast, and it is kind of very haphazard. Companies are finding out that there's some availability at the port in Houston or in New Jersey, so they send their ship. Maybe there could be a role for the government in this particular case of coordinating across different ports, of gathering information, of where the availability is and informing the companies that there are some more capacity in certain ports. Because, again, we're living in a very decentralized world of supply chains. Not everything should be centralized, obviously, but there could be a role for some centralized entity that could be beneficial to everyone involved.” The Talk.

Then the unexpected aggregation of events created that bullwhip effect: “[In] the past couple of years, what we've been witnessing is that it actually happened simultaneously on the supply side and the demand side. Very interesting from a resources perspective, but at the same time, frustrating for a lot of other people. I remember about a year ago, the summer of 2021, I read some reports forecasting that at that time we've been experiencing some shortages of semiconductors and other products, and things will get stabilized by end of the year. And I remember thinking that that was too optimistic because one of the things about supply chains is that things really don't move, you know, in a linear, predictable fashion…

“The inventory is one of the most important elements that we look at in supply chain management. Basically, the goods that we store somewhere before the demand happens. If we have a lot of inventories stored somewhere, we may not experience the shortages that we've experienced at that time. It's easy to say that, but from the company's perspective, it's not easy because the inventories that are sitting in warehouses, they're extremely costly for them. These are the items that they already paid for sitting in the warehouse until the consumption occurs. So some money tied up. So oftentimes it is really difficult to convince them that you need this inventory because something like COVID happens--very unpredictable. So as a result, it is very difficult proposition for the companies themselves to decide that we have to hoard up this inventory. So this is the context in which I suggested maybe some action by the government could help. In a sense that this is a public good, to a certain degree, it has huge public health implications, and there's an incentive mismatch between the companies and what the public wants.” Sang in The Talk. But for companies that expanded their inventories by reason of recent events, watching prices soar, they will sooner or later have too much inventory (warehousing is not cheap), and they will have to dispose of that inventory.

And there’s the impact of climate change on infrastructure. If coastal areas face sea rise, the ports have to be reconfigured to deal with that. And there will be tons of unanticipated additional costs as bridges and roads are washed away, fires eliminate vast forest resources, heat rises reconfigure where people can farm, live and work… and all of this will impact our supply chain.

Sang adds: “So if I think about the supply chains, the reason that we have all these disruptions is because we're experiencing different bottlenecks at a certain point in time. It's not just within one company or organization, but encompassing different organizations. How do we coordinate?” Governments, hand-in-hand with our most sophisticated systems technology companies and analysts need to work a solution. Without such efforts, it will just get worse. It is time to face reality and not manufacture “issues” that take our focus away from necessities.

I’m Peter Dekom, and as we are distracted from truly improving our educational system, creating polarizing culture wars and destabilizing attacks on the government, not allowing government to prioritize obvious paths to the desired solutions, we are simply taking ourselves down… to the delight of our enemies.