There’s a logic to the chaos of the global supply chain

David Brancaccio and Natalie White Jun 14, 2024
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Increasing resilience would be costly and reduce profitability at many supply chain businesses, author Peter Goodman explains. Above, shipping containers at the Port of Oakland in California. Justin Sullivan/Getty Images

There’s a logic to the chaos of the global supply chain

David Brancaccio and Natalie White Jun 14, 2024
Heard on:
Increasing resilience would be costly and reduce profitability at many supply chain businesses, author Peter Goodman explains. Above, shipping containers at the Port of Oakland in California. Justin Sullivan/Getty Images
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Four years ago, the pandemic sent the world economy into disarray. Panic buying led to widespread online order backlogs, satellite images showed historic shipping gridlocks and a wave of labor shortages affected every industry, it seemed. The series of disruptions revealed a troubling reality: the fragility of our global supply chain. The pandemic merely served as the straw that broke the camel’s back.

So, where did the structural weaknesses lie? How deep do they run? Above all else, what can the global supply snafu teach us about how to create a stronger, more resilient system? New York Times global economics correspondent Peter Goodman tackles these questions in his new book, “How the World Ran Out of Everything: Inside the Global Supply Chain.”

“Marketplace Morning Report” host David Brancaccio spoke with Goodman about the inner workings of our unstable global supply chain and the factors that led to its near-collapse. The following is an edited version of their conversation.

David Brancaccio: We could pick the shipping industry, we could pick U.S. railroads or trucking. These were industries with structural weaknesses almost engineered in that made them vulnerable when COVID hits the world. 

Peter Goodman: Yeah, for sure. Each of these industries, you should think about sort of like the way we think about electrical utilities. These are things that we don’t think about. We take them for granted. We flip on the switch, the lights turn on. Until something goes awry. 

This is essentially what happened to us during the worst of the pandemic. We discovered that this system — and “system” is sort of a stretch because what we call the supply chain is like a bunch of systems that interact. It’s not as if a bunch of wizards went on top of the mountain and designed the global supply chain. It just happened bit by bit. It was very improvised, and there was a lot of deregulation. 

So, we’ve now got a situation where we’re kind of at the mercy of the trucking industry, the rail industry, the shipping industry. There are different regulations for each of them. It’s never clear how one is supposed to interact with the other. When we got this huge surge of demand for factory goods coming in from Asia to North America in the worst of the pandemic, the whole system just basically buckled.

Brancaccio: Then also not enough humans who felt safe doing their jobs to help get it to where it needed to go. 

Goodman: You know, Henry Ford once said that any business that’s built on low wages is fundamentally insecure. Over the course of decades, going back to the beginning of deregulation, which many people start with Ronald Reagan, it really goes back to the [Jimmy] Carter administration. When we deregulated all of these industries, we pushed wages and working conditions down steadily. Union power was eroded. We wake up and discover that the system that we’re depending on to bring us, you know, everything from medicines, ventilators, suddenly, all of this stuff can’t get to us, in part because the people we generally don’t think about who all have to work to bring this stuff to us suddenly have other options. The unemployment rate goes down, and a lot of people chafe at these miserable conditions. 

I mean, I rode along with a truck driver for three days through the frozen midsection of the United States in the middle of January, and I saw the ideal conditions for a long-haul truck driver. And boy, that is a tough job. It was not a mystery to me after three days in the cab as to why we supposedly ran out of truck drivers. We ran out of human beings willing to take the miserable bargain that is driving a long-haul truck. 

Brancaccio: There’s this promise of the open road and the great American vistas driving. But as you detail, it’s not a lot of power that resides with the truckers themselves in that system. 

Goodman: Their time is treated as if it’s almost valueless and limitless. You know, these are people who, like everybody else, they got to deal with their families, deal with their medical issues. They need some semblance of a schedule to plan their lives. And they’re just constantly stuck waiting at warehouses, which themselves, you know, supposedly ran out of workers. And they’re not paid, typically, for their time. They’re paid by the mile.

And their time behind the wheel is spent, you know, fretting over where they’re going to park, over how they’re going to caffeinate enough. So this is what their minds are full of, is the hundreds of miles to unfold. And this whole idea of, you know, open vistas? Yeah, there’s some of that. But there’s a lot of just driving through the seamy service quarters of every major city. Everything looking the same — liquor stores, pawn shops, big-box retail, it all kind of blurs together.

Brancaccio: There’s a business philosopher named Ian Mitroff. He’s written a lot about our disturbing propensity to answer the wrong question precisely. And I thought of his work reading your book about railroads. Railroad companies and their investors obsess over this metric called dwell time. They don’t want cargo sitting idle, but it has unintended crazy consequences. 

Goodman: Rail, in particular, from the beginning of time has been about investor interest trumping all other considerations. The latest version of this is this thing called precision scheduled railroading, which is a fancy way of saying, let’s fire lots of people who used to work on railroads. Let’s diminish the number of trains and make them longer than ever, which is a really complex logistical undertaking. 

Meanwhile, let’s tell Wall Street that we’re going to satisfy their craving for numbers that will show that we’re moving more freight more quickly than ever, so our stock prices will go up because ultimately we’re running the rail for the benefit of the shareholder. And dwell time became one such metric. So like, how long does a rail car sit in a given freight yard? 

Well, I talked to this guy, this engineer in Idaho who was working for Union Pacific, one of the huge rail companies that’s really dominant. He was horrified to discover that he was pulling this huge train that had started in Nebraska was headed out to Oregon, and he realizes that he’s actually pulling cars in the wrong direction. Just because somebody in the yard decided, I would rather attach this car to the next train getting out of here so I can minimize the dwell time, which will make Wall Street happy. And of course, you know, at the other end is somebody waiting longer not able to make their own products because they don’t have the parts.

Here’s a perfect example of how this really perverse form of efficiency — I mean, dwell time is supposed to be all about efficiency — has given us something that’s wildly inefficient and contrary to everybody’s interest, except for somebody sitting in a cubicle on Wall Street looking at this one metric.

Brancaccio: You would have thought the goal was getting the cargo to where it’s supposed to go quickly. But instead, it’s just, keep it moving.

Goodman: Imagine getting on a plane at LaGuardia Airport [in New York City] and you’re trying to get to Chicago and you land in Des Moines [Iowa]. But you’re told, “Hey, but good news. You know, we got here really early.” I don’t think anyone will be celebrating that.

Brancaccio: Shipping during the great supply chain snafu. And I’m reading your book and thinking, “Well, I guess antitrust rules have been set aside here. I mean, those shipping companies seem to work quite smoothly together.”

Goodman: It’s essentially this unregulated cartel made up entirely of foreign companies. You know, there’s these three alliances — think of them like airline alliances — and they control 95-plus percent of the traffic from China to the West Coast of the United States. Not an incredible surprise that when there’s a disruption, there’s enormous pricing power, and companies that used to pay $2,000 or $2,500 to move a container full of factory goods from China to L.A. suddenly have to pay $25,000, $27,000, $28,000 for that same container. And even when they’re willing to pay these charges, they are told, “Oh, actually, unless you pay some special handling charge, there’s no room for you on the ship.”

Meanwhile, you know, Amazon, Target, Walmart, they’re big enough that they’re chartering their own ships. So, in the middle of reporting this book, the [Joe] Biden administration gets pretty serious about identifying shipping as a source of inflation. 

They task Dan Maffei, this former congressman from upstate New York, who’s the chairman of the Federal Maritime Commission. In a very candid moment, he says to me, “You know, I’ve been tasked with implementing the Ocean Shipping Reform Act, which is really going to bring the shipping companies to heel so they can’t abuse importers.“ At one point, he says, “But I really don’t want to push them too hard because I’m worried that if I do, they might just not serve the United States.” That’s the nature of the kind of political regulatory culture that we’re dealing with. 

Brancaccio: You know what it is changing, right Peter? You thought a lot about this. A big story of our time is shortening the length of the supply chains, bringing production home or closer.

Goodman: I mean, some big things are happening in the U.S., right? So we know that the Biden administration is handing out these very large subsidies to companies that are building things like computer chips in the United States. There’s a big push to have the next generation of cars, the electric vehicle industry, be set up in the United States. 

Then, there are companies that are looking at the seeming permanence of trade hostilities between the U.S. and China, along with the chaos that we’ve discussed, as their cue to try to move some of their production closer to their biggest market. So, for companies that sell into the U.S., there’s a big push to set up factories in Mexico. I spent a lot of time in Mexico, I followed Columbia Sportswear to Guatemala as part of their journey to find factories closer to their largest market.

There’s a lot of movement for major multinational companies like Walmart to shift some of their production out of China to places like India, Turkey, to an extent Vietnam, though Vietnam is heavily dependent upon parts and components from China. So there’s already some pushback to that. The question is, you know, to what extent have the incentives that produced the supply chain we’ve got changed? I would argue, not very much. 

So, you know, once our memories of this chaos fade, we’ll still live in a world where the people who are running publicly traded companies are going to be under pressure to boost the profit margins. That’s traditionally been about lifting prices and lowering their costs. That’s the great unknown, is what happens as we go forward? Because past supply chain crises, I mean, the first supply chain story I ever wrote was back in 1999, when there was an earthquake in Taiwan that produces shortages of computer chips because that was already a big place to make them. 

Essentially, nothing happened because consultancies like McKinsey, I tell the story in the book, managed to persuade the heads of multinational companies that low-cost and going lean, you know, just-in-time manufacturing, not wasting money. “Wait until you actually have an order and then make your inventory and take the savings and give it to yourselves through executive compensation, give it to the shareholder through dividends and share buybacks.” Like, that basic system still holds.

If you’re somebody saying, “Let’s spend more money for a more resilient supply chain,” you’re essentially diluting the earnings of the company that you work for. If you’re somebody saying, “Let’s just go back to how we used to do it,” the investor is probably going to cheer that.

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