Episode 22. Strong as Their Weakest Link: What the pandemic taught us about supply chains.

Bernie Fette (host) (00:00):
Welcome. This is Thinking Transportation. Conversations about how we get ourselves and the things we need from one place to another, and all that can happen in between. I’m Bernie Fette with the Texas A&M Transportation Institute.

Bernie Fette (00:32):
Supply chains are a bit like the utility services we have in our homes. We don’t think about them all that much, until something goes wrong. Whether it’s tap water or toilet paper, when the availability is suddenly shut off, we know we’re in trouble. What we don’t know, typically, is how long that trouble is going to last. A global public health emergency has given us plenty of chances to consider that reality. And it’s given experts like Jolanda Prozzi and Juan Villa a fresh opportunity to understand more about supply chain disruptions, and how to make them more manageable in the future. Juan is a research scientist at TTI and Jolanda is a senior research scientist at the agency. Jolanda and Juan, thank you both for joining us. Thanks for sharing your time.

Juan Villa (guest) (01:24):
Thank you, Bernie. It’s a pleasure to be part of this podcast.

Jolanda Prozzi (guest) (01:28):
I look forward to participating.

Bernie Fette (01:33):
When our pandemic experience started almost two years ago, it was all about toilet paper. And since then, we learned that the list of things that we have to wait for is a pretty long list. Why have our supply chain problems extended to so many different things that we need?

Jolanda Prozzi (01:53):
Well, we think that there’s a two-fold problem here. The one is that our supply chains have become increasingly lean, which means that, you know, manufacturers and retailers over many years have tried to squeeze efficiencies out of the supply chain. In other words, making the supply chain more competitive, reducing the cost of the supply chain and reducing the cost of manufacturing products. And that has translated of course, into lower prices for consumers, but it has also made the supply chain very vulnerable to disruptions. And part of that, moving to more efficiency, moving to more lower-cost supply chains, lower production costs. Specifically, we see that supply chains have become increasingly global. So products are sourced from various countries, multiple countries, um, based on, you know, which country produces the most competitive component or the lowest cost component. And so if products are sourced from so many countries, then if one component doesn’t make it to the manufacturer, it can disrupt the whole manufacturing process. And then furthermore, I would say that we see an increased reliance on China as a major manufacturer of a lot of intermediate components that’s used in manufacturing. And Juan, do you want to take that one on?

Juan Villa (03:43):
Yes, I can continue from here. So yeah, we have our reliance on products from Asia and that compounded the whole problem. I think this was a storm in the making even before the pandemic, because the infrastructure was already stressed in terms of ports being at capacity, land ports of entry also being at capacity. So then when the pandemic came, the demand went down for different reasons. People were not buying as much food at restaurants. They were buying food for home. And then so basically the demand structure changed. Different products, different commodities were changing in terms of volume. So when the demand start to pick up, the ports were not ready because there was still a lot of people out of work. You know, they were not confident of going back to work. This thing happened at land ports of entry. So our research shows that it was mainly a demand change that caused the problem.

Juan Villa (04:45):
And then as you were asking, Bernie, the issue is here that, you know, two years from the beginning, we’re still even worse. And again, what we have analyzed is that this is going to be staying here for awhile because it’s not easy to start manufacturing things in the U.S. or in North America. I mean, it takes a long term to do the planning, to build a factory or to change the factory, to make a specific goods. And for example, we see semiconductor issue. The reason why first we were relying on semiconductors from Asia, then the production went down because a lot of the vehicle companies that were not selling cars, so they decided to basically stop the manufacturing. So when demand started picking up and then there was a higher demand for electronics for your computer, your tablet that your kid was using at school.

Bernie Fette (05:39):
Your iPhone, yeah.

Juan Villa (05:39):
The different types of semiconductors were used. Now we have no cars because we have no semiconductors to place in those cars.

Bernie Fette (05:49):
Right. There’s the saying that we’ve heard for so many years about a chain only being as strong as its weakest link. And what I hear both of you saying is that this was a problem that was bound to happen, that was almost waiting to happen. And if it wasn’t a global public health crisis, then it might’ve been some other cause, but it was going to happen.

Jolanda Prozzi (06:10):
Yeah. So what I was trying to say, Bernie, is that these supply chains have become very global. So the manufacturing, for example, of a simple product, like paint requires chemicals, and these chemicals are sourced from all over the globe. And if there’s a disruption in the sourcing of one of these components, then it means that that specific paint cannot be manufactured. And so the supply chains have become what Juan is also mentioning very vulnerable to disruptions. You know, I think the pandemic highlighted how vulnerable supply chains have become, but it’s not only pandemic-related disruptions. I mean, there’s just normal disruptions where they’re shipping incidents and also by the pandemic.

Bernie Fette (07:07):
Juan, just a minute or two ago, you were starting to talk about one of the things that you’ve learned through the recent research that you and Jolanda had been working on. Can the two of you hit some of the high points of that research? What you’ve learned just in the last year or two?

Juan Villa (07:22):
One thing we learned, I mean, not only in the last couple of years is that supply chains are controlled by the private sector while the infrastructure that is needed to handle those supply chains is driven by public sector investment mainly. So there’s a disconnect in terms of the timing. For example, if you want to build a new port or expand an existing port, it will take years, sometimes more than 10 years to do that. We did a study at the border and in order to build a new border crossing, it takes from 10 to 15 years, just to give you an idea, because there’s a lot of coordination that has to be done with two countries, many agencies in both the funding from both sides of the border. In the other hand, the supply chains or the freight movement is again, driven by demand. And that’s basically the private sector who handles that. So our warehouse in Los Angeles can be handling imports from Asia, but then if that particular shipper or receiver wants to change the sourcing and then move to Seattle, they can do that in a week or two.

Bernie Fette (08:37):
As compared to the years that it takes to create infrastructure, to accommodate those changes.

Juan Villa (08:44):
Exactly. So that’s a main issue that we have learned, and we have tried to obviously come up with ideas on how to streamline the planning process, but Jolanda can expand a little bit more on the work she’s been doing in Texas with the Texas Department of Transportation in terms of the planning of infrastructure.

Jolanda Prozzi (09:05):
Yeah. So let me start by saying that even before the pandemic, there were questions as to how the infrastructure can satisfy consumers’ demand for same-day or next-day parcel delivery. So pre-pandemic, if we remember pre-pandemic, there seem to have been a move to same-day delivery or Amazon shoppers buying a gallon of milk at 6:00 a.m. and expected it to be delivered by 8:00 a.m. in some urban areas, and transportation planners were wondering, if this trend really takes off, how can that level of on demand shopping be satisfied in urban areas that’s already experiencing congestion levels? During the pandemic, What we’ve seen was that not only as Juan referred to earlier, the type of commodities that consumers were buying changed when the travel restrictions were imposed, but also how consumers purchase those commodities. So we saw this tremendous increasing e-commerce shopping. People, when they were scared of the health risks associated with going to brick-and-mortar stores, were all of a sudden embracing e-technology or e-commerce to purchase groceries and other household commodities and the e-commerce supply chain is even more complex because it moves away from the traditional supply chains, where products are shipped to a warehouse and from a warehouse to a store.

Jolanda Prozzi (10:57):
And a consumer goes to a brick-and-mortar store to purchase the commodities. Now we see that the commodities get shipped to a warehouse and from there, it gets delivered to individual’s home. So the way that infrastructure is used is different. And as Juan mentioned, the infrastructure development process takes a very long time. State departments of transportation develop 25-year long range transportation plans in a way to estimate demand, future demand for the transportation system. And that translates at least in Texas into a 10-year transportation program that finally funnels in two-year construction programs. So where the result is the development of transportation infrastructure takes a long time. And as Juan mentioned, transportation planning is not so nimble that we can change these investments to satisfy fairly quick changes in demand, how people shop and what kind of products they are purchasing.

Bernie Fette (12:18):
So these are really fundamental distinctions about how private sector businesses operate, to borrow your word Jolanda, in a very nimble fashion. And you can say a lot about how the public sector operates, but nimble is not one of the words that typically comes to mind. So as we try to overcome the problems that we’ve experienced and look ahead to possibly avoid supply chain problems like this, how do we get past those distinctions? How do we get past that disconnect?

Juan Villa (12:52):
Well, the key thing is that first of all, we have more data available because of technology implementation. We have a lot of information or data, and that’s something that TTI is doing is basically trying to be able to develop these systems or processes to analyze the data, transform it into information for a better decision-making process. So that’s a key point. You know, be able to gather and analyze as much information as possible. So that way you can provide that information to the decision makers.

Bernie Fette (13:27):
So you simply understand more about the problem now than you did two years ago, is that right?

Juan Villa (13:31):
Exactly. But now we have more, they’d say data elements. We know what commodities are moving. You know how this last-mile is operating. What’s going to be the trend in the future. And again, this can change, but at least in order to be able to have a better handle of potential disruptions, you need to have that information on hand. And then for both public and private sectors, companies and stakeholders, it’s important to develop the systems and the processes to be able to analyze the data, to be able to take some decisions on it on time. Because again, in the past, you know, pre-pandemic, it was relatively stable. You can plan in advance your demand because you knew that, you know, by December, this type of commodity will be on demand. And I think in the future, they might, these might change. So that’s why my recommendation is to be able to be prepared in terms of gathering data, analyzing it, and be able to make decisions on that.

Bernie Fette (14:36):
When you were talking about better planning just now, I’m glad you mentioned December, because of course the problems that we’ve been talking about so far, we’ve been discussing at a pretty high altitude. How, you know, in a very broad sense, nationally, globally. I’d like to take the conversation down a little bit closer to the consumer level, especially with regard to the upcoming holiday season. What do you think the consumers can expect as we get into the really active stage of the holiday buying season?

Jolanda Prozzi (15:11):
So I think that in the short term, what we are seeing is that there’s a trade-off between the efficiency focus of supply chains, you know, removing any redundancy in supply chains, and the increasing risk to a supply chain. And so holiday shoppers should expect to see potentially fewer choices, lower inventories on desirable items, potentially higher prices for a service, and then also delays in getting the desired items. So some out-of-stock situations over this holiday season.

Bernie Fette (16:00):
Fewer choices and longer waits?

Jolanda Prozzi (16:03):
Fewer choices, longer waits.

Bernie Fette (16:05):
And on the topic of higher prices, we’ve been reading and hearing a lot about supply chain disruptions now for well over a year. But another thing that we’ve been hearing and reading a lot about very recently is inflation. 6.2 percent. The highest it’s been in almost 30 years. So is there a connection between inflation and the supply chain problems that we’ve been talking about?

Juan Villa (16:29):
I believe so. I mean, inflation is not high because of supply chain disruption, but there’s a connection because it’s supply and demand and the supply has not been able to cope with the demand. We have vessels waiting in L.A. ports to be able to unload. We have another thing that’s compounding the issue on the transportation sector is the lack of drivers, truck drivers. Truck driver shortage is becoming an issue. And especially now. One of the issues of that is the changing in the way the things are delivered. Now, most of the drivers will prefer to do the last-mile trips because they can go back and sleep at home, not the long-haul trips where you have to be out on the road for weeks sometimes. So again, that supply and demand is causing a little bit of the inflation. And also what we have been analyzing is that there is also, you know, money available. So that makes it, that prices can go up. So again, these might be related, but again, not 100 percent with supply chain issues.

Bernie Fette (17:37):
And not a simple cause-and-effect relationship, sounds like, right?

Jolanda Prozzi (17:42):
So I agree with Juan. I mean, we see higher prices, not only because of supply chain issues, but what we do see is that transportation costs are higher. We see that the shipping lines, uh, charging higher prices for shipping containers. We see that domestic transportation costs are increasing, to Juan’s point. We see a shortage in truck drivers. And one way that trucking companies has tried to solve that problem is to pay truck drivers higher wages. So transportation costs are higher than pre-pandemic, which of course adds to the final price that the consumer is paying. But it is not the whole story. On the other side, there is labor issues in the manufacturing and in the retail sector, also, that’s increasing the costs of products.

Bernie Fette (18:50):
Right. A lot of folks have talked about getting back to normal, but part of the conversation nationally, globally, I think has been talking about how maybe we can do better than normal. And I wonder if the two of you think if that’s the case with supply chains in the future. Should we be going for something that’s better than what we were accustomed to, the way that we were accustomed to doing things?

Jolanda Prozzi (19:14):
Actually, I don’t know if it will be better than normal. I think what we can expect is that the supply chain will change and that manufacturers and retailers will change their business model and look potentially at sourcing differently, having more redundancy in their processes to make the supply chain more resilient. I mean, we hear increasingly manufacturers like car manufacturers talking about moving from a just-in-time supply chain to a just-in-case supply chain. But, you know, unfortunately if you want to build redundancy into a supply chain, or if you want to make infrastructure more resilient and have more capacity that will come at a cost. And so they did their normal, maybe in the sense of we can address the inventory issues, we can address delay issues, but we will pay a price for that in my opinion, at least.

Bernie Fette (20:26):
Juan?

Juan Villa (20:29):
Yeah. I agree with Jolanda. And again, the, the new normal, I think it’s going to be different in terms of, for example, sourcing, what we have done is we analyze potential impacts of nearshoring, which is basically, you know, trying to get your suppliers near to your manufacturing or to your consumption. There is multiple terms used: nearshoring, rightshoring, reshoring. Those are the terms that have been come up in the recent past.

Bernie Fette (20:58):
One example of that would be moving from a reliance on manufacturers in Asia to perhaps Mexico?

Juan Villa (21:06):
Right. To basically North America. That way you can have shorter supply chain, you can have products being manufactured at the Texas-Mexico border, for example, and that will cause potential issues in transportation. Or even coming back to the U.S. That will take first a lot of planning. And then also it will take some initial costs for the manufacturing to take place in those locations. But once those are established, we will have a more reliable supply chain, probably being able to cope with potential disruptions, not only on, on international trade, but also environmental disruptions that we have seen in the past hitting ports, hitting other type of infrastructure.

Bernie Fette (21:53):
So it sounds like you’ve got clear ideas for how to fix the problems in the future. But one thing that seems very clear is that this will not be a quick fix.

Juan Villa (22:05):
That’s correct. But again, in the good news side of this, we have learned from this experience. And I think all the different stakeholders, both public and private, have learned from it and they go take action to be able to come up with better solutions for the future.

Bernie Fette (22:22):
Well, this is a really complex topic and we only have so much time to explore it today, but I’d like to ask you, what’s your main takeaway for people listening?

Jolanda Prozzi (22:33):
I think that intuitively we know that things are going to be different post-COVID. You know, we see already that, you know, the labor market is going to be different in the many articles about the great resignation and the great reshuffling that’s happening at the moment. We know that supply chains are going to look different to Juan’s point about nearshoring options and reshoring. We’re pretty certain that both the private sector and the public sector will try to reduce the vulnerability and risks to supply chains. I think it’s pretty clear that e-commerce is here to stay, that people have gotten pretty comfortable shopping online. I think in the short term we already see their higher prices, the longer delivery times and, um, poorer service. But I think what is clear at this point is how it’s going to look in the medium- to long-term. Are all these changes going impact U.S. consumers moving forward? If some of these pain points that we are experiencing now, if some of that is also going to stay moving forward.

Juan Villa (23:59):
My main takeaway is that we should not take everything for granted. You know, in the pre-pandemic, we assume that, yeah, we want to buy a car. Then you can go to pick whatever you want. Now, if there’s so fewer options, obviously, and we need to probably live with that because it’s specific items that are going to be difficult or not as easy to find as we used to. And the same with the transportation system. Everybody assumed that the transportation system will be working, you know, very well with no disruptions. And now we’ve seen that it’s not that anymore, because there’s too many moving parts. And finally, the key understanding that the two main stakeholders — the public sector and the private sector — they have different priorities. They have different timelines. I think it’s important to take into account in order to be able to make decisions better.

Bernie Fette (25:01):
Jolanda Prozzi, and Juan Villa. Supply chain experts at the Texas A&M Transportation Institute. Thank you both for helping us understand this very complex topic a bit more clearly. This was really helpful. Thank you.

Jolanda Prozzi (25:16):
Thank you, Bernie, for the invitation.

Juan Villa (25:17):
Thank you.

Bernie Fette (25:21):
The global pandemic has helped us all learn a bit more about how supply chains work, and what can happen when they don’t. Most of us have probably heard the saying about how any chain is only as strong as its weakest link. And one thing we’re coming to understand about supply chains is that they were strained to their limits long before the COVID-19 outbreak. Our public health crisis simply exposed the weaknesses that were already there.

Bernie Fette (25:51):
Thanks for listening. We hope you’ll be back next time for a conversation with Jerry Ullman and a close look at one of the most hazardous driving environments that we all face from time to time — street and highway work zones.. Thinking Transportation is a production of the Texas A&M Transportation Institute, a member of the Texas A&M University System. The show is edited and produced by Chris Pourteau. I’m your writer and host, Bernie Fette. Thanks again for listening. We’ll see you next time.