Supply chains that long functioned as well-oiled machines have been no match for a world beset by Covid, a European war, and surging inflation. Those disruptions to just-in-time supply lines have caused well-publicized shortages of everything from semiconductors to baby formula this year. But there are steps we can take to avoid such supply outages in the future, according to Christopher Tang of the UCLA Anderson School of Management.
In addition to serving as a University Distinguished Professor and the holder of the Edward W. Carter Chair in Business Administration, Dr. Tang is also a recognized leader in global supply chain management and author of six books and more than 160 research articles that have appeared in The Wall Street Journal, Financial Times, Barron’s, Fortune, and Forbes, among other publications. He has also consulted with global companies, including Amazon, HP, IBM, Nestlé, and Accenture, and taught at Stanford University, UC Berkeley, Hong Kong University of Science and Technology, National University of Singapore, the Massachusetts Institute of Technology, and the London Business School.
Dr. Tang received his B.S. in mathematics from King’s College in London and an M.A. in statistics, an M.Phil. in administrative science, and a Ph.D. in management science from Yale University. He recently spoke to Group Editorial Director David Maloney as part of DC Velocity’s “Logistics Matters” podcast on supply shortages.
Q: We have seen many shortages in key supply categories this year and, of course, the reasons for those shortages are complex. But are there common denominators among the types of products that are in short supply?
A: Many of the products that are in short supply are ones that are manufactured overseas. That is why President Biden is thinking about reshoring some of the production back to the United States.
Q: For years, companies have tried to run lean supply chains, and as you mentioned, a lot of those products are manufactured overseas. How much do those lean supply chains and the lack of alternative sources contribute to the current product shortages?
A: I think lean supply chains play a role because we have had to adjust our timeframes. Lean inventory management works when there is no disruption—but then when you have Covid, port shutdowns, and factory shutdowns, these disruptions create shortages. That is point number one. Now, companies are starting to think about “just-in-case” inventory management.
Secondly, before Covid, many companies sourced all of their products in China because it is cheaper and also because China can produce on a large scale and has the capabilities to produce many different kinds of products. But now, due to the trade war that started in 2018, there is friction between the U.S. and China, which makes this kind of global supply chain a little more complicated. As a result, companies are trying to find alternative sources of supply in countries such as Vietnam, but it takes time to locate and set up a new supply partner. Therefore, right now we are caught in a transition period.
Q: As you mentioned, a lot of shortages were due to sourcing from faraway places. But one of the biggest shortages we saw this summer has been with baby formula, and that was actually from a domestic source. National news reports indicate that one plant was primarily to blame. Was that really the case?
A: Now we have to separate the issues here. The infant formula shortage is a domestic supply chain issue, but it is not so much a supply chain issue as a supply issue. In this particular case, the formula shortage was triggered by the shutdown of an Abbott Laboratories plant in Michigan that had quality-control issues due to bacterial contamination. That was actually known in 2019. The plant did not take adequate corrective action right away, plus the FDA was late in doing inspections—because of Covid, it had postponed its inspection until February 2022. As a result, the plant had to stop production for more than four months. That created the shortage in this country.
Q: Are our supply chains really so vulnerable that the closure of a single plant can trigger a shortage? Aren’t there other companies that manufacture those products?
A: The infant formula situation is complicated. It is not about the number of plants. Actually, in the U.S., we have four manufacturers producing formula, and they also have multiple plants. So, one plant shutdown would not typically create this kind of chaos. The problem in this instance is that the WIC program, which stands for the Women, Infants, and Children program, stipulates that a lot of states must source from a single brand. Therefore, when a brand like Abbott formula is not available, the WIC program in those states may not support formula produced by other manufacturers. That is point number one.
Point number two is that baby formula is a stable product—the demand is very stable and there is really no excess capacity, and no need for extra capacity. Therefore, when one plant shuts down, the other plants do not have capacity to make up the shortfall. That is the problem.
Q: What can be done to prevent similar shortages in the future? Is it just a matter of better management within the plants themselves, and should we be looking at finding other sources for critical products?
A: For infant formula, there is actually an easy solution. First, I think we need to make sure these four manufacturers are doing their due diligence and doing preventive maintenance. They need risk-mitigation contingency plans in case they have bacterial contamination issues, so they can shift the production at the plant. The FDA also needs to improve its efficiency. It needs to follow up with inspections when issues arise and then force companies to shut down the plants or recall the affected products to protect the consumers and the infants.
Third, the FDA should consider preapproving some of the international brands that are produced in Europe or Australia, so that if this kind of situation occurs again, foreign suppliers can immediately begin shipping formula to the United States. That can be done. This is really about scenario planning and risk-mitigation strategies that it needs to put in place.
Q: That all makes sense, especially for that specific product. But there are other commodities that are in short supply as well. You talked about preventive maintenance. We are living in a time of economic uncertainty, when it is difficult to find workers. How can our supply chains ensure that proper maintenance is being performed in our factories to assure a continuous supply of materials and goods in the face of staffing and financial concerns?
A: You raise a very good question. This is a very tricky period because, as a result of the Covid pandemic, most companies are struggling. Point one, they are struggling just with production to make supply meet demand. Secondly, we are facing a potential recession, and the cost of doing business is very high, so companies ought to try to be lean in terms of operations to keep their costs down.
When you’re facing this kind of situation, very few companies will actually take the time to think about risk mitigation in terms of factory safety, in terms of building safety. This is not on their radar screen. Therefore, we need to drive home the point that even during this challenging period, companies should not lose sight of what is fundamental. What is fundamental is employee safety, product safety, and quality. Without that, these companies will not survive. I think that instead of just fighting the short-term fires, they should be planning with an eye toward long-term survival.
Q: Should the government be doing more to make the supply chains for critical products more resilient? And should it require companies to do a better job of communicating with the public when there are impending supply chain issues on critical products like baby formula?
A: Yes, absolutely. I think that right now, the government is beginning to realize that we don’t have supply chain transparency. If you think about the situation with infant formula, President Biden and the White House staff did not know that a severe shortage was brewing until after it became a problem. Now, this is not uncommon. Actually, during Covid, many companies realized that they don’t even know who is producing their products. Therefore, when they had shortages, they had to try to trace it back to exactly who is producing their products.
During these difficult periods of time, I think it is important for governments to work with manufacturers and suppliers to improve supply chain transparency so that if shortages or disruptions arise, they can share this information with the public.
Q: In addition to improving transparency, are there practical steps companies can take to make their supply chains less vulnerable to disruption?
A: Well, I think global supply chains have grown and are becoming overly complex. I think the pendulum has swung too far. Now is the moment for companies to think about how they can shorten and simplify their supply chain configurations. For example, I think companies in the U.S. should take advantage of the USMCA [U.S.-Mexico-Canada] free-trade agreement to relocate some of their manufacturing operations either here or to Mexico. That would result in a shortened supply chain, and possibly better communication and visibility, so that supply chains would be less vulnerable to disruptions.
Q: Of course, the main reason for manufacturing in China is that it is cheap. Moving to North America may add to costs that are already on the rise due to inflation. How do you view reshoring as a business strategy?
A: Right now, there is severe inflation. We are aware of that. But on the other hand, for the long-term survival and also the long-term resilience of supply chains, I do not see a single solution.
Bear in mind that the cost of doing business in China is not so low anymore; that is why even China is actually shifting production—to Vietnam, to Bangladesh, to Myanmar. I think that is where things are trending for the future. But that is also why companies should consider diversifying their supply chain configurations to avoid putting all their eggs in one basket.
And yes, there is a cost factor to be considered. But on the other hand, there is also risk, and if you want low risk, you have to pay a higher cost. Just like if you want to buy the insurance to reduce risk, you have to pay the premium. If you don’t pay for insurance, you are incurring bigger risks.
I think this is the time that companies need to re-evaluate how they balance the risk, the disruption, and also the cost. If you don’t do this kind of balancing, you may actually end up not having the product to sell at all.