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COVID-19—that’s the answer.
That’s what caused all the shortages of 2020 and 2021.
That’s it.
COVID-19 caused the shortages in the same way that an iceberg caused the Titanic to
sink… or the collapse of Lehman Brothers caused the Great Recession… or the straw
broke the camel’s back.
That’s really to say, COVID did cause these shortages—they would not have happened in
the manner they did, when they did, if not for the pandemic.
But just as the Titanic’s design flaws would eventually lead to calamity, the vulnerabilities
in the global economy would eventually lead to a recession, and something would eventually
break the overloaded camel’s back, COVID caused these shortages, but it’s not what
made them possible.
What made them possible is a fundamental, structural vulnerability in the way today’s
supply chains work.
On April 13th, 2021, Boba Bliss, a small bubble tea shop in Dublin, California, posted on
Facebook.
They explained that they were having a hard time getting their ingredients, and that this
would mean their menu would have to change daily—reflective of what they could actually
get from their supplier.
On April 15th, MighTea Boba, in Canandaigua, New York explained on Facebook that they would
have to serve a smaller quantity of tapioca pearls in each drink, and would no longer
be offering extra as an option, due to a shortage of this ingredient.
Bing’s Boba Tea in Tucson, Arizona said much the same one week later, and Tea Hut
in San Francisco, California then announced that they would have to raise their prices
due to a 26% rise in their ingredient costs.
All across the country, shops selling this popular Taiwanese drink simply could not get
ingredients in the quantities demanded, despite no dramatic increase in demand.
However, thousands of miles away, in Taiwan, where much of the world’s Bubble Tea ingredients
are made, things were operating fairly normally.
With single-digit daily case numbers for much of COVID’s reign, factories on the island
were able to work at full-force in a way they couldn’t elsewhere but still, somehow, Boba
Bliss, MighTea Boba, Bing’s Boba Tea, Tea Hut, and thousands of other shops across the
US couldn't get their product.
The problem had less to do with anything happening in Taiwan, and more with what what happening
here—in the waters off the coast of Los Angeles.
Throughout the first half of 2021, a rotating cast of dozens of cargo ships have dotted
the Pacific’s horizon.
Each sat there, at anchor, sometimes for weeks, until a spot opened for them at the port of
Los Angeles or Long Beach.
This is abnormal.
While the year prior it was possible for a ship or two to have to wait a day or two,
it was never dozens of ships for dozens of days.
Transit time from Taiwan to Los Angeles typically takes about two weeks, so an additional ten
days of waiting represents a near doubling of shipping times.
The root cause of this was, of course, a perfect, pandemic-fueled storm.
As the 2020 holiday season approached, more people were getting back to work in the US,
consumer spending was ticking up, and online shopping was exploding.
With limited access to travel, restaurants, shows, and other services, physical products
were one of the few ways people could spend their discretionary income.
More goods than ever were coming from factories in Asia, and 49.1% of those imports to the
US passed through one of just two ports—Los Angeles and Long Beach.
Compared to a year prior, before COVID hit the US in earnest, February 2021 saw a 31%
increase in ships and a 49% increase in container traffic at these two ports.
They just couldn’t keep up.
Simultaneously, however, a significant tranche of dock-workers were constantly out sick due
to COVID itself or the quarantine procedures it demanded.
But the disorder doesn’t end there.
While a year ago a 20-foot container would cost about $1,800, they now run for $3,500.
There’s a regional shortage of shipping containers that’s having global consequences.
You see, in 2020, just as much of the world entered lockdowns, China’s manufacturing
industry was emerging from it.
The entire world bought masks, personal protective equipment, and regular goods from the country
and once those containers arrived in ports like Long Beach, they were unloaded.
However, due to those destination country’s lockdowns, there wasn’t really much that
needed to be shipped out.
For every 100 containers that are imported into the US, only 40 are exported.
So, containers stacked up in the places there weren’t needed, because they weren’t needed,
and they didn’t make it back to the places where they were, like Asia.
In the case of the ports of Los Angeles and Long Beach, their capacity crunch means they
don’t even have the time to justify loading ships with empty containers for return to
Asia.
Not only that, but a shortage of truck drivers in the US means that it’s tough to actually
get empty containers back from their final destinations to ports to send them back to
Asia.
So, a shortage a shipping containers is worsening a shortage of shipping capacity, which is
worsened by a shortage of port capacity, which is worsening the shortage of shipping containers,
which itself is worsened by a shortage of truck drivers, all of which is causing a shortage
of bubble tea ingredients.
Shortages causing shortages causing shortages—its a vicious cycle that is only worsening as
economies reopen.
Across the world, there’s a proliferation of scarcity.
Lumber prices in the US quadrupled after predicted decline failed to manifest, and a boom in
construction and renovation did instead.
The use and construction of pools also accelerated, as outdoor space became more valuable, spurring
increased demand for chlorine which, when mixed with reduced supply as a result of a
fire at a major chlorine plant in Louisiana, led to sky-high prices, and insufficient availability.
As restaurants pivoted to take-out and delivery, bulk ketchup was out, and single-serve packets
were in, but with manufacturers unwilling to spend significantly to increase production
capacity for a short-term bump, the packets became scarce, and companies started successfully
selling them for $10 per 50 on eBay.
However, the greatest shortage of all can be seen here, in the empty parking lots of
Anchorage, Alaska’s airport.
The state relies heavily on its summer tourism season, and after missing it last year, 2021’s
season is crucial.
Facing uncertainty about the legality of their operation until May, cruise companies cancelled
many of their summer sailings to Alaska, so this year is all about independent, domestic
tourists.
To traverse the vast wilderness of the last frontier, independent travelers need rental
cars.
However, these travelers can’t get rental cars—regardless of which date you search
in summer 2021, there simply isn’t availability.
For the lucky few who do find one, current market rates are over $500 a day for a compact
car.
American travelers can now legally, safely, and easily get to Alaska, but they can’t
get around Alaska, which means that eager travelers aren’t going.
You see, during the depths of the pandemic, Hertz, Enterprise, National, and other rental
car companies sold off much of their fleets of cars—they needed money somehow, and it
wasn’t coming from rentals themselves.
Now, however, with vaccinations easily available to all in the US, there is demand for rentals,
yet no supply.
In Alaska especially, with its highly seasonal tourism market, its normal for the rental
car companies to sell off their old vehicles in the fall, and purchase new ones in spring,
but the latter half of that didn’t happen this year, because there’s a massive, global
shortage of new cars, and manufacturers are simply unable to fulfill the huge orders rental
car companies are asking for.
You see, in Spring, 2020, as COVID took hold of the globe, car manufacturers cancelled
and reduced their orders for components as they anticipated reduced demand for new vehicles.
They were right on that—demand did go down as it tends to during any recession—but
it recovered faster than anyone imagined.
Regardless, the plan was that, once recovery started, they’d boost component orders and
manufacturing in step.
The problem was that they’re now at the back of the line, and for one, critical component
of modern automobiles, there’s quite a long line.
Computer chips are sold out everywhere.
It was the perfect storm of circumstances.
First, the US’ trade war with China caused the country’s manufacturers to start stockpiling
the chips.
Then, COVID led to production shutdowns in certain areas of the world, demand for consumer
electronics exploded as people spent more time at home, and now, even the solution is
causing problems as silicon is both needed in computer chips and vaccine vials.
Altogether, the reasons are complex, but the result is clear: this is why you still can’t
easily buy a PS5, this is why Samsung likely won’t release a new Galaxy smartphone this
year, and this is why you can’t get a rental car in Alaska.
In a twist of cruel irony, the car industry is culpable for all of this.
That’s because, decades ago, the very industry that is now suffering the hardest propagated
a system that made shortages such as this so possible.
Eighty years ago, as Japan emerged from World War Two, Toyota had a problem.
The world was marching towards further globalization, and Japan especially was starting to develop
a trade relationship with the US.
American car manufacturers, at the time, though, had a huge cost edge over their Japanese counterparts.
Especially during the post-war economic boom, demand for their vehicles was so high that
American manufacturers had incredible economies of scale.
Their process was batch manufacturing—at a given time, a given assembly line would
build one type of one model of one vehicle, exclusively.
Then, they’d switch to another type of another model, and so on and so forth.
With this, the manufacturers could use massive production lines working at breakneck pace,
unlike Toyota’s.
Theirs were small and slow.
The domestic car market in Japan was limited, and it demanded quite a lot of variety in
vehicle types.
This meant that they didn’t have the scale to make batch manufacturing work well—at
least as well as in the US.
Their inability to realize the gains of batch manufacturing meant that they simply would
have to have higher prices compared to their new American competitors, but there just wasn’t
a clear alternative.
So, they created one.
They created the Toyota Production System.
It had two core principles, starting with autonomation—not automation, autonomation.
This was their term for the efficient use of automation.
Now, complete automation would require machines to build cars, plus diagnose any problems,
plus fix those problems, but having machines fix their own problems is very complicated
and very expensive.
So, in their autonomation system, they look for only what machines can do better than
humans, which in their context was most of vehicle assembly and problem diagnosis, while
problem-solving was left to humans.
Autonomation was and still is a crucial, critical component of the Toyota Production System,
but it wasn’t the core principle that would go on to change manufacturing fundamentally.
What did was the principle of just-in-time manufacturing.
All it really is is this: each step in the manufacturing process should end when the
next one is ready to start.
It’s a pull system, as opposed to a push system.
Just as your Coffee shop doesn’t start making your latte until you ask for it, the polyvinyl
butyral resin should only leave the chemicals plant when the laminated safety glass production
facility is ready to start making windshields, and it should only start making windshields
when the final assembly line is ready to put all the pieces together, and it should only
start putting all the pieces together when the dealership is ready to put more cars on
its lot.
In the view of the Toyota Production System, excess inventory is waste, because holding
inventory costs money without making money.
Elimination of excess inventory is elimination of waste, and elimination of waste is what
leads to production efficiency.
This system worked.
In the early 1950’s, Toyota was on the brink of bankruptcy.
Today, the company is the largest auto manufacturer in the world, and the principles of the Toyota
Production System can be found in any business textbook.
Just-in-time manufacturing is no longer an innovation—it’s the norm.
Articles aren’t written about companies implementing just-in-time—they’re written
about those that don’t.
In fact, just-in-time has become even more integral today.
If there are six steps in a manufacturing process and each holds two months of inventory,
it would take a year to pivot to producing a new product.
The short product life-cycles of today’s technology industry would not accept that.
Just-in-time is such a simple principle, but the pursuit of the elimination of waste is
now the central mission of any major manufacturer.
However, most did it wrong.
Manufacturers globally saw the headline—elimination of inventory leads to massive efficiency gains—and
jumped on that without actually determining what made it work for Toyota.
They ignored that Japan’s small physical size made for short domestic supply chains,
less vulnerable to things going wrong.
They ignored the company’s production leveling—finding the average daily demand and producing that,
regardless of short-term changes in demand.
They ignored the fact that eliminating excess inventory is different from eliminating all
inventory.
They ignored the principle of growing strong teams of cross-functional workers, predicted
on respecting people.
They ignored the culture of stopping and fixing problems, to get things right the first time.
They ignored huge swaths of the Toyota Way and created a system that’s less effective
and less resilient, but can impress shareholders through short-term savings.
How Toyota has effectively implemented this system fills books, but many are just reading
the covers.
Even Toyota, though, is not perfect.
In 2011, Japan was rocked by a 9.0 magnitude earthquake—the fourth strongest ever recorded
anywhere.
Not only did this cause immense destruction to life and property, but it also led Toyota
to recognize a flaw in its own system.
As Japan recovered, some supply chains were quick to as well—for example, securing plastic
resin for door panel production is not difficult.
There are plenty of manufacturers globally creating easily substitutable alternatives.
That’s not the case with, say, semiconductors.
The hugely expensive facilities that create these chips require years to construct, and
after the 2011 earthquake, it took many months to mend them back to operating status.
This surfaced a truth that had never been fully considered—not all supply chains are
made equal.
Plastic resin can handle supply chain disruption.
Semiconductors cannot.
Therefore, Toyota made changes.
All along, their mission was not to eliminate inventory full-stop—it was to eliminate
excess inventory.
Supply chain disruption is inevitable.
It’s inevitable in the same way that Titanic flawed design would eventually encounter an
iceberg or the structural economic vulnerabilities of 2008 would eventually collide with a market
panic.
Therefore, semiconductor inventory is not excess because inevitably, due to the inevitability
of disruption, excess semiconductor inventory will eventually become necessary.
Recognizing this, Toyota, in recent years, has started to build up a stockpile of two
to six months worth of chips, and that’s why the company is the only major vehicle
manufacturer that is unfazed by the semiconductor shortage.
Toyota followed its own principles.
It did not stray from them, and it did not reinvent them.
It’s no surprise that Toyota excels at implementing its own system, but it is a surprise that
the entire manufacturing world has so wholeheartedly embraced flawed implementation of the system.
The reality is that just-in-time manufacturing is more efficient, but some think that that
efficiency must come with a trade-off in resilience.
That’s simply not true.
Proper just-in-time supply chains must inherently be inflexible once formed, but their form
is flexible.
It’s a philosophy, not an equation.
Shortages in an economy are incredibly complex, and any explanation of them is an oversimplification,
but just-in-time manufacturing does not have to be the cause.
In addition, disruption is inevitable, so it can’t be the cause.
You can’t blame the fact that your house is sinking on the fact that you built it in
the ocean.
A ruthless pursuit of short-term profit at the expense of long-term gain is the cause.
Running as close as possible to the edge is the most efficient manner to manufacture,
until it isn’t.
Constructing a resilient supply chain requires long-term thinking, but most companies have
not nurtured an environment that allows for that.
As the world recovers from the pandemic, many will ditch what they call just-in-time manufacturing,
as the alternative is to accept that the very people in charge of those companies have’t
implemented it properly.
To be fair, few have, and even Toyota is still learning how to best implement its own system.
However, Toyota has proven that strict adherence to its principles means just-in-time manufacturing
can be everything at once—it can be both efficient and resilient, if one knows what
is truly excess.
Proper implementation of the Toyota system won’t fix every shortage but it did fix
one shortage for one company.
Therefore, if the auto industry had built a stockpile of critical components, if it
had implemented production leveling more strictly, and if it had understood vulnerabilities in
inbound supply chains, Alaska would have its rental cars.
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