(photo cred: Golib via Canva Pro)
Prior to the COVID-19 pandemic, the things that consumers and producers desired, from cars to toilet paper to yeast to lumber, simply appeared in showrooms, store shelves, and ports to be purchased and used whenever it was convenient. However, over the last 18 months, we've seen shortages in both large and small quantities, often caused by surprisingly minor causes and hidden vulnerabilities. For example, demand for yeast quadrupled in spring 2020 as homebound Americans experimented with breadmaking. Fleischmann's Yeast, a major producer, had the capacity to produce yeast; however, a lack of packaging caused shortages and delays. The glass jars used to package the yeast came from India, where manufacturing had been halted due to the COVID-19 pandemic.
Some of these shortages were quickly resolved by nimble businesses. Fleischmann's discovered how to package yeast in plastic bags, and toilet paper manufacturers made a slew of minor changes to their equipment and product mix. Others, such as the semiconductor chip shortage, have proven more difficult to resolve and are weighing on the US economy. According to some analysts, the chip shortage could reduce GDP growth by nearly a percentage point this year, and it has resulted in waves of production shutdowns that have harmed hundreds of thousands of U.S. workers employed in manufacturing jobs in the automotive and heavy trucking sectors.
A resilient system has the ability to recover quickly from an unexpected shock. Firms often use three interconnected strategies to strengthen resiliency in manufacturing supply chains:
Visibility: The ability to monitor the supply chain, often in real time.
Buffering: Having multiple sources of supply or holding more inventory.
Agility: The ability to quickly pivot to alternative processes or products.
Individual firms' ability to pivot quickly in the face of a shock, on the other hand, can be limited by collective action issues, such as a lack of communication and trust between firms along a supply chain, and a lack of access to the data required to support visibility and agility.
The government has an unrivaled ability to solve coordination problems and serve as a reliable source of data. This role is especially important during times of scarcity because it counteracts the tendency of downstream firms, such as manufacturers of finished goods, to overorder or hoard inventory and of upstream firms, such as manufacturers of inputs, to not fulfill orders due to a lack of trust in the demand signal, resulting in shortages, delays, price increases, and uncertainty for the workers, families, and small businesses who rely on these goods.
Reaffirming Our Commitment to Transparency and Flexibility
Since April, the Administration has used its convening power to improve communication and trust between semiconductor manufacturers (including those that design chips, manufacture wafers, and assemble them into devices) and semiconductor users (including automakers, consumer electronics manufacturers, and medical device manufacturers). As a result, firms such as General Motors have changed their supply chain management practices, announcing new efforts to build more direct working relationships with semiconductor suppliers who are downstream suppliers to GM. It also includes chip manufacturers' growing recognition that industrial sectors such as the automotive industry represent a growing customer base.
This is a step forward, and we continue to look to industry to take additional steps to improve transparency, trust, and accountability to help address bottlenecks in the supply chain.
In order to diagnose supply chain chokepoints and provide businesses with information that can help them adapt their production processes to the supply shortage, the Department of Commerce is currently taking new steps to improve data collection. This includes conducting a voluntary survey of industry participants. For instance, the survey may reveal that power management chips are not in low supply, but sensors used in sensors that help trigger pacemakers and power a car's safety features. In this approach, the data can also serve as a distinct demand signal, luring more private capital to increase production and alleviate the shortfall.
Additionally, in order to address the shocks to global supply chains brought on by the COVID-19 pandemic, we have been collaborating with foreign governments in Southeast Asia and other regions to maintain the operation of crucial factories while putting worker health and safety and our trading partners' public health responses at the forefront of our efforts. By setting up a new early alert system for COVID-related shutdowns of microelectronics manufacturing globally, the Biden-Harris Administration is building on this work. The system will help us identify possible problems sooner, assist quicker problem-solving, and coordinate with the private sector and our trading partners while balancing a focus on worker health and safety, supporting the public health response, and safely reopening factories. Also, this system is made to safeguard confidential or proprietary information for businesses who freely participate. The entry point for business will be the Commerce Department, which will collaborate closely with the State Department both in Washington, D.C., and at our embassies abroad. To complete this goal, we will also rely on technical specialists from the CDC and USAID.
Avoiding the Next Chips Shortage
Yet, in the long run, the U.S. needs to act more forcefully to spot and prevent weaknesses in the supply chains of vital goods. Shocks in the supply chain are not uncommon. According to a McKinsey Global Institute report, supply-chain shocks with an impact on global production lasting at least a month happen roughly every 3.7 years on average, costing businesses 42 percent of a year's revenues. Due to an increase in the severity and frequency of storms, droughts, and other extreme weather events, the climate crisis is driving "100-year" events that interrupt supply chains to occur more frequently and with more ferocity. If we don't take action to create more robust supply chains throughout the public and private sectors, as well as with partners and friends, American workers, consumers, and companies will continue to experience disruptions and price shocks.
Since taking office, the President has responded quickly and consistently to supply chain risks. In February, he issued orders for a 100-day supply chain evaluation of a few key items and a one-year supply chain vulnerability analysis for a few key industries. A strategy for reducing supply chain risks by putting money into American workers, communities, and innovation is laid out in the 100-day report, which was released in June. Additionally, it argues for the creation of new federal tools to address these vulnerabilities. This includes the ability to map and monitor current gaps and run stress tests to identify potential vulnerabilities. It also includes funding for applied research on best practices for supply chain resiliency at the firm and national levels. Finally, it includes financial tools like grants and loans to advance private sector investments in resiliency, combating the tendency of the private market to overinvest in short-term cost control and underinvest in resiliency.
Congress may advance the development of more resilient supply networks by taking two essential actions. The bipartisan CHIPS for America Act, which would allow for transformative investments in domestic semiconductor research, design, and production, may be funded first by Congress. The long-term answer to the current chip scarcity is this. Second, as part of his Build Back Better proposal, which is currently being considered by Congress, President Biden has proposed the new Critical Supply Chain Resiliency Program (CSCRP) at the Department of Commerce. The program would serve as a central node in the federal government for supply chain resilience, facilitate better coordination and planning across federal agencies to address vulnerabilities, and invest in critical supply chains where the private market has failed to allocate sufficient capital.
The following are a few examples of the activities the new office could support:
The U.S. government is attempting to avert interruptions in the supply chains for cutting-edge energy and communications equipment by mapping the supply chains for essential businesses. Along with industry partners, the CSCRP surveys businesses in each sector. The office can undertake stress testing for various shocks thanks to the survey's data and mapping, this includes scenario planning exercises, for example, a cyber assault at a vital node, to help the private sector and government agencies be better prepared to react to potential shocks to a crucial supply chain.
Developing domestic clean energy supply chains: A U.S. consortium of green energy businesses wants to bring the supply chain for solar panel production domestically. Currently, Chinese companies manufacture 80% of the world's solar panels, in part because of Chinese government subsidies. The CSCRP offers low-cost financing to encourage the establishment of new U.S. manufacturers in order to increase the proportion of American-made renewables in the projected U.S. build-out.
Increasing the availability of reliable and secure hardware: A prospective 5G equipment
start-up is looking to increase production of 5G network infrastructure equipment. But, it has had difficulty obtaining the late-stage finance necessary to commercialize its technology, a long-standing issue that has driven numerous American manufacturers overseas. A contract manufacturer is wooing the business to relocate its production to Asia. In order to solve this problem, CSCRP offers a direct loan for a portion of the scale-up requirements and a loan guarantee for the remainder.
The federal government needs to be better prepared to anticipate potential disruptions and have the resources at its disposal to lessen their effects on the American workforce, customers, and economy. One company or industry cannot predict or appropriately address the impacts of a cascading supply chain shock on the global economy on their own. The federal government can monitor, foresee, and react to economic, geopolitical, and climate-related shocks by taking a comprehensive approach to the industrial base and supply networks that are essential to US economic and national security. In order to boost our country's long-term economic competitiveness, our national security, and to advance the President's 21st century industrial plan, the CHIPS Act and the CSCRP are two crucial initiatives. Preventing the next global supply chain catastrophe in the first place is the key to solving it.
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