Why are supply chains broken? Blame it on the “black swan” tsunami: Sarah K. Rathke

CLEVELAND – It’s 2021, and the lingering question of our age might just be, “Where’s my patio furniture?” American consumers know everything looks broken, but may not fully understand why. Indeed, President Joe Biden said many publicly last month when he encouraged the media to improve their coverage of supply chain issues.

We are in the midst of a “black swan” tsunami in the supply chain. A black swan event is defined as a negative event that is virtually impossible to predict even by knowledgeable experts. COVID-19 has produced several black swan events – all of which are happening at the same time – that have fundamentally changed the transparent workings of global supply chains.

Before COVID, supply chains were based on two separate operating preconditions. The first was “just-in-time manufacturing,” whereby companies maximized their economic output by eliminating excess inventory throughout their supply chains. Typically, companies could determine how much of whatever was needed by referring to reliable historical analyzes that were stable over time.

The second prerequisite for the functioning of the supply chain before COVID was the prevalence of a relatively harmonious global free trade, which developed after the end of the Cold War. Free trade is why consumers today can buy more of almost everything at lower prices than ever before.

The COVID-19 Black Swan Tsunami disrupted both of these preconditions for operation, leaving us in uncharted and dysfunctional territory.

The Black Swan’s first upheaval concerns fundamentally altered consumption patterns, caused primarily by people spending more time at home. This shift has shifted the cost of the last mile of delivering products to retailers, but consumers expect product prices to stay the same nonetheless.

The second disturbance of the black swan concerns the modification of manpower resources. When COVID-19 hit, the United States was halfway through baby boomer retirement, and most of the time in transition to a service-based economy. COVID-19 has accelerated both of these transitions. In addition, with childcare services becoming less and less reliable, COVID-19 has forced a massive withdrawal of parents and in particular women from the labor market.

COVID-19 has also strained our global logistics networks – the third black swan-related disruption COVID-19 – from unprecedented port congestion, to a record need for transport workers, to insufficient warehouse space.

Sarah K. Rathke is a partner at the international law firm Squire Patton Boggs whose practice focuses on supply chain and litigation issues.

The latest disruption of the black swan concerns diplomatic relations with the United States, and in particular with China. And while the United States has experienced periodic cold spells with China, this one will likely be more permanent.

China’s rise in manufacturing since the 1980s has enabled it to improve the economic well-being of its people. However, China is engaging in certain behaviors that the United States doesn’t like – and shouldn’t – like. Meanwhile, China’s economic prosperity has driven up its labor costs, making it less competitive as a foreign manufacturer. On the other hand, China’s successes have created a strong consumer market for China, and Chinese President Xi Jinping has made it clear that China intends to start prioritizing its own consumers – undermining the idea that we will one day return to “normal” with post-pandemic China.

It’s not often that people on the verge of a historical inflection point know they are on the verge of a historical inflection point, but now we seem to have that awareness. Returning our supply chains to functionality will require improvements in automation, possibly starting with the warehousing industry, and increased transparency of end-to-end supply chain information. The technological underpinnings already exist for both of these developments, and the cascading effects of these improvements are likely to be substantial – and likely produce their own black swan impacts.

Sarah K. Rathke is a partner in the Cleveland office of international law firm Squire Patton Boggs whose practice focuses on supply chain and litigation issues.

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