What Went Wrong?

What Went Wrong?

Global supply chain delays are something everyone has heard about or experienced firsthand. Yet it’s a subject that very few are familiar with beyond a superficial acquaintance.

Most people think the supply chain is just part of the global economy. That’s not entirely true. The supply chain is the global economy. There isn’t a single good or service of any kind offered to you that doesn’t arrive through a supply chain. Not one. If the global supply chain is broken, then the global economy is broken. That increasingly appears to be the case.

Supply chains — what could go wrong?

Most people have some notion of how supply chains work, but few understand how extensive, complex, and vulnerable they are. If you go to the store to buy a loaf of bread, you know that the bread didn’t mystically appear on the shelf. It was delivered by a local bakery, put on the shelf by a clerk, and then you carried it home and served it with dinner. That’s a succinct description of a supply chain — from baker to store to home.

Yet that description barely scratches the surface. What about the truck driver who delivered the bread from the bakery to the store? Where did the bakery get the flour, yeast, and water needed to make the bread? What about the ovens used to bake the bread? When the bread was baked, it was put in a wrapper of some sort — where did those come from?

Even that expanded description of a supply chain is just getting started in terms of a complete chain. The flour used for baking came from wheat. That wheat was grown on a farm and harvested with heavy equipment. The farmer hires labour, uses water and fertiliser, and sends his wheat out for processing and packaging before it gets to the bakery.

The manufacturer who made the oven has his own supply chain of steel, tempered glass, semiconductors, electrical circuits, and other inputs needed to build ovens. The ovens are either handcrafted (engineered to order) or mass-produced (made to stock) in a factory that may use either assembly lines or manufacturing cells to get the job done. The factory requires inputs of electricity, natural gas, heating and ventilation systems, and skilled labour to turn out the ovens.

The store that sells the bread is on the receiving end of numerous supply chains. It also requires electricity, natural gas, heating and ventilation systems, and skilled labour to keep the doors open and merchandise in stock. The store has loading docks, backrooms for inventory, forklifts, and conveyor belts to move its merchandise from truck to shelf.

Every link in these supply chains requires transportation. The farmer relies on trucks or rail for deliveries of seeds, fertilisers, equipment, and other inputs. The oven manufacturer also relies on trucks or rail for deliveries of its inputs, including oven components. The bakery and the store rely mainly on trucks for deliveries of their inputs and the finished loaves of bread. The consumer relies on their cars to get to the store and return home.

These transportation modes have their own supply chains — involving truck drivers, train engineers, good roads, good railroads, rail spurs, and energy supplies — to keep moving and make deliveries on time.

This entire network (farms, factories, bakeries, stores, trucks, railroads, and consumers) relies on energy supplies to keep working. The energy can come from nuclear reactors, coal-fired or natural gas-fired power plants, or renewable sources fed to a grid of high-tension wires, substations, transformers, and local connections to reach the individual user.

Everything described above sits somewhere in a complex supply chain needed to produce one loaf of bread. Now, take everything else in the grocery store (fruits, vegetables, meat, poultry, fish, canned goods, coffee, condiments, and so on) and imagine the supply chains needed for each of them.

Then take all the other stores in the shopping centre (home goods, clothing, pharmacies, hardware, restaurants, sporting goods) and imagine all the goods and services available from those vendors, and the supply chains behind each and every one of them.

So ubiquitous they’re invisible…until something goes wrong

In case you think I’ve exaggerated the components and steps for making a loaf of bread in the above example, I didn’t. The example above is actually a grossly simplified description of the actual supply chain.

A full description of the necessary supply chain would reach back further (where do the seeds for the wheat come from?) and branch off in tangential directions (where do the bread wrappers originate?). A full description of the bread supply chain — with choice of vendor analysis, quality control tests, and bulk purchase discounts, among other decision tree branches — could easily stretch to several hundred pages.

You get the idea. Supply chains may be hidden but they are everywhere. They’re interconnected, densely networked, and unimaginably complex.

With that as an introduction, let’s think about how supply chains break down. The best description is the one Ernest Hemingway wrote when a character in The Sun Also Rises was asked how he went bankrupt. The answer: ‘Two ways. Gradually, then suddenly.’ Supply chains break down gradually at first. Then the collapse can be sudden and catastrophic.

Right now, we’re at about the midpoint of Hemingway’s description and dangerously close to something that could rival the oil embargo of the mid-1970s or the collapse of world trade in the 1930s in its impact.

In my next edition, we’ll look at just how close we are to a supply chain breakdown…

Regards,

Jim Rickards Signature

Jim Rickards,
Strategist, Strategic Intelligence Australia

This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.