The Supply Chain Crisis Isn’t Going Away

Hannah Kain, CEO of supply chain management company Alom, shares her analysis of how we got into the supply chain crisis and the larger story it reveals about trade wars, labor shortages, and the need for better automation systems. 

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Episode Transcript

Speaker 1 (00:15):
Pushkin from Pushkin Industries. This is Deep Background to show
where we explore the stories behind the stories in the news.
I'm Noah Feldman. One of the important stories that's come
out of COVID is the disruption of the global supply chain.

(00:37):
If you've recently tried to buy a new car or
some furniture, you know all about this problem. The system
of making and distributing goods around the world is not
working quite the way we're accustomed to it working, and
we're not exactly clear on how to fix it. For

(00:58):
today's show, we wanted to speak to someone could explain
what's going on to us and deepen our understanding and
knowledge of this headline topic, supply chain disruption. I'm very
glad to say that our fantastic team here at Deep
Background found someone who could do exactly that. Hannah Kane
is the founder and CEO of a Loom, a global

(01:21):
supply chain company based in California. She has decades of
experience in supply chain management, and I'm going to talk
to her about what's causing supply chain slowdowns, what we
should think of the supply chain as actually being the
role that government has to play in this and how
we make our way out of it over time. Hannah,

(01:48):
thank you so much for joining me. So, when we
entered this COVID world, many people who were consumers spent
exactly zero time ever thinking about the words supply chain.
I'm sure if one ran any kind of a company
that made a product, these were everyday, day to day concerns.

(02:09):
But the sense from the end consumer's perspective was it's
all under control, right, We're convinced there are people out
there like you who are expert in it, who keep
it all flowing, and the rest of us just didn't
worry about it very much. Then COVID came and suddenly
everyone noticed that we were interdependent on one another in
a very complex set of ways. And then people started

(02:31):
using the words supply chain problems to justify almost any change.
Was there a particular feature in your view of the
COVID disruptions. Are there specific moments or events that you
could point to as inherently transformative that sort of put
your topic on the front page or was this just

(02:53):
a slow, gradual thing that the rest of you were
following the entire time and the rest of the world
only noticed it because of these events well, it's a
little bit of both. So for a long time we
have been teaching at the edge of the ABYSS when
it comes to supply, and many of us have already
wasted flags because things like infrastructure has been totally underserved.

(03:18):
When you look at at our population growth, we are
essentially in the US thirty three percent more population over
the last three decades, and we're allmost invested in the
new infrastructure. And that is a huge problem because we
know that the demand is going up, but in the

(03:40):
end we need to have the infrastructure to keep up
with that. So we knew things like infrastructure was the problem.
We also know that regulations are exploding. And when I
say regulations, it's things like how do you get product
from point A to point B. You've got to get
it out of one country into another country. The bureaucracy

(04:04):
and the regulations concerning that keep increasing. We are at
a trade wall with a number of different open countries,
and that trade those trade walls really heavily impact the
supply team. So all of this is not really COVID related.
You know, we saw it coming. We've been dealing with

(04:25):
it for a long time. Edge of the ABYSS is
a very strong formulation. And it's fascinating because I mean,
of course it's going to leave it to ask you
whether we're now in the ABYSS or whether we're still
clinging to the edge of it. But before I ask
you that infrastructure, do you mean give some examples? Do
you mean ports where products arrive, roads where things are

(04:46):
carried by trucks, railroad? What are the features of infrastructure
in the US that seemed particular lead to have been
teetering on the edge of the abyss to you? I
think pots are a really good example, and that's mainly
the seaports. We also have some restrictions on our airports,
restrictions on planes and trock limitations. We certainly have a

(05:11):
big crisis when it comes to a number of truck drivers.
We simply have two few truck drivers. And this already
started and had become an issue before COVID. But what
happened with COVID was really that all of a sudden
we saw a big demand shift. Demand switched to home partucts,

(05:31):
shift to shifted to different parduct types, and and all
the travel money went away and instead it was used
on getting a new, more fancy home television home set
up for your home office, etc. And all of a
sudden that demand shift happened. So that was a really

(05:53):
big supply chain event that happened in the beginning of
the pandemic. And then you had the other The other
problem was that you had the disruption and the labor
and that was a global issue. So those two issues
to get have made it now it's too complex. So
if you think back a couple of yes, you could

(06:16):
probably do a fodcast that was ninety percent great. You
could probably plan for ninety to ninety eight percent of
all events that were going to happen. And here during
COVID we have been lucky if we've been hitting fifty
sixty seventy percent great focast. And then when you look
at what the SAT mean and supply chain, it means said,

(06:37):
you're buying the wrong thing. I want to talk about
the demand shift and I want to talk about the
labor disruptions, both of which I think are hugely fascinating
and important, and also both of which are relevant to
the question of inflation. But I also want to ask
you about how unique the United States is with respect
to these infrastructure problems, because in other places in the
world that at least I traveled to. Back when we

(07:00):
traveled more, it struck me that, at least at a
superficial level, the infrastructure seemed much fresher, much newer, and
much more updated than in the US. I don't just
mean Western European countries, where Americans who are accustomed to
traveling to those countries in the last thirty or forty
years are accustomed to seeing the infrastructure as being really
superior to US infrastructure, but also in countries that one

(07:23):
might have thought of as developing countries, some of which
are not so developing anymore and are are pretty developed,
but some of which are really still very much developing countries,
which still looked like they had newer airports, newer roads.
I'm not an expert in seaports, but you could drive
by and see large, functioning seaports that looked like they
were fancier than the ones that we see, at least
in the northeast. Am I right to think that the

(07:44):
US lagging behind an infrastructure is pretty distinctive? It is.
It most definitely is, and certainly I mean the physical infrastructure.
We're definitely lagging, and especially compared to some of the
growing Asian nations. There are some great standouts in Asia
where they built infrastructure and in a very impressive manner,

(08:08):
China Coast in one of them, Singapore, Japan to a
very large extent. And then there are some countries that
are lagging behind, and we are seeing as we already
pre pandemic, we saw a shift away from China with
shifting productions to a country like Vietnam where also the
infrastructure is really lacking and companies have their product get

(08:31):
stuck in Vietnam because they cannot get it moved, they
cannot get it out of the country, and so it's
a course of board. Infrastructure really important and it's an
important consideration when you design your supply team. Where is
the infrastructure that can really help you. Another area where
the US is, of course lacking, is in the technology.

(08:53):
We are not nearly as advanced as some of the
top players within broadband and speed of the networks and
for that matter, coverage in remote areas. So that's another
area we need to work on. You mentioned, and the
regulatory barriers to smooth supply chain operation. The trade wars

(09:16):
I sort of can account for. I personally don't believe
they're rational. I don't think they're helping for the most part,
at least in the United States and the trade wars
that we've started in recent years. But at least I
can understand where they come from. Right, there's a domestic
sentiment that says we're getting taken advantage of by other countries.
There are interests domestically that imagine that it will lead

(09:36):
to more US jobs. There's not a lot of evidence
that always happens, but at least you can understand the impulse.
But what about the other kinds of regulatory barriers that
you mentioned. I mean, what's in it for the regulators?
Who is asking for greater regulatory intervention in ordinary effective trade? Well,
let me give you a couple of examples. California decide that,

(09:59):
in order to get products from the ports and into
the country, use something called yage. Those twyage trucks have
traditional in the most polluting trucks on the road, and
California decided that you cannot use trucks that are older
than yet two thousand and eleven to move products from

(10:21):
the port. And that regulation then meant that many of
the truckers simply could not do it, could not move
that product. And so that's a small part of the
port crisis, but certainly it happens. And I think we
all have the sympathy for the environmental regulations that we
don't want polluting trucks out there, but this is an

(10:43):
example of where where the balance may shift and it
may become more difficult. Another type of regulation is hope
for social responsibility, where you can say child's labor, we
don't want any child's labor or other human rights abuses
in the supply chain, and had then creates some intrigacies

(11:05):
in where you place the supply chain and how you
are able to run. So there's a lot of regulationship
are very important in many ways, but certainly they impact
a supply chain. We'll be right back, Hannah. You spoke

(11:30):
of the demand shift that happened at COVID when suddenly
consumers didn't want to buy the same things they previously
wanted to buy. I recognize that that can cause problems
for the supply chain. If I'm running a company and
I suddenly need some product that I didn't otherwise have,
and where I need more of something that I had
a little bit of, is it fundamentally a supply chain

(11:53):
problem though, or is that fundamentally just the kind of
economic problem that sometimes arises, right? I mean, if we
said that there is a change in supply of a
product or a change in demand of a product, those
seem to be underlying economic forces that they impinge on
the supply chain, but they don't seem to be answerable
as it were, just via the supply chain. Well, it
certainly it becomes the supply chain problem because you need

(12:16):
to be able to produce what the consumer wants in
the end. That's what it's about, is producing what is
needed and getting it to the location where it's needed.
And so when we saught the demand shift, of course
companies have to respond and it creates a lot of
problems when we have these big swings. As we saw,

(12:37):
the swings are becoming bigger over time, and it's a
very interesting thing. I think social media is driving a
lot of the demand shifts. That many people go and
buy what others seem to be buying, and so you
get these big shifts, and of course they need to
be produced. What also has happened over time is that

(13:00):
we as consumers have gotten really spoiled when we get
it in any type, configuration color it said right that
we want. And one of the ways companies have tried
to minimize complexity and focus on at least getting product
out in the supply chain is to cut down on

(13:20):
the number of selections. And you see that a little
bit when you're out shopping, that there's a little bit
less selection these days than they used to be. Not
that we are suffering any big card shifts, but it's
a good way to decrease the complexity. And complexity is
really a big issue in supply chain right now because
the systems cannot handle it, and because there's so many

(13:44):
unexpected events, and supply chain professionals are joggling all these
balls in the air because of those shifts. The complexity
also seems to be part of our current moment of consumerism,
where I not only understand that if I go to
the shop, the product that I want may exist in
ten colors, but I expect it to exist in those

(14:05):
colors as well, and that's sort of what keeps me
buying in some sense, at least to the low end
of expenses. But when you gave that answer, which is
totally fascinating to me, I had this feeling that maybe
people are using the words supply chain is kind of
an excuse to kind of catch all excuse that, at
least for some consumers, I think, I include myself here
might be misleading. So you know, it's been COVID. I've

(14:26):
been sitting on my couch a lot. My couch isn't
very good. It's time for a new couch. So I go,
this actually happened to me recently. I go shopping for
the couch and they say, oh, for that couch, the
weight will be you know, nine months. And I say, well,
oh my goodness, that seems like a long time to
wait for the couch, and they say, well, supply chain.

(14:47):
Then they also say, but actually there is one color,
and if you get that couch in this one color,
we actually do have those, and those are in the
warehouse and you can get those. Now, I guess it
is a supply chain question. You're convincing me that everything
is a supply chain question, because if they have something
in the warehouse and I can get it, that means
the supply chains has sent it here and it's functioned correctly,

(15:07):
and if I'm willing to buy the product, you know,
even if it's not the color that I would have
first chosen. Pretty good, right, It's a pretty good outcome.
The year weight for the sofa or the couch and
the color that I would have wanted. Seems to be
that they're using the word supply chain as a shorthand
for We had no idea so many people were going
to want to buy sofas, and so it takes a

(15:30):
while to make the new sofas. And we also have
to hire people. You spoke about labor. We have to
hire people in the factory wherever that is to build
these sofas, and we need to hire truckers so that
the sofa can be transported, and if it's coming internationally,
it has to come in through report. But they're using
supply chain effectively as a grab bag to mean all

(15:50):
of those things, and I think too many consumers, at
least to myself, it sounds like they're saying, oh, it
just takes a long time for it to get here,
or something like that, or you know, there was a
particular part of the fabric that we can't get enough
of because people want that. But the reality seems to
be that they just didn't anticipate that there would be
the kind of demand that there is, and they can't
be blamed for that. I mean, no one could have

(16:11):
anticipated we would all spend such a higher percentage of
our days sitting on our couch than we previously did.
But it sounds like the words supply chain are covering many,
many different causes of delays. That is correct, and that's
because I gained the supply chain is ultra complex and
there are many different places where you can have and
currently you have delays in the supply chain. And so

(16:35):
what supply chain professionals do is they try to work
around these delays and try to circumvent them. But you
can only do so much. If we step back and
look at this over a long time and sort of
from a more macroeconomic standpoint, what has happened over the
last thirty years is we have driven cost of manufactured

(16:59):
goods down and down and down, so it's now cheaper
than ever to buy a thing, and that's of all
a good thing. That downside that we are seeing now
is as we are producing cheap things in cheap countries
and cheaper countries and driving down the manufactured cost, we

(17:20):
are increasing the risk and we are also increasing the
supply chain cost, the supply chain cost of transportation and customs,
cleerens and all of those type of things, and governance
for that matter. So that's what we're seeing right now,
and explosion and those costs. It's not really that the

(17:40):
things are getting much more expensive to manufacture. It's all
the extra supply chain cost, and we are seeing the
increased problems in managing that complexity. So I'm sorry you
have to wait for your sofa. I can't help you
get it there far. I just I just took the
one color they had in stock because I didn't want
to wait a year for za. You know, I was
a good soldier at least with respect of that decision. Labor, So,

(18:06):
labor cost is obviously an important part of making anything
and an important part of transporting anything. And as you mentioned,
manufacturing costs have been going down, and some of that
is by pushing down wages in some places and times,
but more of it is by gaining efficiencies from other aspects.

(18:26):
Right now, at least in the United States, the cost
of labor is very high for complex reasons that no
one fully understands. That that that I have to do with
people coming back from COVID and deciding they're not going
back to the jobs they were in before and they
don't wish to participate in the official economy in that way.
When you think about labor in its relationship to the
supply chain, how do you think of that. I think

(18:47):
it's a course abort. So we already, as I mentioned,
have a labor crisis, ongoing labor crisis in truck Trucking
has been an area where we have seen a lot
of retirement and not a lot of new people coming in,
and so that has been a big concern for a
while and been talked about for a while. But you're right,

(19:10):
what we're seeing right now is an emotional shift where
everybody is asking themselves whether they're working the right job
and whether they want to do something different, and it's
certainly impacting the supply chain big time. You're also seeing
an increased need for staff in the supply chain, so
a lot of the workforce have shifted from retail to

(19:35):
supply chain. So we're buying more and more online, We're
getting more and more shipped to our homes, so people
move from retail into warehouses. There's a big move to
automate much of what's going on and the supply chain,
but there's still we still need labor, and so I
am very concerned about the inflation that we are seeing

(19:58):
and the inflationary pressures coming from the labor as well
as inflation or materials and components coming in and for
that to finish good, so the cost is just going
up tremendously. I think we are going to see the
supply chain crisis continuing for another several years. And I

(20:20):
think supply chain issues are going to stick with us
for a while until we get the infrastructure fixed, until
we get more automation in the supply chain, until we
get better systems to be able to handle with all
the exceptions that we deal with in supply chain. So
definitely a lot of big investments need to happen and

(20:44):
development needs to happen before we are in a position
where we can say supply chain is just humming it all.
So what I'm hearing you saying is that the process
of not only manufacturing but of delivering things is a
process that is still very human intensive. Right, Maybe someday
we'll have automated trucks, but we don't have automated trucks.

(21:06):
Maybe someday we'll have a way in a fully automated fashion,
and to take the products off the ship at the
port and put it onto the trucks or the trains
and get it from place to place. We don't. We
still require human beings to participate in this. So I
guess the question I want to end with is, when
you say, you know, well we need more automation in
this space, how fast can that happen and how good

(21:27):
will that be? Are these jobs that can be replaced
by automation as opposed to by humans, at least in
the foreseeable future, and will that lead to the opposite effect,
an effect where many many people whose jobs depend on
being the human beings who operate the supply chain find
themselves desperately needing some other kind of work, much as

(21:48):
we've seen in manufacturing, where many relatively good blue collar
jobs went away, and to the extent they're replaced, they're
replaced by much less appealing surface sector jobs. I mean,
is it basically the case that that's going to happen
and elsewhere in the supply chain as well. It just
hasn't happened yet. I am a firm believer that automation

(22:09):
and it's not a bad deal, and that it's all
about how we transition the workforce. I don't see right
now that we're going to have a surplus workforce. I
see that we are very much in need of more workforce,
and I think that trend is going to stay with
us for a long time. And the other thing we
can do, apart from, of course, automation, is to go

(22:31):
in and say, maybe we can do more near sourcing
and not have to transport products so far distances. We
are seeing that right now, corporations are coming in and saying, Okay,
we have so much cost in transporting all these goods around,
maybe we can buy some of them locally where we

(22:53):
need them and closer to the market. And so that's
called near sourcing and a really strong strategy from a
sustainability standpoint. But also it takes risks down. The closer
you are to the less, the less can go wrong
in the supply chain, and so that may be a
possible opportunity for small and mid sized companies also to

(23:16):
come in and play a stronger role in the supply chain.
So there's a lots of good things that could come
out of this as cooperations, A reevaluating their supply chains.
And I want to thank you so much for educating
me and our listeners and for the fascinating and important
work that you do. And I guess I want to

(23:38):
apologize on behalf of all of us for not paying
enough attention to the significance and importance of supply chain
affairs until suddenly we experience disruptions. Thank you very much,
Thank you. We'll be right back. Talking to Hannah Kane

(24:03):
brought home some reality to me that I truly did
not anticipate before speaking to her. Maybe, like a lot
of you, I've mostly taken the excuse supply chain delays
to be a reasonable explanation of the difficulty in getting
goods to market in the time of COVID. But as
Hannah argued, we were on the edge of the abyss

(24:25):
her striking phrase even before COVID happened. In other words,
the global supply chain was already extraordinarily delicate, and as
population grew, regulation not only the good kind, but also
the kind that comes with trade wars, was increased, and
as our infrastructure above all continued to degrade. In the

(24:47):
United States, we were already, without quite knowing it, in
a position where the slightest disruption to our regular economy
could really break the supply chain in a range of ways.
At the same time, just in time, servicing had made
us expect to get things when we wanted them, how
we wanted them, in a way that was probably ultimately unsustainable.

(25:11):
It follows from this that the major shifts of the pandemic,
the demand shift, the labor shift, and other challenges, we're
just really the straw that broke the camel's back, albeit
a rather a large bale of straw. That means, according
to Hannah, that we're not going to see a rapid
turnaround or a set of improvements in the global supply

(25:33):
chain just because things begin to get back to a
new normal post COVID. Instead, we're going to have to
actually build better infrastructure. We're gonna have to engage in
a rationalization of our trade policies if and when that
actually happens. We're gonna have to develop norms appropriate to
a consumer economy where we can't always expect to get

(25:55):
everything we want magically when we want it. And most troublingly,
according to Hannah, we also need substantial automation through the
supply chain. As you heard That's a little worrisome because
the kinds of jobs that the supply chain historically supported
in transport were at least sometimes relatively good blue collar jobs,

(26:16):
many times unionized jobs. If those are going to go
away as part of the rationalization of the supply chain,
it means further problems of the kind were already familiar
with as manufacturing jobs have gone away. That means that
making the global supply chain hum again is going to
have distributive effects in our real economy, distributive effects that

(26:39):
we have to develop good policy solutions to address in
a manner that is fair and just. Regular listeners of
this podcast know that I am no MBA, and I
have the feeling that my ignorance of the everyday processes
of how a business transports things around the world was
particularly in evidence today. But maybe for that reason, I

(27:01):
found this conversation especially powerful and especially illuminating, and I
certainly appreciated Hannakane's extreme clarity of analysis and purpose. Until
the next time I speak to you, breathe deep, think
deep thoughts, and have a little fun. If you're a
regular listener, you know I love communicating with you here

(27:23):
on deep background. I also really want that communication to
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(27:44):
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Editorial support from noam Osband. Theme music by Luis Gara

(28:09):
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