Posted on 06/12/2022 6:54:04 AM PDT by FarCenter
Today’s supply-chain policy challenges are a consequence of forgetting that other considerations besides economic efficiency matter, and that hands-on craft knowledge cannot be transmitted online. Unfortunately, problems that have been four decades in the making cannot be solved overnight.
CAMBRIDGE – Starting in the 1980s, transnational production enabled the expansion of global trade and low prices for goods, contributing significantly to economic growth. But the shocks caused by the COVID-19 pandemic and the Ukraine war have shown firms that the efficiency gains implied by the global division of labor – and just-in-time production – come at the cost of resilience. With global supply-chain bottlenecks unlikely to resolve themselves soon, firms have turned their attention to reshoring or at least “friend-shoring,” which seeks to combine closer geographic proximity with greater geopolitical peace of mind.
But turning re-establishing the shorter and more national (or regional) supply chains of a generation ago will be costly in terms of growth. For a hint of just how costly, look no further than post-Brexit Britain’s lack of any post-pandemic trade recovery. The United Kingdom’s independent Office for Budget Responsibility estimates that productivity will be 4% lower in the long run than it would have been had the UK retained its deep trading links with the European Union. The specialization enabled by globalization has brought significant benefits, as many economists (including me) have long argued.
Businesses will adjust to supply-chain shocks in different ways. Some will reshore. Some will find subcontractors in diverse locations. And some may opt for increased automation. The latter two strategies will carry a lower productivity penalty than reshoring, but will involve adjustment costs and new investment. All three options will roll back some of the globalization of the past four decades.
Other firms, however, will not be able to take any of these steps, given the scale and nature of the upstream activities they have outsourced over the years. In some sectors, such as pharmaceuticals and chemicals, outsourced production accounts for as much as 15-20% of total output.
After 1980, there was a substantial shift among companies toward buying components, rather than making them in-house. This reflected the spread of information and communication technologies that made it possible to send instructions and receive feedback instantaneously, along with a management philosophy that emphasized cost efficiency and lean production. Many multinational firms kept high-value activities such as research and development or design in the headquarters’ countries, and sent formulae or blueprints to factories in lower-cost locations such as Malaysia and China. After an initial learning period, these facilities could produce goods at a far lower cost than at home, and often with more consistent quality.
Over time, however, this pattern has generated another hidden cost: the loss of what is often termed tacit knowledge, or know-how, in manufacturing. This refers to the kind of tweaking and learning from experience that never gets written down but happens on every production line. Such insights can provide vital feedback to researchers and engineers, but the feedback is lost when production takes place thousands of miles away.
Ca law messed up the trucking industry....Canada didn’t help matters...totally destructive to our economy. If these first attempts at killing the trucking industry didn’t put you out of business...the $7.00/gal (and more) diesel will do the job.
I must thank the educated elite at Cambridge for in 2022 pointing out to us what we in the trenches have known since the mid 1980s. “Welcome to the party pal”.
I marvelled in the 80s how circuit boards loaded with ICs with all the different countries of origin labels reminded me of old steamer trunks with their stickers.
Never thought that boded well for us.
I am old enough & have worked long enough to clearly remember retail businesses that had ‘warehouses’ of storage room & did INVENTORY on paper cards.
BUY something==ADD to card—by hand—in ink.
Sell something? == Review invoices each night(or next day) & reduce inventory ON THE CARD_-BY hand—IN INK.
REORDER as necessary, based on history of retail sales usage.
THEN-—Everyone lost their mind & decided that COMPUTERS were smarter than persons.
Hasn’t that been wonderful???
This was also made worse by states TAXING inventory on hand on a certain date-—3-1 was common.
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