14 Supply Chain
Smith
Ocean freight costs alone add 5% to 10% to the cost of everything we buy, and remember, 90% of the stuff we buy is shipped on a container ship. The globalized supply chain and shipping containers have brought down the cost of shipping goods and manufacturing by close to 90% over the last 50 years.
In America, the ports are owned by the local city that they’re in. Therefore, they’re not managed as a strategic national asset, which they clearly are.
We’ve under invested in our supply chain infrastructure for over 20 years.
In hindsight, the signs were there for years. Almost no logistics companies can show you where your freight is in real-time on a map. Most data is exchanged in unstructured email messages with attachments. There are almost no logistics APIs to speak of.
We’re going to get sub-optimal outcomes if you don’t invest in technology. If we don’t have robotics, if we don’t have systems that are better at managing appointments for managing pickups and returns of containers at ports, if we don’t have better safety mechanisms (some of these are incredibly hazardous jobs and robots would be far safer), it’s going to take many years, not months to fix this crisis. Technology and automation have helped modernize and increase the efficiency of ports in other countries like the port of Rotterdam in the Netherlands, but that’s because it’s managed as a strategic asset for the country. It has been a fully automated operation for over 20 years so the technology exists, but we still have a lack of investment to implement those changes in the United States.
N.S.: What should the Biden administration have done to overwhelm supply chain bottlenecks early on in the crunch? What should the administration be doing now?
R.P.: I think many of us imagined that we live in a world where there’s a wizard behind the box. That there’s actually somebody in charge of all of this, and that that somebody must have made a mistake. And of course, it must be the president of the United States. But that’s not actually the world that we live in. It’s a market-based system. We’re lucky to live in an economy that’s built on the principles of free enterprise, and so while it’s easy to cast blame and point fingers at the administration, we have to recognize that they’re not really in charge of all of these things. They didn’t create this situation and I’m not 100% convinced that they’re the ones that are going to be best equipped to solve the problem.
N.S.: Was the global economy simply over-engineered? Did we optimize supply chains for efficiency at the cost of resilience, like a machine with tolerance gaps that are too small? And if so, should we recalibrate going forward, to leave more slack in the system in case of future crises?
R.P.: In my opinion, what’s caused all the supply chain bottlenecks is modern finance’s obsession with Return on Equity (ROE). To show great ROE, almost every CEO stripped their company of all but the bare minimum of assets. “Just-in-time” everything with no excess capacity, no strategic reserves, no cash on the balance sheet and minimal investment in R&D. We stripped the shock absorbers out of the economy in pursuit of better short-term metrics. Large businesses are supposed to be more stable and resilient than small ones, and an economy built around giant corporations like America’s should be more resilient to shocks. However, the obsession with ROE means that no company was prepared for the inevitable hundred-year storms. Now as we’re facing a hundred-year storm of demand, our infrastructure simply can’t keep up. And let’s not forget the human aspect of the workforce that makes this all happen. A lot of companies in the industry haven’t invested in taking care of their people, especially during market downturns, so now they can’t staff up quickly to meet surging demand.
The Dutch government has pushed for infrastructure innovation for decades and has a great working relationship with unions and employers through a polder model, which is based on consensus. This effort was started in the eighties. They used the polder model to successfully implement solutions developed by Delft University of Technology.
There were two reasons they were able to accomplish this:
The Port of Rotterdam, a government-owned commercial entity running the port, had this vision way before other countries did as logistics is a key source of GDP in the Netherlands.They had a proper, documented approach to getting buy-in from multiple stakeholders through a polder model. The polder model is a method of consensus decision-making, based on the acclaimed Dutch version of consensus-based economic and social policy making in the 1980s and 1990s. The model is characterized by the cooperation between employers' organizations, labor unions and the government with a central forum to discuss labor issues (with a long tradition of consensus). This model helped them defuse labor conflicts and avoid strikes. Similar models are used in Finland.
We should really explore why the U.S. can’t do what many mature and rapidly-growing economies already have. Big structural changes are hard to make, but we should at least start somewhere. For example, new technology can be used to eliminate appointments at terminals and allow truck drivers to just show up and take the first available container with a mobile app telling them where to go. We’ve already built this technology and it’s ready to go right now and we believe it could clear the backlog at the Long Beach/Los Angeles ports within 30 days. However, it requires changes to contracts of who’s responsible for picking up which container and a lot of coordination between the private sector, trucking companies, importing businesses, warehouses, ports and ocean carriers. This type of coordination is inherently difficult for the private sector to coordinate, where each is looking out for their own best interests.
Smith (2021) Interview: Ryan Petersen, founder and CEO of Flexport