Re: Supply Chain Management Chopra Test 15
Niki Wienberg
We see many companies struggling with the challenge of building resilience in a cost-effective manner. Questions arise: Where and to what extent should we strategically stock inventory? Which segments of our supply chain warrant dual sourcing? This is where the practice of stress-testing supply chains becomes invaluable, as it allows companies to:
Incorporating stress-testing into supply chain management is a proactive approach that empowers organizations to anticipate and counteract potential disruptions. To effectively execute this strategy, a systematic and well-defined process is crucial. Stress-testing the supply chain should not be seen as a one-off exercise: as your supply chain evolves and new risks emerge, supply chain stress-testing is a continuous process that keeps on going.
We offer a range of supply chain stress-testing services to help your organization identify vulnerabilities, quantify the impact of disruptions, develop effective mitigation strategies, and embed them into your S&OP process.
Our team has extensive expertise and experience in supply chain modeling, simulation, and optimization, and we use advanced tools and techniques to analyze your network and identify potential risks. We furthermore bring years of business expertise to the table. We work closely with you to develop customized stress-testing scenarios that simulate various disruption scenarios and help you understand the potential impact on your operations. Our team then works with you to develop and implement mitigation strategies to build resilience and future-proof your supply chain.
Whether you need a one-time stress test or ongoing support, our team is here to help. Learn more on how we can support you on this page. In case of specific questions, feel free to reach out to Dina Smirnov for more information or get in touch with us here.
Economic shocks caused by the Covid-19 pandemic severely disrupted global supply chains. At the same time, Covid-related shutdowns rapidly rotated consumer demand towards goods and away from in-person services. This collision of pandemic-induced supply shocks and strong demand for goods generated inflationary pressure across the global economy. As suppliers were unable to meet elevated demand, the true cost of highly-efficient, but fragile global supply chains became clear.
A growing economic literature shows that supply chains can be made more resilient. For instance, supply chains that rely on a broader diversity of input suppliers are more easily able to switch to alternate suppliers in the event of a concentrated shock to a large supplier (CEA 2022; MacDuffie, Fujimoto, and Heller 2021; Chopra and Sodhi 2014). As the pandemic faded, supply chains have improved. This issue brief documents this progress and describes ongoing efforts to prepare for future economic shocks by strengthening and diversifying supply chains.
Data presented below demonstrates that actions taken by the Biden-Harris Administration have helped to hasten supply chain normalization and put downward pressure on prices. After defining supply-chain resilience, this brief highlights existing areas where a lack of diversification could lead to increased fragility. The brief then describes current policy efforts to increase supply chain resilience, including through partnerships with allies that have already reduced bottlenecks and increased the diversity of inputs. Finally, it highlights the need to increase data availability for monitoring the health of supply chains.
Connectivity across global supply chains can threaten resilience because networks can, under some circumstances, propagate individual shocks across the broader economy. Economic research has long been clear that deeply intertwined supply chains can turn micro disruptions into macro-level effects (Acemoglu et al. 2012). Research has explored, for example, the fragility of supply chains and how disruptions at one firm can extend across the economy, and how diversified inputs and strategic sourcing can make supply chains more robust (Acemoglu and Tahbaz-Salehi 2020; Elliott, Golub, and Leduc 2022).
During the global pandemic, it became clear that global supply chains were propagating micro shocks into macro-level effects. For example, individual firms halted operations due to the spread of COVID-19, which created sectoral supply shocks that drove up prices. In the transportation and logistics industry specifically, a series of supply chain disruptions and delays at ports during the pandemic led to historically high prices for imports to the United States during the pandemic. At their highest point, spot shipping prices for containers coming from China to U.S. West Coast ports skyrocketed to more than 1000 percent of 2019 levels (see figure 1). The inflationary effect from the supply side was compounded by elevated demand pressures as consumers directed their spending towards goods, not services (Giovanni et al. 2022).
The correlation between supply chains and inflation can be seen in the Global Supply Chain Pressure Index, produced by the Federal Reserve Bank of New York, which tracks both headline and core goods inflation in the United States and the Euro Area (Giovanni et al. 2022; Council of Economic Advisers 2023). As shown in figure 2, the index grew sharply over the first year of the pandemic, reaching its highest-ever recorded value in April 2020, only to rise to an even higher peak by December 2021 (Federal Reserve Bank of New York). Since then, the index has come down significantly. In October 2023, it fell to 1.74 standard deviations below its historical average.
Recent research estimates that sectoral supply chain bottlenecks were responsible for a significant share of total observed U.S. inflation from 2021 to 2022 (Comin et al. 2023, Giovanni et al. 2022)). Santacreu and LaBelle (2022) also estimate that supply chain disruptions during the pandemic were a large component of cross-industry inflation for producers.
It is likely that both domestic and international diversification is required to increase the resilience of supply chains. Increasing supply chain diversification is distinct from boosting U.S. production capacity, although the two can work together to promote common goals. For example, Bonadio et al. (2021) finds that global diversification is critically important during a nationwide shock which may limit key domestic inputs.
The public sector has an important role to play in improving supply chain resilience. Legislation can prioritize investments in supply chain resilience in targeted sectors that are critical to national and economic security and have large spillover effects, including semiconductors, energy production, transportation, and health. Supply chains cross international borders, and the public sector is uniquely capable of facilitating international cooperation to prevent or mitigate economic shocks and increase the ability to substitute inputs in the event of supply chain disruptions (Council of Economic Advisers 2022).
The reviews revealed vulnerabilities in a number of key industrial sectors due to supply chain concentration. For example, for each of the key battery material inputs lithium, cobalt, and graphite, a single country controlled at least 60 percent of one or more stages of global production (Department of Energy 2022). In semiconductors, 88 percent of semiconductor production occurs overseas, reflecting a decline in U.S. manufacturing capacity over time (Department of Defense 2022). Similarly, the Department of Defense identified 37 critical minerals where more than half of global production relied on a single country (The White House 2021).
Based on the supply chain reviews, the Bipartisan Infrastructure Law, the CHIPS & Science Act, and the Inflation Reduction Act were passed and signed into law by President Biden to address key supply chain vulnerabilities. Together, these laws have leveraged public-private partnerships to spur private sector investment in domestic manufacturing and its raw material inputs. As of November 2023, private companies have announced more than $614 billion in planned investment in industries including semiconductors, electric vehicles, and batteries. These commitments are translating into tangible spending. For instance, compared to January 2021, inflation-adjusted spending on construction of manufacturing facilities had nearly doubled by September 2023.
The Biden-Harris Administration worked in partnership with Congress to put in place new legislation to alleviate specific supply chain disruptions and promote greater resilience in the future. Prior analysis has shown that international shipping costs can translate into broader U.S. inflation (Sly et al. 2016). In June 2022, President Biden signed the Ocean Shipping Reform Act to address port and ocean shipping challenges. The legislation allows the Federal Maritime Commission to introduce a ban on unfair and discriminatory practices for shipments and authorized the Bureau of Transportation Statistics to collect additional data about dwell times at various ports, among other provisions. Following these legislative reforms and other Administration efforts to promote competition, ocean shipping prices have normalized to 2019 levels after their 10-fold increase during peak bottlenecks, coinciding with declining goods inflation in late 2022 (see figure 4).
The Biden-Harris administration is working in partnership with global partners and allies to build resilient supply chains across a globally integrated economy. In 2021, President Biden held a Summit on Global Supply Chain Resilience with partners from the European Union and 14 other countries to discuss opportunities for collaboration on embedding resilience into global supply chains.
The United States has prioritized engagement with allies on critical supply chains, including those relevant to building the clean energy economy. In particular, critical minerals and materials will be essential for a variety of clean energy technologies, including batteries (for EVs and energy storage), solar modules, and others. The United States developed a Minerals Security Partnership with Australia, the United Kingdom, the European Union, South Korea, and others to mobilize private sector investments in projects to support mining, extraction, processing, and recycling of these critical minerals that enable the transition to zero-carbon energy. Also, the United States is engaging in bilateral negotiations with countries to develop critical minerals agreements, like one signed with Japan in 2023, to promote a more diverse supply chain by lowering trade barriers.
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