TALKING SUPPLY CHAINS
A Conversation (again) with Oliver Beige
Supply chains have been in the news a lot lately - because there have been shortages of many important things like food, semiconductor microchips, heating and cooking gas, and even shipping containers. Prices of many commodities have gone through the roof because of these shortages, and policymakers globally are scrambling to find a solution especially with the holiday season coming around. I tried to unpack some of the issues with Decision Scientist Oliver Beige. We also revisit some of the themes from our last conversation (note that this was recorded before the new Omicron variant!). It is always informative to talk to Oliver, and many thanks to him for his time. The transcript for the conversation is available below for everyone.
My guest, who is making his second appearance on the show, is Oliver Beige. He is a decision scientist and, welcome back to the show.
[A] pleasure to be on your podcast.
Yeah. So, the last time we talk pretty much about the pandemic. Mostly about some of the predictions that experts were making about the patterns of infection, and fatality, and so many of the public health implications of that.
But one thing we are now seeing, that as is quite becoming so clear, is some of the other I should say secondary "effects" of some of the measures that were taken because of the pandemic policy-wise.
One metaphor you use which I like so much - it pumps my intuition in all the right ways - is like the lockdown is like telling half of the cars on the route to stop instantly and the other half to just speed right ahead.
You know, and there is a global shortage of so many things. Supply chain is so much in the news now, from shipping costs going up about over 400%, food inflation is high. It's crazy in Nigeria, India is experiencing hunger, poverty has definitely worsened for a lot of vulnerable demography. There is also the issue of joblessness, businesses have gone under.
Again, I'll ask you and this may seem like picking up from the theme of where we stopped the last time. Could some of these problems we are now seeing, which we are going to delve into, could it have been prevented?
Clearly, like most of the policy has been over the last year and a half were not taking this into account. And the analogy you're saying about half of the cars on the highway, like being forced to stop and the other half being forced to speed up - the situation in 2020 was basically a lot of people were calling for a complete shutdown of the global economy until we're done with fighting this virus.
I remember like the prominent German economist, I think, probably two [to] three weeks into the lockdown was making fun of the German government's decision to bring in asparagus harvesters - so [who] usually [do] not come from Germany, they usually come from Czech [Republic] or Poland.
This particular economist [was like] whatever, asparagus is not important enough, we cannot let people in that might bring in the virus or something like that. Of course, very, very, very quickly, we had massive problems on both food production and, of course, we had food shortages very, very quickly.
So we basically had harvests dying on the field, and shortages within the supply chain in between the production and the consumption of things. We have, like, abattoirs and [...], [...], and so on.
So we are very much into a severe food crisis very quickly, and always a predictable food crisis very, very quickly. And so then we had fairly massive measures taken in order to alleviate that [by] giving people money, at least, in the Western world here.
That seemed to have stopped it. And suddenly people had got the feeling really [that] the economy is working again, and we can still buy our car and we can still consume, and people had money to spend and use the money to buy products because there was not a lot of other things they could spend it on. The movie theatres were closed.
So this is the situation. It looked like we're good for a while. Seemed like we had resolved this quickly emerging problem of a stopped economy. And of course, that's not how it works. And we've seen increasing numbers of reports of an economy that is not working anymore, because of the basic things we take for granted like, basically, shipping containers.
The basic things are not where they should be. We not only have severe shortages, we also have the situation where we're piling up empty shipping containers in certain ports, and they cannot be moved anywhere else because we don't have the shipping capacity.
And the current situation that things are not what they should be. Things we take for granted are in short supply which has all kinds of effects on other things. So, basically, we're having a global supply chain that is locking down just in time for Christmas and next year, you know, Chinese new year, sort of the highest capacity, highest load times.
Always the situation in supply chain is that it affects the most vulnerable parts of the supply chain the most. And that is usually the ports part, right? So the ones that don't have the alternatives… if you are a rich participant in a supply chain, if you are a big carmaker [or] something like that [and] you cannot get shipping capacities, you're currently moving your raw materials by airplane. It's more expensive, far more expensive, of course, but you need to stop to build your cars.
The worst thing you can have is... no, the second-worst thing you can have is an almost finished product, 99% of [a] finished product that sits on your parking lot and it's still missing one part. And this one part is like three months away from being delivered.
Companies that are rich enough [and] that can afford it are using any means possible to get these missing pieces. But what we're also seeing now, you have in automotive (it's not only in automotive, it's general but automotive fits very much) is missing microchips.
Microchip supply chain topic is the production topic. We don't have enough production capacity to fulfil demand. But of course, now that we see car manufacturers closing down plants - they used to close down for (a) week[s], now they're closing down for months.
Now you have a whole dependent supply chain that feeds into these plants that had nothing to do with microchips. They're doing whatever... glove compartments, plastic, glass, paint, everything else; they're not being used because [this] particular facility is not producing anymore [and] now they're being affected by this.
And this is the situation we have right now and this is something I've been predicting for a long time, basically, since last February [which] is that we're running into a situation where basically the whole thing goes out of control.
And the one thing I just posted like last week, I think, is Northern Europe, especially the UK is experiencing a gas shortage, which affects flower production. Flowers are usually grown in greenhouses in Europe, and Ireland and UK, apparently.
But they're closing down, which opens an opportunity for Kenya, which is also a flower producer to have less competitors (who are now in the situation to put fewer flowers on the market, of course), but they can't because they don't have the shipping containers they need to bring flowers to Europe or North America.
And this is a situation where basically the whole thing freezes up. I heard for the longest time, especially coming from something like the politically relevant economists said, Okay, "markets tend to self regulate," which is true for most of the time. "All of this is basically driven by capitalism and we should see all of these problems being short term. So we should see all of this to be temporary, and then it is just going back to normal eventually."
Now they have to admit that it's probably not gonna go away anytime soon. Basically, everything I see in global shipping assumes that these problems are with us through 2022 talking 2023 already. So, yeah, this was foreseeable. And it was like a situation where people who did not want to predict this for whatever ideological reason, like, basically, ignoring the pointers we had all along.
That's just depressing. But a bit of a trivia, well, maybe not so trivial question. You work on supply chains, I don't want to name names of some of the firms you work for, but like right now, who are the people calling you the most demanding for your expertise and help [in] understanding or solving this problem? Where I'm going with that question is, where exactly are the bottlenecks?
I don't currently work on a supply chain. This is some, just basically, 25 years of expertise. I think basically, where the most interest comes from right now is actually startups.
I think, of course, from what I see, [a] lot of current procurement managers, also logistics managers, they do everything they can to handle the situation, they're not really the ones that need my expertise. They have, what, 25 years logistics[of] experience, they don't really need me.
But what I see and what I'm trying to help [with] is sort of like resolve the underlying information problem we have and this is not something we can resolve within a couple months. Basically, people who are supply chain bottleneck managers do whatever they can with the tools they have.
Really to give better tools to be better prepared for these crises is all about having the information, shifting information across five, six tiers within the supply chain for someone with at the end of a supply chain to see what's happening at the beginning in order to make better plans. Also, like, if we have a surplus of shipping containers in the Port of Auckland, New Zealand, while the rest of the world is in severe shortage, how can we resolve these problems?
Yeah, this is definitely something that has to happen that I normally don't work on, like trying to come up with quick fixes. I'm usually working with people that sort of try to resolve this in the long term.
So there are two explanations that I've seen in the media and which I want you to help assess. So one explanation goes like [this] "We had the lockdown. Everybody stay at home. You work from home. You order whatever it is you want at home." A lot of countries give stimulus in form of money to households, though we weren't very successful with that in Nigeria, it was a massive failure and had its own problems. But you know, so the theory goes, that demand for most items went through the roof and that is what we are seeing feeding through the supply chain now.
But another explanation goes that what we are experiencing now is the result of economies starting to open up and that is where the surge in demand is coming from and that's why companies are struggling to meet this demand, you know, but usually, I don't see anything about the massive restriction on supply that also was policy during the pandemic, because, companies that had no house delivery capacity basically shut down or went out of business. So, I mean, how do you assess some of these explanations, perhaps there are others that we've seen in the media, from The Economist to the Financial Times to so many people trying to explain this?
They're not mutually exclusive, the explanations. This is probably definitely a combination of all of it that's coming all at the same time.
For one, both on the supply and the demand side, we had an expectation that the economy will shut down for a long time. So people stopped whenever... ordering cars, and then like two, three weeks, months on, they realize that so okay, it's still going on, I can actually order my car. And of course, all the manufacturers have to catch up with this. This has been going on two, three months of no production had to be produced in double triple shifts afterwards.
Stimulus money, the interesting thing is not so much word [about] where the stimulus money went to but where we see it now, which is actually popping up in venture capital. Happy for all the startups that are [a] beneficiary of this money, but stimulus money should not go to venture capital. So something went wrong here.
But money, people were able to spend, which they did. And the third thing [is] we have a shift from money spent on things you can do outdoors - entertainment is an obvious one - to money being shifted on things you can do indoors, which is like stationary bicycles, bread makers, or PlayStations, all these things.
Basically physical goods that have to be shipped. And in general, we had a shift from shopping in stores to things being delivered by deliveries and this has put its strain on the whole supply chain and our supply chain is built to run at 90% capacity. And so pushing this over that limit, over a 100% limit, well there will be points where it gives out.
This is just [like] taking a leaky old pipeline system and you're putting like whatever, whether 100% of liquid you want to run through this pipeline, and [the] pipeline will burst in certain points. And that's exactly what happened. And it's usually the most vulnerable point of the pipeline system where it bursts. We're seeing that it emanates out from there.
One other thing (which is a point you've also made, albeit in different words), that the pandemic also, sort of, exposes is the pattern of economic specialization of the global economy. Because for one, I didn't know how Malaysia was important to the supply of hand gloves before the pandemic and so many other things like tissue paper, and so many other overlooked everyday household commodities that we found out through shortages and empty shelves, you know, [to] how important and how the supply chain is configured.
And I mean, this brings up issues around the theories of economic trade and the geopolitics of that, you know, and so many people have been - although for political reasons - talking about a reconfiguration of the supply chain. Joe Biden is talking about putting money in bringing America's supply chain closer to its borders, South Korea is spending so much money. There's so much talk of developing domestic capability. We've seen that too with the supply of vaccines, you know, so are politicians or I mean, local stakeholders just having an overreaction, or can the economics of [the] supply chain be reconfigured? Basically?
Yes, basically, we can think of the last 70 years as, what, the post-war economy which we had until like [the] late 80s, early 90s. If you look at the post World War, we had two very distinct periods, which was like the post-war, Cold War era, where every country had a strategic reserve on things they thought they needed in terms of a future war.
So, like, a lot of production was still in the country even if it was not economically efficient for those reasons. And then we had the end of the Cold War and economic efficiency overruled all kinds of strategic considerations. And we had the period of global sourcing, which matched the time, basically, I think, the mid-80s… sort of the time when we started having the enterprise systems that allowed us to source everything globally.
We need to take from wherever it's cheapest, or wherever we get the best quality for the least money and transportation cost, logistics, is not a concern. I wrote a thing like two years ago, as I said, we cannot simply ignore the rumblings of global supply in our considerations because, in comparison to production costs, or marketing costs, logistic costs are negligible, right?
So you can see very, very weird things that basically is being produced in say, Lebanon, and then it's being shipped to China where it's being manufactured and being brought back to Europe, because it's just cheaper.
Of course, we are in a situation where the supply chain layer, which basically nobody paid any attention to other than the operation and logistics people is the thing that's causing the problem and realizing that okay, we should probably be producing our own chips because the global chip manufacturers (microchip manufacturers) are not taking our urgent calls, they're taking others' calls.
So, they are basically sorting their customers by considerations which are not aligned with ours. I see this as a global trend going up, and probably over the next 20 years. Largely being connected to manufacturing trends like 3d printing, but also economies of scale becoming less important.
But this bringing production back home thinking is really at the root of what's happening in the United Kingdom now, because they basically decided that if they sort of disconnect themselves from the EU, they can do this by helping production back home. And that did not turn out to be correct in this case.
So this is like a major trend we're seeing overall. But this is something that will unfold over the next 20 years.
A bit of a side question, I'll say, on that point. I remember my operations research professor telling me in school that one of the wrong assumptions economists have is thinking that prices always clear markets. So which brings me to the question that, why does economics as opposed to other important parts on this particular issue, like operations research and the like...why does economics have so much influence on policy and the nature of public discourse?
The discipline is tasked with setting the ground rules for capitalism, in a way. So like, usually, if you get an operations research degree, you work for a company and you do like production or logistic stuff we're talking about and if you get an economics degree you end up in the white hallways in Washington, DC or similar.
And of course, it's always more attractive to set policy than to work in the trenches of manufacturing or logistics or the other operational stuff that is clearly not as appealing.
In the United States, we have very clearly the shift in operations research where they were, like, really world-leading to economics. I think one reason is because there's a Nobel Prize for Economics and not a Nobel prize for operations research.
Like, the operational stuff became less attractive, less interesting and sort of moved on to others. And of course, if you're very important, you always want to capture the strategic things.
So something I did not like seeing, um, I went to the United States and study operations research at a time when the United States [factories] were just shedding their manufacturing base. This was like the mid-90s. So it's a clearly recognizable decline.
Then [on] the other hand you saw economics on the ascendancy, but economists really don't know very much about production, or logistics, as we've seen. They're basically caught completely by surprise by this whole supply chain thing.
I remember having discussions "is this is a supply shock? Or is this demand shock? And I was like "it's an in-between shock, it's the stuff that happens in between supply and demand, and this is stuff, economists don't usually pay any attention to."
For me, the problem is really these very adjacent fields, right? If you're studying operations research, you're automatically studying economics along. But if you're studying economics, you're not studying operations research.
How is that possible?
Exactly. This is the problem of academic specialization [...], right? If you don't know how things are being made, and if you don't know how things are being shipped, that's a huge gap in your knowledge.
I think we've gotten to where I'd say [is] the most uncomfortable part of this conversation for me...
Which is something that you and I have talked about so many times - which is, there are actual, real-life consequences or effects for some of these problems and the decisions that were made in terms of policy during the pandemic.
And I do not think it would be an exaggeration - even though that's where the world is currently fixated, but I don't think it would be an exaggeration to say that the fatality or the welfare consequences of some of the measures taken in terms of the pandemic response, lockdowns particularly, would have more cost in human lives than the pandemic itself.
I can certainly speak for Nigeria. Not as any kind of expert, but we see in the news every day [how] 2020 was a very tragic year both in terms of poverty, hunger, insecurity, that were all exacerbated by the measures during the lockdown. And I've seen so many other stories from all around the world, India, Kenya, Congo, Brazil, of the real-life consequences of lockdowns, you know, in terms of jobs, in terms of livelihoods.
Now, are we ever... this is like asking you to play a psychologist, I'm sorry I'm always asking you to put on so many hats. Are we have are going to get a reckoning from some of the experts who gave legitimacy to some of these policies that I would say were not well thought out, or maybe were developed in panic... Or, like you've also copiously documented were based on wrong models, wrong assumptions, are we ever going to get to a point where there will be a public reckoning for some of these policies?
Because what I see is a lot of these same people are sort of taking a victory lap, you know, we save the world, the curve is flattening, we are vaccines, you know, and are we ever going to discuss these other problems that we've relegated as secondary, but which may actually have more effects and even lasting consequences for people? Are we ever going to get to that point?
Sadly, I think, also a couple of weeks ago this career academic columnist, you had two career-defining events, and that's like 2007 and it's like 2020 and quite a remarkable majority of economists got both wrong.
Basically in 2007, they just didn't see it coming and in 2020, economics had a large part in actually triggering the event we were talking about, and none of them will lose their jobs over this. None of them will lose tenure over this.
Usually, the reckoning is generational - if incoming economists after 2007 came in to also understand and, sort of, have knowledge that is hopefully enough to avoid another 2007.
And I think emerging countries - Africa - in balance was much more negatively affected by all kinds of hapless attempts to stop the pandemic. There's also young people, basically young people [globally] got dropped off the two years of their lives, but severely restricted for something that they had really no part in.
And, of course, Africa is a very young continent too. So a lot of younger Africans were robbed of opportunities. Yes, but reckoning is generational. Young emerging generation basically realizing that they were shortchanged in this situation. So it's gonna unfold over 20 years. Yeah.
So but in the immediate, we will expect that, like they did in 2007, I remember Kirkman saying basically, "we did almost everything right, in a great financial crisis. We missed out on this big event. But afterwards, we did everything right." We'll see same things, just as normal. I predicted that the tenure system will crumble over this, but I'll wait [to see] if that happens. Yeah.
But there's definitely a problem if you have highly paid experts being so wrong on these momentous events, they should be trained to be able to predict.
For a layperson...Because I think there was this metaphor by the venture investor Naval. And I don't agree with him on a lot but I sort of agree with him on this one where he said, "the pandemic created a situation where epidemiologists were running the economy and economists were doing public health," you know? And I don't know if that's exactly correct but that creates this miasma of confusion for the public.
And we know with social media, there is so much talk about misinformation, disinformation campaign right now, and people just generally have a hard time telling what's what sometimes, or knowing basically sometimes what is good advice. And even for some of us who would like to be a bit more active in our local political process, we also struggle to know where to demand accountability or even common sense.
So, again, I'll ask you, like I did in the last podcast when we're talking about the infection models. Again, regarding associated policies for public health crisis, whether it is how to run the economy, how to run the transportation system, how to tell people what to do and what not to do, how should the public approach expert advice? Are there heuristics?
There was a lot of like reaching out from one's own expert domain into others. And then, of course, the incumbents trying to fend them off. My view of the problem is that we allowed people to get prominent positions, both academically and in the public discussions, who are very good at that and not very good at their field.
Like my field is highly mathematical, I would not be able to deal without having fairly in-depth math knowledge, but I have to understand what's happening in the ground. This is expertise, right? And we have people who are very good at math and have very little understanding of how does math translate into the real world. This is something to stop, right?
If I can contradict mathematical prediction models with 20 minutes of Excel work, then we have a problem. Because someone is living in their very very cloistered mathematical world with very little interaction with the real world they should be dealing with.
So we have to have people who are good at being actual epidemiologists and epidemiologists as modellers, you have to understand how the economy works. And not only what the academic knowledge [or] mathematical knowledge of economics portends to be. And this was the problem, we basically handed the control over to people who have extremely little exposure to how things work.
One last question though, one last question. And I may or may not put this in the podcast, it depends. The delta. Which I know you were tracking for the UK, and I mean, maybe possibly for other places...for a while it seemed like the delta is actually the strain that many people have predicted, you know, but you were also saying that It holds pretty much with the previous pattern.
But now, talk of the Delta has pretty much faded in the same media. What did you learn from that brief experience tracking the data?
We still continue to track the [...] virus more closely than we did before. I mean, it's been like testing procedures, like the amount of testing we do are still going up. In terms of predicting outbreak pattern, I was wrong...at least the ones that was like, the first time England happens up and down, we say this was over which is not over, it's like going up and down again.
It's definitely not going exponential but it didn't stop at the point with the others. Poland, Scotland, a good rate. India is not going through the roof. Yeah, I don't really see the predictive significant difference between what we're seeing with Delta and what we saw before.
What you should expect in the course of the pandemic if you think in terms of population heterogeneity, which is something we should always think about, is sort of, like, variants that emerge later are trying to capture the parts of the population that have not been affected yet. So they're basically closing the pocket.
And this is like, basically, a new vulnerable part of the population that were shielded from the variants before that's vulnerable to this particular new variant. And that goes up very quickly. It reaches this part of the population very quickly. And that's what happened with delta.
And of course, then you had the modellers who ignore population heterogeneity just extrapolating this as though it's gonna capture the whole population extremely quickly and this is definitely not.
I mean, India was the first obvious contradiction to that theory and, of course, India was ignored. And then we had the UK. The UK was like the first time where a government refused to take action. So you cannot retroactively attribute it to whatever kind of [...] action we took.
Of course, Boris Johnson said, "we're gonna open anyway." And most of the exponentialist modellers got it horribly wrong. They're still in the media, I'm still reading guarded articles about their dire predictions, it has not stopped. I think the general population is slowly catching up with the pattern.
Yeah, I expect more to come. We have a world population [and] there are still pockets that have not been affected by this. And this is like my claim from the very beginning [which] is the best strategy we can run is not hurt [halt] all interaction. We've seen that it doesn't work in Australia and New Zealand, that's another thing I predicted. At least for Australia that the virus will make a comeback in the southern winter, which it did.
But that we reduced the point of interaction to situations where we kind of have a buildup of the virus. So basically go away from close indoor events with crowded people until enough people are vaccinated.
And the big supply chain task we have, as of now, is like this massive surplus in vaccines we're building up in the developed Western world. I think we have more than 200 million charges of vaccines coming into Germany with a population of 80 million. So we should not be talking about registered Shot boosters until we get the rest of the world vaccinated.
And hopefully, we do this on a voluntary basis. Voluntary vaccination. That's the other major problem we have that we try to force the... I don't know what the number is 10% of [...] to also get vaccinated by stupid, exclusionary measures. This is not our primary concern, in a way. I think in Germany, we're good. We're just starting to realize that we are undercounting, as usual. So our much much more urgent target is to get the vaccine to people who want or need them.