I don’t know the economics of it, but it is the kind of high risk-high reward style investment where one bad year can wipe out many many years of savings?
As was mentioned earlier, how much profit have companies lost by having such fragile supply chains, and how does that compare to what it would have cost to have more redundant supply chains?
During a bad year, unsold inventories can also wipe out years of savings. Left-of-center writers spent most of the 1930s clucking about the evils of overproduction.
Perhaps, but if so, they were overstating it. It’s not exactly my cup of tea but people who want a comfortable, quite, dependable convertible to ride around in, it was world class.
Good article. Pretty much nails what I was getting at and the conclusion is that companies will probably continue to be shortsighted in absence of any pressure to the contrary.
regrettably, economic pressures will force all companies back to Just In Time and having global supply chains. In the same edition of the NYT, there is an article about how there is a glut of N-95 masks in China and the low prices are driving all the US manufacturers out of the business. Even though we know better now, the bottom line forces every business to use the cheapest possible source.
Sigh
Something like N-95 masks, which have a strategic import, make a very good candidate for a punitive tariff. I know we went down this road under Trump, but we really don’t want to be dependent on China for PPE and other similar items. Plus, you know, quality control on stuff we breathe through should be subject to some form of regulatory oversight. There are supply chains that we need to incentivize to stay onshore.
Or instead of applying “a punitive tariff”—which, despite the misunderstanding of certain ‘leaders’, is only ‘punitive’ to the purchaser who ends up paying the tariff—the federal government could, you know, support domestic manufacturer of strategically important products to ensure manufacturing capability in time of need. It is very easy to blame China, or US manufacturers, or the end purchaser—hospitals and medical facilities largely run by for-profit companies maximizing investor return by minimizing costs—but the reality is that he United States could produce for its own needs domestically if it was defined as a strategic priority. The Department of Defense certainly doesn’t have any problems mandating that textiles, weapons, vehicles, et cetera be manufactured in the United States using domestically-sourced raw materials (with a few notable exceptions) even if it means paying a premium.
The notion that it is the purchaser who should be punished for the sin of buying low cost products even if it is foreign-made instead of the government using its resources to ensure that manufacturing capability for domestic production of critical items is yet another of those contradictions of unrestricted capitalism. I know it would be a terrible shame if the government had to step in and ‘impose’ the same kind of socialist market controls and regulations that it routinely does for military procurement but just maybe it is something that should be considered rather than shifting the burden onto short-sighted end users who are only doing the American thing tby minimizing costs to maximize profits.
Stranger
I understand the argument, but I’ve yet to see a effective approach to incentivize domestic production of important items. I don’t know that nationalizing the production is the answer. Tax credits typically don’t work. There’s no shortage of capital. We can’t race to the bottom on wages.
Just as DoD does, you simply require by law that the end consumers buy only from domestic middlemen who buy only from domestic manufacturers who in turn are required to buy only from domestic suppliers all the way back to the mine, farm, forest, whatever. And then everybody along the chain pays whatever that turns out to cost.
The obvious problem is that instead of having a monopsony buyer = source of demand, we’ve got the entirety of US business and consumers as the source of demand.
The money to be made by cheating middlemen will be irresistible, so the government will need to include an incorruptible domestic Supply Chain Police on the scale & powers of an internal customs authority to keep everyone honest through frequent and very public jailings and jillion dollar forfeitures visited upon the cheaters.
We know how well this approach has worked for recreational drugs, so there’s no reason it won’t work for domestic strategic N95s, etc.
Well that’s helpful.
How sure are we that it’s short-sighted? Just-in-time processes are, of course, risky, but in the long run, we need to reduce the resources we use.
Lowering the cost of something generally means lowering the amount of resources needed as inputs. That includes the costs of maintaining inventories. Even for labor–American workers are expensive because we use a lot of resources.
JIT is not the problem; it’s a part of the solution of a sustainable economy. Another part of the solution is increasing the resiliency of our trade networks. In the case of pandemics, we need to do a better job of monitoring novel pathogens and better coordination in stopping their spread.
Why do you say that? If the input to a process was very expensive, it would cause the manufacturer to invest more to make the process more efficient and cut down on the need for the expensive component.
But I agree that increasing inventory doesn’t help, since it makes the process less flexible and reduces the ability to customize products. Dual sourcing (hopefully from factories not next door to each other) would seem to be safer.
I agree with the article in the Times today that companies will go back to the old ways as soon as this issue goes away. It is cheaper.
Seems simple to me: The government pays the costs for what it wants to happen.
To continue the example of N95 masks: The government wants American industry to have the capability of manufacturing some number of masks. But in normal (i.e., non-pandemic) times, industry doesn’t want to maintain the equipment to manufacture that many masks, because in normal times the demand is low, and so they won’t sell enough.
So what the government does is, they calculate how many mask-making machines they need to be able to produce the number of masks they want, and then calculate how much it costs to maintain that number of idle machines. Then they take a pool of money that size, and divide it proportionately among all American manufacturers who maintain mask-making machinery (with maybe an inspection once a year or so to make sure that the machinery is actually being maintained). You’d quickly reach an equilibrium where the right number of machines are kept on standby. Now, the companies that make masks don’t lose money on those machines during normal, low-demand times, and when the high-demand times come, they make a lot of money. Businesses are happy because they’re making money, the government is happy because they’re getting a reliable domestic supply of masks, nobody’s being punished, everyone’s happy.
I’m guessing that what’s actually happened is that manufacturers have faced bottlenecks due to specific components being unavailable due to supply chain disruptions, not broad shortages of everything they need.
So what I think we’ll see is more effort spent diversifying the supply chains for those critical path items, and likely also more reserve of those items as well.
Forgot to add a point earlier. Capitalism is excellent at reducing costs; we should let it do that as much as possible. The real issue is what to do with the wealth generated by it. (As in, maybe the capitalists shouldn’t be the primary beneficiaries of the economic system.)
An input is more expensive (in the long term) only because it requires more resources to obtain. So, as you say, there’s a large incentive to either reduce the dependence on the input or reduce its cost. (I’m not sure exactly what you were asking.)
I agree with you in most part, but the problem (IMHO) is the term ‘the government’. Especially in recent years, ‘the government’ cannot agree on what it wants: or rather, it can agree that anything the other party does is wrong/evil. While I tend to agree that a lot of the Republicon/Qanon caucus is getting there, it does mean that expecting the government to maintain a state of readiness is likely implausibly optimistic.
So yeah, we might get 2-4 years of such subsidies, and then a new group of legislators/executives will come in planning to slay ‘corporate pork’/‘unproductive spending’/‘in-group kick-backs’ or just plain old attempting to balance the budget, and everything returns to current status quo. This is not a swipe at your idea of establishing a manufacturing reserve, but until we can get to a consensus on good government again, I cannot see it having any lasting effect.
Yeah capitalism reduces costs down to the optimal level and then below that. So it is good at finding a local optimum but not a global optimum considering risks.
It seems to me that more expensive by definition requires more resources, like money, to obtain. But a more expensive thing might not require more resources to produce. There could be a natural or artificial shortage. Gas prices did not go up recently because gasoline got more expensive to product.
Not quite sure if that is what you meant, though.
This is an interesting article, although not specifically abour JIT.
And presumably more profits in monopoly/oligopoly areas?