Lately, I’ve been hearing a lot about how governments should regulate supply chains and enforce more transparency as a way to solve supply chain issues. But what if governments are not the best option when it comes to supply chain management and, contrary to their intentions, they inflict even more harm on the already fragile and volatile supply chains?
Let’s look at COVID tests as a case study.
Those who planned to travel or meet with family members during the holiday season know how difficult it was to get tested. Testing sites were overwhelmed. It was difficult to find an available slot — along with quick results — and buying an at-home testing kit was nearly impossible.
Though we already experienced shortages in 2021 for many products, I’m choosing now, in early 2022, to say the government is doing a terrible job of rectifying this. Allow me to explain.
When there is a shortage of iPhones or kettlebells or, God forbid, coffee grinders, we can cope. But when there is a shortage of COVID tests, things become a little trickier. Without intending to sound too polemic, in many cases, it can be a matter of life and death. Though the U.S. government announced last month the planned distribution of 500 million home testing kits, we don’t have the capacity to manufacture this number of tests in such a short period of time.
Gigi Gronvall of the John Hopkins Center for Health Security says this is because “there are a lot of components that go into an at-home testing kit.” This includes the packaging, the testing strip, the cotton swabs, and the fluid used to administer the test. But the roots go deeper than this, and the reality is the government botched the at-home test kit market, according to a ProPublica investigation.
Initially, the Food and Drug Administration (FDA) made it very hard to get home tests approved and relied on only a few companies, Abbott being one of them. Smaller players faced difficulties in having their tests approved and some alleged improper prioritization.
The situation became worse when the FDA signaled the efficacy of the vaccines and the potential “end of the pandemic.” In fact, Abbot ramped down manufacturing of its at-home test last summer after the Centers for Disease Control and Prevention (CDC) announced the vaccines were so protective they would mitigate the need for frequent testing.
Thus, government action made the shortage worse. No, it did not cause the surge in demand, but it increased volatility in the supply chain. There are, however, a few things that can be done to improve the situation.
The federal government can purchase large quantities of tests from companies that are able to manufacture them in bulk, and then offer these tests to end-customers at low or no cost. This means they can commit to buying home tests from any firm that is able to meet the necessary standards and is willing to manufacture them.
Demand for home tests is quite volatile. When trying to decide how much inventory to carry, retailers such as drug store chains need to balance the risk of overstocking and under-stocking. To do so, they usually target a certain service level (e.g., a level of 95 percent) to carry the average demand plus a certain amount of safety stock. For a level of 95 percent, this will amount to approximately 1.6 times the standard deviation of demand.
I’m not an epidemiologist, but I would expect the government to be more risk-averse than a regular firm when it comes to inventory and the possibility of stocking out on products. If it’s too expensive for a firm to offer a service above 95 percent, I expect the government to be willing to tolerate the additional cost of a service level north of 99 percent. For 99 percent, the government needs to carry 2.3 times the standard deviation of demand. For 99.9 percent service level, it needs 3 times the standard deviation. In the middle of a pandemic, this doesn’t strike me as too much.
The government also can centralize inventory and distribution. While drug store chains need to carry safety stock in every store, even in areas where there is no major outbreak, the government can mobilize these tests to areas of need and instead carry safety stock at a national level, instead of a local one.
The government has the scale to deliver these tests quickly and efficiently — but because they have been reluctant to try anything too “socialist,” expecting something such as this would be almost un-American.
It’s quite symbolic that 2021 ended with a shortage in the midst of a pandemic that defines our current century. Supply chains and COVID. COVID and supply chains. 2021 was a year that gave supply chain experts and researchers a lot to think about — and even more to work on. As 2022 opens, I think we are all more than ready to get back to supply chain obscurity.
Gad Allon is faculty director of the Jerome Fisher Program in Management & Technology at the University of Pennsylvania.