Getting serious about solving the supply chain crisis
America’s supply chains are in a shambles. The Biden administration has the power to solve this crisis. To do so, it must urgently reform policies to incentivize paid work in our nation’s ports and supply hubs, invest in the infrastructure and logistics needed to move freight more efficiently and, ultimately, reinvest in U.S. manufacturing.
The situation is dire and worsening every day. A massive shortage of electronic chips has sent car prices, new and used, through the roof. The global semiconductor shortage, which could extend through 2022, and subsequent component supply constraints have extended lead times to as long as 120 days for all but the most elementary mobile PC models.
Meanwhile, according to the Freightos Index, the median cost of shipping a standard rectangular metal container from China to the West Coast hit $20,586 — nearly double what it cost in July, which was twice what it cost in January, and 700 percent of its cost just a year ago.
Such paralyzing shortages mean retailers and consumers alike fear half-empty shelves this holiday season, now but a few weeks away.
When these challenges became apparent at the start of this calendar year, the Biden administration took note. In February, the president issued an executive order calling for more resilient supply chains, facilitating domestic production, creating built-in redundancies and adequate stockpiles. In June, the White House announced a Supply Chain Disruptions Task Force to address short-term supply chain discontinuities. Another executive order followed in August, meant to maximize domestic production of essential medicines.
But the administration’s actions since then have undermined these goals. Less than 10 percent of President Biden’s $1.2 trillion infrastructure bill is devoted to fortifying core infrastructure such as roads, bridges and ports. More than 90 percent is earmarked for other priorities. For example, $126 billion would go to clean drinking water, solving the Western water storage and removing pollution from water and soil. Another $39 billion would shore up faltering and mismanaged public transportation systems. While worthwhile, these investments would do nothing to fix our nation’s supply chains.
Meanwhile, the unprecedented unemployment benefits program enacted in response to the pandemic has exacerbated the crisis. By providing unemployed workers an additional $600 per week, it had the unintended effect of creating labor shortages in trucking and retailing precisely when the need is highest.
The president’s press conference on supply chains merely created the illusion of solving the problem. He announced an increase of 60 hours of work per week in the Long Beach and Los Angeles ports, which he said will reduce unloading times by 25 percent. But this plan remains aspirational. Even if implemented, it will reduce total lead times by no more than a day or two.
It is time to take the supply chain crisis seriously. This starts with getting people back to work in our nation’s ports and supply hubs. Employment policies and the federal and state governments must incentivize paid work and stop providing benefit programs that exceed working wages.
Port infrastructure needs to be improved, not just in California but throughout the U.S., by adding docking capacity and storage facilities, and moving to 24/7 work schedules similar to the California ports.
Ultimately, America needs to re-invest in onshoring our manufacturing and engaging in dual or multi-level sourcing. Companies like Intel have decided to build factories in Arizona. Adidas and Nike are building so-called smart factories here to complement their overseas facilities. Similar initiatives should be encouraged with favorable tax policies.
The supply chain crisis is complex, to be sure. But it is solvable. Industry is responding to the extent that it can. Washington needs to get serious about delivering the right mix of targeted policies along with capital investment in critical infrastructure.
Awi Federgruen is Charles E. Exley Professor of Management at the Columbia Business School and chair of its Decision, Risk and Operations Division.