When the Chips Are Down: Preventing and Addressing Supply Chain Disruptions
By: Sameera Fazili and Peter Harrell
Prior to the COVID-19 pandemic, the things consumers and producers wanted, from cars to toilet paper to yeast to lumber, simply appeared in showrooms, on store shelves, and in ports to be purchased and used when convenient. But over the last 18 months, we’ve seen shortages in goods large and small, often due to surprisingly small causes and hidden vulnerabilities. For example, the demand for yeast quadrupled in spring 2020, as homebound Americans tried their hand at making bread. Fleischmann’s Yeast, a major producer, had capacity to make yeast; it was lack of packaging that led to shortages and delays. The glass jars used to package the yeast were sourced from India, where production had been shut down due to the COVID-19 pandemic.[1]
Nimble firms resolved some of these shortages quickly. Fleischmann’s figured out how to package yeast in plastic bags, and toilet paper manufacturers made numerous small adjustments to equipment and product mix.[2] Others, like the semiconductor chip shortage, have proven harder to resolve and are dragging down the US economy. Some analysts estimate the chip shortage could cut nearly a percentage point from GDP growth this year, and it has resulted in waves of production shutdowns that have hurt the hundreds of thousands of U.S. workers employed in manufacturing jobs across the automotive and heavy trucking sectors.[3]
The ability to recover quickly from an unexpected shock is a hallmark of a resilient system. When it comes to manufacturing supply chains, firms often adopt three inter-related strategies to strengthen resiliency:
- Visibility: The capability to monitor the supply chain, often in real time.
- Buffer: Having multiple sources of supply or holding more inventory.
- Agility: The ability to pivot quickly to alternative processes or products.
However, an individual firm’s ability to pivot quickly in the face of a shock can be limited by collective action problems—including a lack of communication and trust between firms along a supply chain—and a lack of access to the data necessary to support visibility and agility. Government has a unique ability to solve coordination challenges and serve as a trusted source of data. This role is especially critical at times of shortage, to counter the tendency of downstream firms, like manufacturers of finished goods, to overorder or hoard inventory and of upstream firms, like manufacturers of the inputs, to not fulfill orders due to a lack of trust in the demand signal, which results in shortages, delays, price increases, and uncertainty for the workers, families, and small businesses who ultimately depend on these goods.
Renewing our Commitment to Transparency and Agility
Since April, the Administration has used its convening power to strengthen communication and trust between the firms that produce semiconductors—including those that design chips, produce wafers, and assemble them into devices—and those that use semiconductors—including automakers, consumer electronics firms, and medical device firms. The result has been a change in supply chain management practices by firms like General Motors, which announced new efforts to build more direct working relationships with semiconductor suppliers who are downstream suppliers to GM. It also includes a growing recognition by chip producers that industrial sectors like the automotive industry represent a growing customer base. This is progress, and we continue to look to industry to take further steps to improve transparency, trust, and communication to address supply chain bottlenecks.
Today, the Department of Commerce is taking new steps to improve data collection, by conducting a voluntary survey of industry participants to both diagnose chokepoints in the supply chain and offer firms data that can help them adapt their production processes to adjust to the supply shortage. For example, the survey may show that the chips used in sensors that help activate a pacemaker and power the safety features of a car are in shortage, but not the ones that support power management on a device. In this way, the information can also provide a clear demand signal that can attract more private investment to expand capacity to resolve the shortage.
In addition, to address shocks to global supply chains stemming from the COVID-19 pandemic, we have been working with foreign governments in Southeast Asia and elsewhere to keep critical factories up and running, while putting worker health and safety and the public health response of our trading partners at the center of our efforts. The Biden-Harris Administration is building on this work by standing up a new early alert system for COVID-related shutdowns to microelectronics manufacturing around the world. The system will allow us to detect potential disruptions earlier, and support faster problem solving and coordination with our trading partners and the private sector, balancing a focus on worker health and safety, supporting the public health response, and safely re-opening plants. This system is also designed to protect proprietary or business sensitive information for companies that voluntarily participate. The Commerce Department will be industry’s entry point, and they will work closely with the State Department—both here in Washington and also at our Embassies abroad. We will also rely on technical experts from USAID and the CDC to carry out this mission.
Preventing the Next Chips Shortage
In the longer term, however, the U.S. must take stronger action to identify and get ahead of vulnerabilities in the supply chains of critical goods. Supply chain shocks are not unexpected. A McKinsey Global Institute analysis found that supply-chain shocks affecting global production lasting at least a month occur on average every 3.7 years, leading companies to lose 42 percent of one year’s earnings every ten years. The climate crisis is causing supply chain-disrupting “100-year” events more frequently and with greater ferocity, due to increased intensity and frequency of storms, droughts, and other extreme weather events. U.S workers, consumers, and businesses will continue to suffer from disruptions and price shocks unless we take action, across the public and private sector and with partners and allies, to build more resilient supply chains.
That is why the President has taken swift and persistent action to address supply chain vulnerabilities since he came into office. In February, he ordered a 100-day review of supply chains for select critical products and a 1-year review of vulnerabilities in the supply chains for select critical sectors. The 100-day report, published in June, lays out a framework for closing supply chain vulnerabilities by investing in U.S. workers, communities, and innovation. It also makes the case for a new federal toolbox for closing these vulnerabilities. This includes the capacity to map and monitor current gaps and conduct stress tests to identify future vulnerabilities, funding to support applied research on best practices on supply chain resiliency at both the firm-level and national-level, and financial tools including grants and loans to pull forward private sector investments in resiliency, countering the private market’s tendency to overinvest in short-term cost control and underinvest in resiliency.
There are two critical steps that Congress could take to accelerate our progress towards more resilient supply chains. First, Congress could fund the bipartisan CHIPS for America Act, which would enable transformative investments in domestic semiconductor research, design, and manufacturing. This is the long-term solution to solving the current chip shortage. Second, Congress could establish the new Critical Supply Chain Resiliency Program (CSCRP) at the Department of Commerce, which President Biden has proposed as part of his Build Back Better plan that is before Congress right now. The program would serve as a central node in the federal government for supply chain resilience, facilitate better coordination and planning across federal agencies to address vulnerabilities, and invest in critical supply chains where the private market has failed to allocate sufficient capital.
Some examples of the activities the new office could support include:
Mapping supply chains for critical industries: The U.S. government is trying to prevent disruptions in the supply chains for advanced energy and communications equipment. The CSCRP conducts a survey of firms in each industry, working with industry partners. The data and mapping from the survey allows the office to run stress tests for various shocks, including a cyber attack at a critical node, and run scenario planning exercises to facilitate greater preparedness across the private sector and government agencies to respond to potential shocks to a critical supply chain.
Growing domestic clean energy supply chains: A U.S. consortium of green energy companies wishes to onshore the supply chain for manufacturing solar panels, 80% of which are currently made by Chinese companies due in part to Chinese government subsidies. The CSCRP provides low-cost financing to support the development of new U.S. factories so that a larger share of the planned U.S. renewables build-out is U.S.-made.
Expanding supply of trusted and secure hardware: A promising early-stage 5G equipment start-up seeks to scale up manufacturing for 5G network infrastructure equipment. However, it has had trouble securing the late-stage funding to commercialize its technology, which has been a longstanding problem that has pushed many U.S. manufacturers offshore. The company is being courted by a contract manufacturer to move its production to Asia. To address this issue, CSCRP provides a direct loan, for one portion of its scale up need, and a loan guarantee for the rest.
The federal government must be better equipped to get ahead of possible disruptions and have tools at its disposal to limit their impact on the U.S. economy, workers, and consumers. When supply chain shocks cascade, the spillover effects can impact the global economy in ways that no one firm or sector can anticipate or adequately resolve on their own. By taking a holistic view of the industrial base and supply chains critical to US economic and national security, the federal government can monitor, anticipate, and respond to economic, geopolitical, and climate-related shocks. The CHIPS Act and the CSCRP are two important steps towards our goal of strengthening our nation’s longer term economic competitiveness, our national security, and advancing the President’s 21st century industrial strategy. The key to resolving the next global supply chain crisis is preventing it from happening in the first place.
[1] https://slate.com/business/2020/04/yeast-shortage-supermarkets-coronavirus.html
[2] Why the Pandemic Has Disrupted Supply Chains | The White House
[3] Spencer Hill, Goldman Sachs, US Daily: A Semi-Troubling Shortage (Apr. 24, 2021).
