Thursday, May 07, 2020

'rona Reading II: A crisis born of ignorance, greed, and arrogance

Those who cannot remember the past are condemned to repeat it

Is It Time to Rethink Globalized Supply Chains?

The disruption unleashed by the new coronavirus is different in that it has highlighted country risk at an unprecedented scale. Nobody could have foreseen what would happen when the world’s second-largest economy went offline and completely shut down external logistics connections. And because of supply chain tiering and the delays inherent in ocean container shipping, many companies are only now coming to grips with the depth of their dependencies.

What the current situation exposes is that the risks associated with supply chain fragmentation and globalization have been unpriced and largely ignored. For many companies, the combination of lean production and global multistage supply networks is leading to crises.

The good professor is a little disingenuous here. Some people did foresee the dangers of off-shoring, globalization, and systemic risk.

For instance, there's this guy named Nassim Nicholas Taleb....
The Pandemic Isn’t a Black Swan but a Portent of a More Fragile Global System

The coming of global information networks deepened Taleb’s concern. He reserved a special impatience for economists who saw these networks as stabilizing—who thought that the average thought or action, derived from an ever-widening group, would produce an increasingly tolerable standard—and who believed that crowds had wisdom, and bigger crowds more wisdom. Thus networked, institutional buyers and sellers were supposed to produce more rational markets, a supposition that seemed to justify the deregulation of derivatives, in 2000, which helped accelerate the crash of 2008.

As Taleb told me, “The great danger has always been too much connectivity.” Proliferating global networks, both physical and virtual, inevitably incorporate more fat-tail risks into a more interdependent and “fragile” system: not only risks such as pathogens but also computer viruses, or the hacking of information networks, or reckless budgetary management by financial institutions or state governments, or spectacular acts of terror. Any negative event along these lines can create a rolling, widening collapse—a true black swan—in the same way that the failure of a single transformer can collapse an electricity grid.

It's pretty clear, now, that The Black Swan was one of those books that important people bought for show:  they talked about it but never actually read it.

Shih makes an important point about the way good methods and good theories can be misapplied:

When Toyota pioneered lean production in Japan back in the 1970s, its suppliers facilitated this by being colocated nearby. Chinese manufacturers did the same as they evolved their operations during the 1990s and early 2000s. Yet many companies, lulled by efficient and relatively inexpensive logistics and transport, have been applying lean and just-in-time production methods that span global networks. The current crisis exposes the vulnerability of this approach. Notably, Toyota continues to practice localization to a greater extent than many of its competitors. In fact, for its Georgetown, Kentucky, factory, more than 350 suppliers are located in the United States and more than 100 inside the state of Kentucky.

But note how the issue is framed: “companies were lulled.”

Who lulled them?  Did mystical Sirens of Off-shoring slip into boardrooms and C-suites?

This framing absolves executives and corporate directors of any responsibility.

A more accurate way to describe the problem is something like this:

Many companies – out of fear, ignorance, stupidity and greed – implemented lean manufacturing in dangerous ways.

Greed and arrogance are a dangerous combination.
The birth of the hive mind

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