The Great Supply Chain Collapse

The comments below are an edited and abridged synopsis of an article by James Rickards

The supply chain is a complex dynamic system of immense scale. The exact cause and effect cannot be computed because the processing power needed exceeds the combined processing power of every computer in the world.

The Great Supply Chain Collapse - BullionBuzz - Nick's Top Six
Economy, Finance, Impact, Industry, Risk

Few people understand how extensive, complex and vulnerable supply chains are. Rickards explains how a loaf of bread ends up on a grocery store’s shelf—from seeds for the wheat to where the wrappers originate.

A full description of the loaf of bread supply chain with choice of vendor analysis, quality-control tests and bulk purchase discounts among other decision tree branches could easily stretch to several hundred pages.

Now consider that all of those supply chain links and possible bottlenecks are domestic, but few supply chains are local. CEOs, logistics engineers, consultants and politicians have spent the past 30 years making supply chains global.

You’ve heard discussion of globalization since the early 1990s. What you may not have realized is that the process that was being globalized was the supply chain.

Once the global perspective is added, transportation options have to expand from trucks and trains to include ships and planes. That means ports and airports are additional links in the chain.

The supply chain revolution has been about cost reduction, which gets passed to consumers in the form of lower prices.

The system is fragile. When things break down, everything gets worse at the same time. One missed delivery can result in an entire assembly line shutting down. One delayed vessel can result in empty shelves. One power outage can result in a transportation breakdown.

That’s what has happened to the global supply chain. The system is not robust to shocks. The shocks have occurred nevertheless (pandemic, trade wars, China-U.S. decoupling, bank collateral shortages) and the system has broken down.

The failures are mounting up. Delays in receiving commodity inputs in China have resulted in manufacturing delays for exports. Energy shortages in China have resulted in further disruption of steel production, mining, transportation and other basic industries.

If supply chains are breaking down, the economy is breaking down. If the economy breaks down, the breakdown of social order is not far behind.

And the costs of social disorder are far higher than any possible savings from supposedly efficient supply chains.

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