This video was made possible by Hover. Get 10% off your first purchase of a customdomain or email address at Hover.com/wendover. COVID-19—that’s the answer. That’s what caused all the shortages of2020 and 2021. That’s it. COVID-19 caused the shortages in the sameway that an iceberg caused the Titanic to sink… or the collapse of Lehman Brothers caused the Great Recession… or the straw broke the camel’s back. That’s really to say, COVID did cause theseshortages—they would not have happened in the manner they did, when they did, if notfor the pandemic. But just as the Titanic’s design flaws wouldeventually lead to calamity, the vulnerabilities in the global economy would eventually leadto a recession, and something would eventually break the overloaded camel’s back, COVIDcaused these shortages, but it’s not what made them possible. What made them possible is a fundamental,structural vulnerability in the way today’s supply chains work. On April 13th, 2021, Boba Bliss, a small bubbletea shop in Dublin, California, posted on Facebook. They explained that they were having a hardtime getting their ingredients, and that this would mean their menu would have to changedaily—reflective of what they could actually get from their supplier.
On April 15th, MighTea Boba, in Canandaigua,New York explained on Facebook that they would have to serve a smaller quantity of tapiocapearls in each drink, and would no longer be offering extra as an option, due to a shortageof this ingredient. Bing’s Boba Tea in Tucson, Arizona saidmuch the same one week later, and Tea Hut in San Francisco, California then announcedthat they would have to raise their prices due to a 26% rise in their ingredient costs. All across the country, shops selling thispopular Taiwanese drink simply could not get ingredients in the quantities demanded, despiteno dramatic increase in demand. However, thousands of miles away, in Taiwan,where much of the world’s Bubble Tea ingredients are made, things were operating fairly normally. With single-digit daily case numbers for muchof COVID’s reign, factories on the island were able to work at full-force in a way theycouldn’t elsewhere but still, somehow, Boba Bliss, MighTea Boba, Bing’s Boba Tea, TeaHut, and thousands of other shops across the US couldn't get their product. The problem had less to do with anything happeningin Taiwan, and more with what what happening here—in the waters off the coast of LosAngeles. Throughout the first half of 2021, a rotatingcast of dozens of cargo ships have dotted the Pacific’s horizon. Each sat there, at anchor, sometimes for weeks,until a spot opened for them at the port of Los Angeles or Long Beach. This is abnormal. While the year prior it was possible for aship or two to have to wait a day or two, it was never dozens of ships for dozens ofdays. Transit time from Taiwan to Los Angeles typicallytakes about two weeks, so an additional ten days of waiting represents a near doublingof shipping times.
The root cause of this was, of course, a perfect,pandemic-fueled storm. As the 2020 holiday season approached, morepeople were getting back to work in the US, consumer spending was ticking up, and onlineshopping was exploding. With limited access to travel, restaurants,shows, and other services, physical products were one of the few ways people could spendtheir discretionary income. More goods than ever were coming from factoriesin Asia, and 49.1% of those imports to the US passed through one of just two ports—LosAngeles and Long Beach. Compared to a year prior, before COVID hitthe US in earnest, February 2021 saw a 31% increase in ships and a 49% increase in containertraffic at these two ports. They just couldn’t keep up. Simultaneously, however, a significant trancheof dock-workers were constantly out sick due to COVID itself or the quarantine proceduresit demanded. But the disorder doesn’t end there. While a year ago a 20-foot container wouldcost about $1,800, they now run for $3,500. There’s a regional shortage of shipping containers that’s having global consequences. You see, in 2020, just as much of the worldentered lockdowns, China’s manufacturing industry was emerging from it. The entire world bought masks, personal protectiveequipment, and regular goods from the country and once those containers arrived in portslike Long Beach, they were unloaded. However, due to those destination country’slockdowns, there wasn’t really much that needed to be shipped out.
For every 100 containers that are importedinto the US, only 40 are exported. So, containers stacked up in the places thereweren’t needed, because they weren’t needed, and they didn’t make it back to the placeswhere they were, like Asia. In the case of the ports of Los Angeles andLong Beach, their capacity crunch means they don’t even have the time to justify loadingships with empty containers for return to Asia. Not only that, but a shortage of truck driversin the US means that it’s tough to actually get empty containers back from their finaldestinations to ports to send them back to Asia. So, a shortage a shipping containers is worseninga shortage of shipping capacity, which is worsened by a shortage of port capacity, whichis worsening the shortage of shipping containers, which itself is worsened by a shortage oftruck drivers, all of which is causing a shortage of bubble tea ingredients. Shortages causing shortages causing shortages—itsa vicious cycle that is only worsening as economies reopen. Across the world, there’s a proliferationof scarcity. Lumber prices in the US quadrupled after predicteddecline failed to manifest, and a boom in construction and renovation did instead.
The use and construction of pools also accelerated,as outdoor space became more valuable, spurring increased demand for chlorine which, whenmixed with reduced supply as a result of a fire at a major chlorine plant in Louisiana,led to sky-high prices, and insufficient availability. As restaurants pivoted to take-out and delivery,bulk ketchup was out, and single-serve packets were in, but with manufacturers unwillingto spend significantly to increase production capacity for a short-term bump, the packetsbecame scarce, and companies started successfully selling them for $10 per 50 on eBay. However, the greatest shortage of all canbe seen here, in the empty parking lots of Anchorage, Alaska’s airport. The state relies heavily on its summer tourism season, and after missing it last year, 2021’s season is crucial. Facing uncertainty about the legality of their operations until May, cruise companies cancelled many of their summer sailings to Alaska, sothis year is all about independent, domestic tourists. To traverse the vast wilderness of the lastfrontier, independent travelers need rental cars. However, these travelers can’t get rentalcars—regardless of which date you search in summer 2021, there simply isn’t availability.
For the lucky few who do find one, currentmarket rates are over $500 a day for a compact car. American travelers can now legally, safely,and easily get to Alaska, but they can’t get around Alaska, which means that eagertravelers aren’t going. You see, during the depths of the pandemic,Hertz, Enterprise, National, and other rental car companies sold off much of their fleetsof cars—they needed money somehow, and it wasn’t coming from rentals themselves. Now, however, with vaccinations easily availableto all in the US, there is demand for rentals, yet no supply. In Alaska especially, with its highly seasonaltourism market, its normal for the rental car companies to sell off their old vehiclesin the fall, and purchase new ones in spring, but the latter half of that didn’t happenthis year, because there’s a massive, global shortage of new cars, and manufacturers aresimply unable to fulfill the huge orders rental car companies are asking for. You see, in Spring, 2020, as COVID took holdof the globe, car manufacturers cancelled and reduced their orders for components asthey anticipated reduced demand for new vehicles. They were right on that—demand did go downas it tends to during any recession—but it recovered faster than anyone imagined. Regardless, the plan was that, once recovery started, they’d boost component orders and manufacturing in step. The problem was that they’re now at theback of the line, and for one, critical component of modern automobiles, there’s quite a longline. Computer chips are sold out everywhere.
It was the perfect storm of circumstances. First, the US’ trade war with China causedthe country’s manufacturers to start stockpiling the chips. Then, COVID led to production shutdowns incertain areas of the world, demand for consumer electronics exploded as people spent moretime at home, and now, even the solution is causing problems as silicon is both neededin computer chips and vaccine vials. Altogether, the reasons are complex, but theresult is clear: this is why you still can’t easily buy a PS5, this is why Samsung likelywon’t release a new Galaxy smartphone this year, and this is why you can’t get a rentalcar in Alaska. In a twist of cruel irony, the car industryis culpable for all of this. That’s because, decades ago, the very industrythat is now suffering the hardest propagated a system that made shortages such as thisso possible. Eighty years ago, as Japan emerged from WorldWar Two, Toyota had a problem. The world was marching towards further globalization,and Japan especially was starting to develop a trade relationship with the US. American car manufacturers, at the time, though,had a huge cost edge over their Japanese counterparts. Especially during the post-war economic boom,demand for their vehicles was so high that American manufacturers had incredible economiesof scale. Their process was batch manufacturing—ata given time, a given assembly line would build one type of one model of one vehicle,exclusively. Then, they’d switch to another type of anothermodel, and so on and so forth. With this, the manufacturers could use massive production lines working at breakneck pace, unlike Toyota’s. Theirs were small and slow.
The domestic car market in Japan was limited,and it demanded quite a lot of variety in vehicle types. This meant that they didn’t have the scaleto make batch manufacturing work well—at least as well as in the US. Their inability to realize the gains of batchmanufacturing meant that they simply would have to have higher prices compared to theirnew American competitors, but there just wasn’t a clear alternative. So, they created one. They created the Toyota Production System. It had two core principles, starting withautonomation—not automation, autonomation. This was their term for the efficient useof automation. Now, complete automation would require machinesto build cars, plus diagnose any problems, plus fix those problems, but having machinesfix their own problems is very complicated and very expensive. So, in their autonomation system, they lookfor only what machines can do better than humans, which in their context was most ofvehicle assembly and problem diagnosis, while problem-solving was left to humans. Autonomation was and still is a crucial, criticalcomponent of the Toyota Production System, but it wasn’t the core principle that wouldgo on to change manufacturing fundamentally. What did was the principle of just-in-timemanufacturing. All it really is is this: each step in themanufacturing process should end when the next one is ready to start. It’s a pull system, as opposed to a pushsystem. Just as your Coffee shop doesn’t start makingyour latte until you ask for it, the polyvinyl butyral resin should only leave the chemicalsplant when the laminated safety glass production facility is ready to start making windshields,and it should only start making windshields when the final assembly line is ready to putall the pieces together, and it should only start putting all the pieces together whenthe dealership is ready to put more cars on its lot.
In the view of the Toyota Production System,excess inventory is waste, because holding inventory costs money without making money. Elimination of excess inventory is eliminationof waste, and elimination of waste is what leads to production efficiency. This system worked. In the early 1950’s, Toyota was on the brinkof bankruptcy. Today, the company is the largest auto manufacturerin the world, and the principles of the Toyota Production System can be found in any businesstextbook. Just-in-time manufacturing is no longer aninnovation—it’s the norm. Articles aren’t written about companiesimplementing just-in-time—they’re written about those that don’t. In fact, just-in-time has become even moreintegral today. If there are six steps in a manufacturing process and each holds two months of inventory, it would take a year to pivot to producinga new product. The short product life-cycles of today’stechnology industry would not accept that. Just-in-time is such a simple principle, butthe pursuit of the elimination of waste is now the central mission of any major manufacturer. However, most did it wrong. Manufacturers globally saw the headline—eliminationof inventory leads to massive efficiency gains—and jumped on that without actually determiningwhat made it work for Toyota. They ignored that Japan’s small physicalsize made for short domestic supply chains, less vulnerable to things going wrong. They ignored the company’s production leveling—findingthe average daily demand and producing that, regardless of short-term changes in demand. They ignored the fact that eliminating excessinventory is different from eliminating all inventory.
They ignored the principle of growing strongteams of cross-functional workers, predicted on respecting people. They ignored the culture of stopping and fixingproblems, to get things right the first time. They ignored huge swaths of the Toyota Wayand created a system that’s less effective and less resilient, but can impress shareholdersthrough short-term savings. How Toyota has effectively implemented thissystem fills books, but many are just reading the covers. Even Toyota, though, is not perfect. In 2011, Japan was rocked by a 9.0 magnitudeearthquake—the fourth strongest ever recorded anywhere. Not only did this cause immense destructionto life and property, but it also led Toyota to recognize a flaw in its own system. As Japan recovered, some supply chains werequick to as well—for example, securing plastic resin for door panel production is not difficult. There are plenty of manufacturers globallycreating easily substitutable alternatives. That’s not the case with, say, semiconductors. The hugely expensive facilities that createthese chips require years to construct, and after the 2011 earthquake, it took many monthsto mend them back to operating status. This surfaced a truth that had never beenfully considered—not all supply chains are made equal. Plastic resin can handle supply chain disruption. Semiconductors cannot. Therefore, Toyota made changes.
All along, their mission was not to eliminateinventory full-stop—it was to eliminate excess inventory. Supply chain disruption is inevitable. It’s inevitable in the same way that Titanicflawed design would eventually encounter an iceberg or the structural economic vulnerabilitiesof 2008 would eventually collide with a market panic. Therefore, semiconductor inventory is notexcess because inevitably, due to the inevitability of disruption, excess semiconductor inventorywill eventually become necessary. Recognizing this, Toyota, in recent years,has started to build up a stockpile of two to six months worth of chips, and that’swhy the company is the only major vehicle manufacturer that is unfazed by the semiconductorshortage. Toyota followed its own principles. It did not stray from them, and it did notreinvent them. It’s no surprise that Toyota excels at implementingits own system, but it is a surprise that the entire manufacturing world has so wholeheartedlyembraced flawed implementation of the system.
Reviewed by Kashif
on
August 23, 2021
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