When we think of supply chains, our first thoughts are of factories and shipping containers, with huge quantities of goods moving around the world, mainly emanating from China.
The current crisis of supply chains is mainly a result of what Covid has done to demand. A critical component of a just-in-time system is somewhat predictable demand. Everything else follows from that first input.
Years ago in Shell UK, there were many operational business committees, but the most important one was called the STBT or short-term business team. We spent days creating annual plans for the purposes of targeting and staffing, but these plans inevitably collapsed with the first dose of reality. The STBT had representatives from marketing, manufacturing, and logistics, and tried to make sense of the coming weeks. Oil tankage is limited and so is the capacity to move oil products around. Refineries cannot be turned up or down at will but can only be reset with some effort and cost.
The most important input from the STBT was the hardest to predict, and that was customer demand. What could we actually transfer to customers over the coming days and weeks, of which products and where? We had one specific advantage, namely the tankage at petrol stations and certain commercial customers. These acted as buffer capacity, where we could run stocks up or down at short notice with minimal cost. But our most valuable weapon was the past. What did we sell last month? What large orders are in the pipeline? What did we sell in the equivalent months last year? For all the variables involved, the total demand tended to follow a somewhat predictable pattern. With a few tweaks, we could feed that to the production side and they could respond accordingly, so long as there were in the midst of their own crisis.
Since those days technology has marched forwards. Businesses have been able to place many more inputs onto computers and use algorithms rather than committees to do the other steps. I am sure that Shell UK still has an STBT (no doubt having used half a dozen different acronyms since my day), but the role has evolved with technology, enabling faster responses and reduced tolerances.
What happened with the pandemic was a series of rather sudden and unexpected ruptures to demand. Previous crises were not like this. In the financial crisis demand plummeted, but across most categories following a demographic profile, so the algorithms could make a fairly good guess for most goods most of the time. In this crisis, people started buying different things in different ways at very short notice, and the guesses went haywire. Only now, two years later, have most algorithms started to recover a semblance of dignity.
We can overlook the fact that there are more to supply chains than products and factories and trucks. Another critical component are people, and not just the beleaguered managers of the STBT. Even in these days of automation, we still need people to man the factories and drive the trucks. With the global economy now based as much on services as on goods, we need people to execute those services as well.
This month I have been travelling in Europe. It has been a lovely experience in many ways, and once again I observe how Europe seems to have developed and become more liveable while the USA seems to be heading in the opposite direction. Another takeaway is how we had temporarily forgotten what a strain travel can be, with its crowded airports and teeming cities. Travelling during the height of the pandemic had its risks and its complications, but it was a joy to move around free of the crowds.
My travel has enabled me to witness the people supply chain crisis at first hand, most notably overt the last few days around the glorious city of Amsterdam. First, Schiphol airport, one of the most efficient in the world, is being hambled by staff shortages. It is no fun arriving on a flight that lands at 2AM. I promise you it is far less fun standing by the baggage conveyor belt for ninety minutes at that hour. I tried to stay calm by envisioning a team of just one or two baggage handlers trying to cope with an expected level of demand.
Then Amsterdam itself was packed with visitors and a joy to experience, but it seemed that every single establishment was short staffed. I had brunch at one large place where I estimated the team of five to have had less than a month of experience there in total, given their absence of teamwork and complete unfamiliarity with the IT system: everybody was being given the wrong items on their bills! Again, the staff and the customers were remarkably tolerant, as if this situation was quite normal.
Businesses have been caught out by the demand upswing. Large or small, they struggled to stay alive in 2020-21, cut staff to the bone and have been understandably cautious in rehiring. That side of the equation has not surprised me, but what has is the way the supply side has not been able to respond either. I can barely remember a time in my life when casual labour was in short supply: who would not welcome a side hustle?
I have been pondering the possible reasons for the shortfall. A good place to start is often demographics. Over the last fifty years, two groups have dominated this casual workforce, young adults and recent immigrants. Lo and behold, the EU birth rate declined close to an all-time low during the 1990’s, only to start climbing again after 2010. So the cohort of young adults is now at its minimum. Furthermore, most of these kids are now in tertiary education for longer. As students, they may still go for a hustle, but perhaps for fewer hours. This cohort has also been imaginative in finding alternative hustles to the traditional service sector, via various online activities.
And since 2016 immigrants have become less welcome across the EU. I find it pleasantly ironic that some of the very people who may be bemoaning the slow service of their latte may be the same ones who drove politicians to confine to camps in Greek islands the very Syrians and Afghans who would be only too happy to help. We reap what we sow.
Then there are the possible reasons related to Covid. Some people are still sick or afraid. Some used stimulus money to sort out the cash flow and can now be more fussy than before. Perhaps a bigger factor is where the young are now living. Many went back to families and away from large cities. You don’t commute a long way for a bar job so the cities may have fewer workers available as a result.
I expect things will balance out within a few months; after all that is how market economies work. Wages are rising and conditions are improving. Demand will become more predictable again. Tragically, Ukrainians may become a significant service workforce for an extended period. There is probably a downturn coming as monetary policy tightens, so more mature workers may soon be looking for casual work. Maybe, just maybe, a more humane immigration policy might emerge. That would a cause for celebration, even more than the joy of finally seeing my bag trundle onto the luggage belt at 4AM.
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