Manufacturing shortages show there are no safe harbors
The past year and a half has not failed to provide society with various crash courses on industry and science.
During March and April 2020, our first lesson was on the unreliability of lean supply chains during the Great Toilet Paper Shortage. It seems appropriate that we have now come full circle with a lesson on the difficulties of bringing supply chains back online with a rapidly opening economy.
Supply chain management is not intuitive at first glance.
My first interaction with the science was back in the day when I was watching reports on infantry-fighting vehicle manufacturing in Pennsylvania.
The Obama administration was discussing cuts to the military budget, and vehicle production was on the chopping block. What caught my attention was the facility owner explaining that the long-run costs of shutting down the plant could be greater than the short-term savings. Sidestepping the manufacturer’s natural interest in continuing production of Bradley fighting vehicles. This caught my attention – the idea of losses being better than savings. Sounds like absolute insanity to financial planners.
But it is true! In the short run (however you define it), it may make more sense for a business to continue production so long as its average revenue for a product is greater than its marginal cost. For a nation, this means it is often more efficient to let military manufacturing continue during peacetime than it is to re-create industries from scratch during wartime.
This brings us to today’s manufacturing shortages.
For starters, the term “shortage” is probably more headline-grabbing than necessary.
When I order books from Amazon and then cancel my order, I don’t proclaim I have a shortage of novels when I finally realize I want to read something new.
Similarly, the current scarcity in everything from semiconductors to lumber has more to do with poor industry demand forecasts than the perceived resource scarcity a word like “shortage” conjures up.
In an entire article on the challenges of a microchip shortage in the car manufacturing industry, the Wall Street Journal only devoted a single sentence to the fact automakers canceled microchip orders early in the pandemic because they didn’t expect demand to pick up so quickly.
Auto manufacturers, lumber mills and other industries didn’t heed the advice of our Bradley fighting vehicle manufacturer: don’t interrupt the supply chain.
However, I don’t think we can blame manufacturers for that decision.
We all operate in a world of uncertainty, and few could have imagined (or committed to investing the tens of millions of dollars necessary) that within the first year of a global pandemic we would have multiple vaccines and an opening economy.
Columnist George Will often says, “There are no safe harbors in politics.”
As a society we have quickly learned there are no safe harbors when it comes to economics and decision making, only tradeoffs.
With that in mind, I don’t think we are in the worst of all possible harbors. I much prefer the harbor of vaccines, temporary manufacturing shortages and (hopefully) transitory inflation to the harbor of two- to three-year lockdowns that the manufacturers predicted.
Nicholas Haberling is a partnership advisor for Community First Bank | HFG Trust in Kennewick.