I’m going to preface this post by noting the obvious: I am not a trained economist or anything like that. While I do cover some of the nuts and bolts of the supply chain crisis as I understand it, I have no doubt there’s much I’m misrepresenting and even more I’m missing outright.

Now, with all that said, I’m gonna dive right in and hope I don’t get anything egregiously wrong. So, without further adieu…

Growing up in a place like Alberta, you’re never really that far from the agricultural sector. But, as a born and bred city boy from the bustling metropolis that is Edmonton, it’s not unusual to hear someone lament that folks really should have a better understanding of where their food comes from.

And I can’t help but agree!

Food is one of those many things many of us take for granted. If you’ve grown up in some of the more privileged places in the world (and there are plenty that are far less fortunate), it’s pretty normal to walk into a grocery story and just expect to find a huge range of products at affordable prices, many sourced from all over the world.

But it isn’t until times of crisis–usually a natural disaster of some kind–that we actually spend any time thinking about how that food travels from farm to grocery story to plate.

Oddly, I’ve rarely had that conversation about any other products that feature in our day to day lives. Until recently, who among us had spent any time wondering how our television or engine block or framing lumber ended up in our possession?

But, as with so many things, the pandemic has opened our eyes, forcing us to face these complex, interconnected systems that govern so much of our lives.

What we think of as the modern supply chain is a very new invention, and a direct outcome of the process of globalization that only really started to take over the world in the last 40 or 50 years. During that period, a huge range of changes took place that utterly transformed how products are made, shipped, and sold.1

First, the rise of the modern global trade regimes allowed goods to flow cheaply across national borders. Institutions like the WTO, and the growth of broad multi-lateral treaties like the infamous NAFTA, made it far easier for products to move around the world. This enabled countries like China, Japan, Mexico, Vietnam, and countless others, to build local, low cost manufacturing sectors, many of which specialized in particular industries.

Second, modern logistics made it possible to coordinate the manufacture of complex goods in multiple nations. Instead of building a car or a computer in one place, you could manufacture various parts in many different locations, and then assemble subsystems or whole products elsewhere.

Third, the development of the modern container system, and the growth of ever larger ships to move them on, dramatically reduced the cost to move goods across the world, so much so that outsourcing manufacture and then shipping to consumer destinations became cheaper than manufacturing locally.

Fourth, the adoption of just-in-time manufacturing, where companies producing goods would retain just enough inputs to meet purchaser demand–only possible in a world with advanced logistics and incredibly cheap and reliable international shipping–dramatically improved efficiency by reducing waste.

These changes, and many more besides, utterly transformed the way products are produced. More than ever before, the manufacture of products now occurs globally. A single product may be made up of components built in dozens of countries. In a product like a cell phone, partial assembly may occur in one place, and final assembly may occur in another, before the product is shipped to its destination. This interconnected web is ultimately extremely cost effective, pushing manufacturing and assembly to the lowest cost producers, while also being incredibly efficient, by ensuring that only enough products are created to meet consumer demand.

Unfortunately, the pandemic has shown us all how such a finely tuned and deeply interconnected system can go haywire.

It might seem obvious, but there isn’t just one supply chain. For example, the path that a roll of toilet paper takes to reach your local grocery store is not the same supply chain that an iPhone takes to reach your local Apple Store.

But it’s actually more complicated than that.

Anyone who’s used a public washroom stall can tell you that the toilet paper in your local office building is not the same product as the one that you can purchase at the Safeway–in particular, the office building product is seemingly made of molecule-thin sandpaper.

Well, it turns out the supply chain that gets that sandpaper to the local office tower is in fact a completely different supply chain from the one that gets you your Charmin’2.

So it was that when a large percentage of the workforce transitioned from working at the office to working from home, there was a sudden and massive shift in demand from the Cosco-supplied toilet paper to the varieties that land on your store shelves.

This created something called a demand shock.

Remember how I mentioned that supply chains, today, are incredibly finely tuned to create products just-in-time with minimal waste? Well, when there’s a sudden shift in demand–a demand shock–that profoundly screws up those supply chains.

What’s frightening is it doesn’t take a particularly large shift to create such a shock. Our supply chains are so finely tuned that relatively small but unexpected changes in demand can have a significant impact on the availability and cost of products.

In the case of toilet paper, the result was empty shelves during the initial phases of the pandemic.

More broadly, the pandemic has dramatically reduced the amount that people can travel, eat at restaurants, go to movies or other public events, and so forth. This has put more money in people’s pockets, and people are using that money to buy more goods. The net result is a dramatic shift in spending from the service sector to tangible goods.

The result is a more generalized demand shock across multiple sectors.

But it gets worse.

In many sectors, as COVID spread across the world, many manufacturers made the bet that economic activity would be substantially depressed. And in the beginning they were right! In response, these manufacturers cut back on orders for many of their input components, with computer chips being the most prominent example.

But again, these supply chains are very finely tuned. When those input component orders were cut, those manufacturers either reduced their own output, or shifted to other products. In the case of the chip sector, foundries shifted to producing products for other customers who hadn’t reduced their orders.

Then, against all odds, the various policies governments put into place to avoid economic calamity worked! Rather than a recession or depression, we now find ourselves in the middle of a boom.

Unfortunately, all those orders were already cancelled, and so we ended up with a supply shock: manufacturers of consumer products across a whole range of industries were unable to meet demand, automative being the most attention grabbing.

So, we have a demand shock–purchasing shifting from services to goods–and a supply shock–manufacturing cut back due to an anticipated recession that never materialized–creating a massive supply-demand imbalance, with the end result being product shortages and massive price increases across a range of sectors.

Now, this is all fascinating–well, to me it is, anyway!–but more fundamentally, up until two years ago, we didn’t need to care about any of this.

I previously wrote that the pandemic has shown us how the sausage is made in the medical field. So many of us go through our lives thinking of science as this linear, rational process, whereby ideas are tested, proven, and then new truths discovered. But that’s just not how science progresses. Instead, the process is complex and meandering, with many bad starts and dead ends along the way.

The problem is, until COVID came along, we didn’t pay attention. But now that the process is laid bare, for many, it has shaken confidence in our medical and governmental institutions. As our understanding of COVID has rapidly evolved, to some, that which represents the progress of science ends up looking a lot like guesswork.

Similarly, the global supply chain, which has evolved into a hyper-complex, efficient, interconnected monstrosity, worked for decades without any of us having to pay any attention to it. Oh, sure, it’d come up occasionally when Nike or Apple would experience some scandal, but for the most part we could safely ignore this system. Like the issue of how our food gets from the farm to our refrigerator, we could simply rely on the system to work, because for the most part it did.

And then the pandemic came along and exposed the fragile thing that lies at the center of western consumerism.

The end result has been something that I plan to cover in a whole other post: sudden and unanticipated consumer price inflation of the kind we haven’t seen in a generation.

So we now have a society in which many have begun to develop a distrust of government, healthcare, and now our economic system–systems that, despite proving to be surprisingly resilient, are also ugly and brittle and complicated.

How this will all reverberate through the rest of society is anyone’s guess.

My biggest fear is that those who would look to undermine our governments and institutions and communities will use this as an opportunity to advance their cause, praying on that shaken confidence to convince others that those systems do not and cannot work.

My hope is that, instead, we’ll see this as proof that we need functional and resilient systems to see us through when the going gets tough.

  1. While I don’t plan to write about it, it’s become very clear that this all came at significant cost. Whether you’re talking about pollution, the destruction of the western labour movement and commensurate wage stagnation, the rise of sweatshop labour in outsourcing countries, rising wealth inequality, and so forth, globalization has been a story of both significant benefits and profound costs. ↩

  2. As much as I hate those damn bears, clearly the brand recognition works… ↩