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What will happen to supply chains in the era of COVID-19?

by Elizabeth1 min read31st Mar 202027 comments

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Bucky and skybian both asked questions about how COVID-19 and associated shutdowns will affect supply chains. This is a question just to discuss that. I'm interested anything from "observations of very concrete things that have already happened in China" to "speculation about weird counterintuitive effects" to "here are some facts about supply chains in general".

Like the parent question, this is intended to provoke more babble than prune. But even the babbliest thing should be presented such that other people can build on it. So if you have an idea, please share the reasoning or data behind it as well.

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6 Answers

Produce will have trouble being picked because farms frequently rely on temporary immigrant workers, and the necessary immigration is banned. This is already happening in Europe, and seems likely to affect the US shortly. Even if it were not, migrant worker conditions seem pretty rife for disease transfer, so I'd expect a big hit to productivity even if they did show up.

Long term I expect this to shift consumption to things that require less human touch in harvesting, like grains and legumes.

ETA: Apparently Canada thought to exempt migrant farmworkers from the travel ban, but with air travel shut down is having much the same problem.

ETA 4/2: This paper words things in a confusing way, but: in 1997, 75-80% of vegetable-acres and 55-60% of fruits-acres grew a type of produce that has at least a 50% chance of being harvested mechanically. That's helpful for knowing what could be mechanically harvested in a labor shortage, but I assume it's too late for farmers to change plans this year. So the actual range (in 1997) was somewhere between 37.5-80% and 37.5-60% of vegetables and fruits, respectively, and has presumably gone up since.

Reasons this number could be wrong:

  • Mechanization likely to have increased in the last 20 years
  • Mechanical harvesting doesn't actually mean zero labor, someone has to run the machine.
  • It's likely that some amount of labor will be found, one way or another

My conclusion is that in the US, if labor shortage is the only problem this year variety will fall, prices will rise, and there will be more emphasis on processed produce, but it's not likely to be a crisis.

I would expect a pronounced policy push towards national self-sufficiency wherever possible for drugs, medical equipment, and probably other strategically-important things. I would also suspect major pushback against just-in-time supply chains with little in the way of warehoused inventory.


Very positive developments to my mind! Nothing biological operates on such slim margins and such high efficiencies as much of industrial civilization. Because everything that did died, and those with more in reserve and with more distributed capacity were more robust and survived.

Pushback against just-in-time supply chains sounds appealing, but how would it actually work? Is this something we can regulate, maybe make grocery stores go through stress tests like the ones we do for big banks? Somehow I have a hard time believing practices will change.

8Kaj_Sotala2yFinland has a National Emergency Supply Agency [https://www.nesa.fi/], which maintains its own stockpile of emergency supplies including food, fuel, and healthcare supplies; they recently released respirators [https://translate.google.fi/translate?sl=auto&tl=en&u=https%3A%2F%2Fwww.hs.fi%2Fkotimaa%2Fart-2000006450453.html] from the supply in response to COVID-19. (They have previously released crop seeds in 2018 after an exceptionally bad growing season had caused a shortage, and fuel in 2005 after Hurricane Katrina caused a reduction in the availability of oil.) They also actively coordinate with the private sector. I am a little unclear about what exactly that collaboration involves, but according to the news [https://translate.google.fi/translate?sl=auto&tl=en&u=https%3A%2F%2Fyle.fi%2Fuutiset%2F3-11268216] , under normal circumstances Finland's largest grocery chains report on their supply situation to the agency twice a day. The are also legal requirements for drug manufacturers and importers to stockpile medicine: there's e.g. a 10 month emergency supply of antibiotics, a 6 month supply of blood pressure and diabetes medication, and a 3 month supply of respiratory and cancer medicine, among others.
6ChristianKl2yIn Berlin where I live we used to have big warehouses full of grain for the case that we lose our access to outside markets. It's not that complicated to pass laws that force the big grocery chains to have their own warehouses with months worth of essentials.
3ErickBall2yAre those government-owned warehouses of grain like the ones Kaj mentioned in Finland? The US used to have [https://en.wikipedia.org/wiki/Bill_Emerson_Humanitarian_Trust] a strategic grain reserve, although it looks like at the time it was liquidated in 2008 it had only 915,000 tons of grain, which would feed the country for... not even a week. Requiring businesses that sell non-perishable food to store a few months' supply sounds reasonable, but I'm curious if other places have used that approach successfully. I know groceries are a low-margin business to begin with.
2ChristianKl2yWest-Berlin had a wall around it for decades and there was a political need to not be dependent on food transport that relied on permission from the Soviets. As a result we likely had larger stockpiles of food than any other city in modern history. Groceries are a low-margin business but if you require all the supermarkets to follow a regulation they can just pass on the costs to customers. It's also worth noting that we pay huge sums of money in agricultural subsidies, sometimes inducing people not to produce food. We likely want to restructure those subsidies in a way that leads to larger stockpiles of food.
3William Walker2yOne thing we can do is eliminate inventory taxes... this is one reason that companies were forced into just-in-time. We currently punish people for being prepared for any emergency ;)
3Elizabeth2yMy understanding is the stress tests for big banks aren't very good- they encourage the bank to shore up against exactly the scenario they know will be tested, and no other. So I'm not very hopeful about them for grocery stores.
2orthonormal2y"Not being as robust as the stress test would seem to imply" is still consistent with "significantly more robust than they would be in the absence of such a requirement".
4Elizabeth2yMy impression was that if anything these tests were making it worse, but I don't have the reference to double check.
2orthonormal2yNaively, forcing banks to keep enough liquid reserves to handle an imaginary crisis situation should strictly improve their ability to handle an actual crisis, compared to letting them not do that (and competition between banks meaning that they're usually better off not keeping extra reserves available rather than gathering interest etc). I'd be surprised if it were negative on net.
4Elizabeth2yHaving savings is boring and unleveraged. Buying insurance against an *extremely specific* scenario does even better on the tests and costs much less.
2orthonormal2yThe idea that having insurance from another bank counts as passing a stress test doesn't match any source on the first page of Google search results for "stress test banks"; the more specific ones mention that the requirement is maintaining at least 4.5% capital (as Dodd-Frank requires) on hand at the peak of the stress test scenario. Is there a source which says that banks are using massive insurance policies to pass these in place of capital?

Found my source.

What regulators spotted a couple of years ago is that banks were buying very focused packages of insurance that would pay off in exactly the scenarios of the stress tests. They had no commercial reason whatsoever, and were in fact probably quite expensive pieces of insurance to purchase. But it meant that the bank could, with a really straight face say, 'Well, you know what? In this stressful scenario we'd be totally fine.' And what's going on under the table is, 'Yeah, because our bet that this scenario would happen would pay off, and we'd suddenly get an extra half a billion extra dollars.'

I had misremembered the insurance as cheap.

2orthonormal2yThat's unfortunate to hear, and it seems like it could have been different. In the case of food supply chains, though, it would be just a literal matter of counting and not accepting IOUs for food in lieu of actual physical food.

Being self-sufficient and robust as a national economy is accepting a competitive disadvantage relative to a global just-in-time supply chain in times of prosperity in exchange for a competitive advantage during a crisis. Selection pressures will push economies accepting this tradeoff towards being actively interested in a world with more crises.

2CellBioGuy2yYou ascribe too much agency to the great hulking amoebas that human societies are.

A journalist suggests (and I find credible) that some shortages are due to demand moving from business-to-business to business-to-consumer supply chains much faster than supply can. E.g.,

  • Business toilet paper has different fiber content, the rolls are much larger, and many more rolls are sold at a time.
  • Restaurant/cafeteria bananas are small and sold in units of 150, consumer bananas are larger and sold in bunches of < 10.

Presumably these could be retooled eventually, but whether that's even a good idea depends on how long the shut down lasts.


EDIT 4/6 : At least one B2B provider is retooling to allow consumers to purchase from them (not an endorsement, I have not used the service).

Article claims beer and soda are endangered by the reduction in driving. CO2 comes mostly from ethanol production, which is on the decline.

https://www.foxbusiness.com/markets/beer-may-lose-its-fizz-as-co2-supplies-go-flat-during-pandemic.amp

I've done a little research about the food supply chain specifically. Presumably certain supply chains will be similar, certain ones will be different. Also note I am very much not an expert. The basic fact is that there is "enough food" but prices may rise and getting food may be worse. I think there are three key parameters, which could go either way:

(1) Hoarding/instability. Worst case scenario: people panic. People stockpile giant supplies of food. Food goes bad. People buy more food. Food gets prohibitively expensive. Best case scenario: supermarket situation stabilizes, panicky people feel like they have enough non-perishables stockpiled, most last-mile (grocery store) product shortages stop.

(2) Protectionism. This will be less dangerous in the US which exports more food than it imports. But certain countries, especially poorer countries that rely significantly on imports, will suffer if a global panic causes protectionist policies about food (e.g. wheat exporter Kazakhstan apparently stopped exporting grain because of coronavirus fears, see this article ). This is understandable, but probably bad. Here the best case according to this article is if big markets actively work to stabilize the market and punish protectionism (but the economics here is above my pay grade).

(3) Worker/driver issues. This mostly depends on "how freaked out blue-collar workers get". Currently most truck drivers, clerks, etc., are risking infection in exchange for a steady job. If things get bad (for example if there are wide-spread hospital bed shortages and fatality goes through the roof) *and younger people become afraid* (a big if), a big proportion of chain workers will take losing their job over getting infected. This would probably raise prices.

It's important to stress that it's *very unlikely* that anything catastrophic happens in developed countries like the US, and the worst-case scenario is government rationing. The example to keep in mind is WW2 Britain (I originally linked the wrong article here, which is also an interesting read ). Nevertheless, with rationing people survived basically healthy for several years of war.

8ChristianKl2yIn Germany, the amount of crime went down not up. Given that it's easy for antisocial conduct to make headlines I think it's hard to reason about this.
1Dmitry Vaintrob2yWhat makes you say England did not have looting during WW2? England had more cohesion. But that is just one factor impacting people's behavior. Someone who is desperate or immoral enough to loot in wartime is unlikely to be seriously swayed by the need for patriotic unity. Other factors, which I think are bigger, are severity of need and enforcement. Don't know about enforcement, but it is very hard for me to envision a scenario where meeting basic needs is harder and than in WW2 Britain.
1Stuart Anderson2y-

Re 1: The existence of perishable, refrigerated, and frozen food, which can only be hoarded to a very limited extent, puts a ceiling on how bad a run on food can get, right?

I'm more concerned with developing countries, particularly if they depend on international trade for food. Also, their goods are mainly transported by truck drivers travelling long distances, who may opportunistically demand better working conditions. In Brazil, they threatened to stop working, thus reminding everyone of a strike in 2018 that caused supply problems in major cities. Fortunately, they reconsidered it after the government started a mediatic campaign to make them feel valued.

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