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Home >Opinion >Columns >The Suez crisis dealt just-in-time supplies another blow

Now that Ever Given, the large vessel that had blocked the Suez Canal for nearly a week, has been set free, and ships have started to sail through the crucial waterway, it is tempting to see the blockage as a temporary hiccup. But, as with the covid pandemic, it has exposed the fragility of global commerce, in particular the reliance on global supply chains.

Rapidly declining costs of transportation and the availability of cheap labour in jurisdictions that have light regulation and tight laws against unionization have contributed to explosive global growth. It has brought jobs where there were few or none, raised the living standards of many in some of the poorest countries, even if the wages paid for those jobs are low (but higher than the alternative, which would have been no work), and also lowered global inflation, as consumers are able to buy goods cheaper than what they would have been if they were produced at home.

The end of the Cold War too helped, in that it opened up countries whose governments had chosen to run their economies with strict controls, suspicious of markets. These nations had built tariff walls, imposed import quotas and restricted foreign investment. After the Cold War, they began to court investment from overseas, with many of them looking to replicate the experience of Southeast Asia and Mexico, which had successfully lured foreign investors to produce goods locally for export. That could work only if transport costs were low and supply chains operated with clockwork efficiency across the globe.

The Japanese had already invented a methodology for that. Known as kan ban, or just-in-time inventory management, it relied on efficient manufacturers supplying key components to other manufacturers, who would process these further, handing the baton to the next one in the value chain, before these inputs reached the final manufacturer, who would assemble products for shipping. This worked for everything from television sets to cars. Operations required manufacturers to be nimble, infrastructure to be fail-safe, and processes to be efficient.

When I was a graduate student at a US business school in the early 1980s, Detroit’s carmakers were suffering at the hands of Japanese automakers, and president Ronald Reagan was threatening Japan’s PM Nakasone Yasuhiro, seeking ‘voluntary export restraints’ so that the US auto industry might survive. Our B-school professors taught us complex formulae to determine EOQ or economic order quantity.

Global supply chains could function effectively if there were no unexpected barriers. As the Suez crisis (mercifully not violent, as the one in 1956 was) has revealed, things can go wrong when a choke point gets clogged. Queues of ships began to form, and some carriers began to re-route around Africa’s Cape of Good Hope, adding nearly two weeks (and costs) to the journey. A globalized economy relying on just-in-time supplies cannot afford such blockages. This was a setback for global trade and other forms of exchange. Food meant to reach its destination was held up, hurting consumers and farmers; there were cars stuck on board that paramedics could use to reach patients in remote areas; medicines for pharmacies were getting closer to their use-by dates; oil that would keep generators humming so that hospitals could operate 24x7 also remained immobile.

The blockage came on top of the pandemic shock, which affected many industries, bankrupting many firms. As shopping malls closed down, the cascading impact was felt not just by assorted brands that couldn’t sell garments, say, but also by manufacturers in exporting countries and, more importantly, by their millions of workers, many of them women, who stitched those clothes. Ultimately, it’s they who bear the burden. This supply chain made sense so long as supplies kept moving. When the economy suddenly came to a halt, the dislocation was severe. This highlighted the need for safety nets but, in theory, this would raise costs and undermine efficiency.

Companies are thinking of rationalizing supply chains. It will lead to consolidation, with fewer big suppliers left in the fray, and the exploration of alternative routes. But there is a deeper lesson: just-in-time inventory management is contextual. It can be relied upon if all suppliers are in some proximity, if not cheek-by-jowl. Extending the idea globally means relying on shipping and transport systems that never fail. That, as the pandemic and the Suez closure have shown, is riskier than once thought.

Perhaps there is a simpler solution, which is to accept some slack. Profit maximization requires businesses to keep squeezing costs out of their processes, while conventional readings of economics suggest a trade-off between efficiency and equality—you can have one or the other. But as Arthur Okun highlighted in his 1975 work, Equality and Efficiency: The Big Tradeoff, markets are intended to serve a purpose; we are not intended to serve the market. Capitalist democracy spurs everyone to do better than others while following rules that do not undermine the system. This apparent contradiction has a purpose: to level the playing field. An excessive emphasis on efficiency leads businesses to cut corners, undermine standards and overlook weaknesses, which get cruelly exposed at the time of a crisis. Safety nets are vital for everyone to get a fair chance. That means making equality as important a goal as efficiency.

Salil Tripathi is a writer based in New York. Read Salil’s previous Mint columns at www.livemint.com/saliltripathi

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