A version of this story appeared in CNN's What Matters newsletter. By Zachary B. Wolf.
There have been numerous stories in recent days about problems with the supply chain as the economy starts back up after last year's unprecedented shutdowns.
It's everywhere. A ketchup shortage caused by a lack of packets, caused by the pandemic-fueled increase in takeout dining. The idling of GM plants because of a delay in computer chips.
To understand what's going on and how long these types of shortages will last, CNN went to MIT professor Yossi Sheffi, who wrote the book on Covid and the supply chain, The New (Ab)Normal: Reshaping Business and Supply Chain Strategy Beyond Covid-19.
SHEFFI: The supply chain is the process of building products. You can look at it in terms of three basic flows:
- Physical flows. Material is mined and made into, say, iron ore, which is made into metal bars, which are made into a carburetor, which is assembled into a car engine, which is assembled into a car, which is sent to a dealer and bought by a consumer. At the end of life, this car will be disposed (hopefully in a responsible way). Similarly, agricultural products are collected by wholesalers, sent to factories that make soup, sent into warehouses for storage, distributed to retail stores, and bought by consumers. Each operation in this process is executed by a different company, so there is a "chain" of companies involved in transforming stuff mined or grown to finished products. The chain also involves transportation providers (trucks, vessels, trains, airplanes), all kinds of intermediaries (who help, for example, clear customs), warehouse operators where parts or products can be stored until they are used or sold, etc.
- Information flow. To coordinate all these activities, companies involved send a huge amount of information to each other. These include orders, status reports (including sensor data), invoices, many regulatory forms, etc. In addition to coordinating activities, companies use this information to optimize their operations, the inventory they keep on hand, etc.
- Cash flow. While products flow "downstream", from suppliers to manufacturers, to retailers, money mostly flow in the opposite direction as consumer pay retailers, who pay manufacturers, who pay their suppliers, who pay their own suppliers (some supply chains have a dozen "tiers" of suppliers, and sub suppliers, sub-sub suppliers, etc.)