Professor Answers Supply Chain Questions

I'm Harvard Business School, professor Willy Shih.

I study supply chains.

Let's answer your questions from the internet.

This is supply chain support.

[upbeat music]

First question, AnEmortalKid asks, how do tariffs work?

Well, tariffs are a surcharge that are applied on top

of the cost of your import, right?

So when you buy an import from some company abroad

that's selling it to you, the US government, for example,

would add what amounts to a tax on top of that value.

So if you bought something that was worth a hundred dollars

and you have a 25% tariff,

then the US government would collect $25 from you in order

for you to receive your package.

The people who pay that tax are the people

who buy the products, you and me, the consumers.

@MichaelHughes1.

But seriously, y'all, what's with egg prices?

First of all, we should recognize there are two different

supply chains for chickens and eggs, right?

Chicken meat is one supply chain,

eggs are another supply chain.

The hens that lay those eggs have suffered a lot

from this avian bird flu,

and that's led to the culling of a lot of those hens.

When we cull all the egg laying hens,

the egg supply has gotten tight.

That's why we've seen a huge increase in the price of eggs.

So what we have to do is we have to rebuild the flock.

There's another interesting aspect about chickens and hens.

If you're an egg laying hen,

you need biotin in your chicken feed and that biotin by

and large comes from China.

So if we get into a trade war with China

and China decides that they maybe want to restrict exports

of biotin, all of a sudden our hens are not gonna be

as productive laying eggs.

ThatGuyBMills asked, are we in a trade war?

Yes, we're in a trade war and it's getting worse.

The purpose of a trade war is

to favor your producers versus those of another country.

The trade war really started

with the first Trump administration

by applying tariffs to China.

The Biden administration also maintained a lot

of those tariffs and added some tariffs

and other trade restrictions.

President Trump is imposing tariffs

because he says, I want companies

to make things in the United States,

and by making imports more expensive,

I'm gonna encourage you to make stuff in the US.

Maybe it'll be cheaper.

The problem with the tariff argument is the cost

of doing things in the United States is very high.

Even today, when you look at the cost

of labor in the United States versus the cost

of labor in a place like Mexico or China,

it's still four, five times more expensive

to do something in the United States.

What can you then make

in the United States and be competitive?

You can make things in the United States

where you don't have a lot

of labor content in your products.

An example of that might be a jet engine

where there's significant labor cost,

but as a percentage of the total value

of the product is relatively lower.

If I wanted to assemble an iPhone,

the typical labor content

would be probably about four hours.

In China today so say it's $6 an hour

times four labor hours, that's $24.

Four hours of the labor in the US,

that'll probably cost me $40 an hour.

Okay, so that would be maybe $160 versus $24

to assemble that phone.

It's not gonna happen.

@Popafaul asks, high as hell thinking,

why the [beep] was toilet paper

the first thing to go when this covid [beep] hit?

Okay, let's talk about toilet paper.

There are two things to understand about toilet paper.

Number one, demand is flat.

It's not like there's some seasons

you use more toilet paper.

The second thing to think about is economists say it's not

very tradable, and what that means is it's kinda low value

and it takes up a lot of space.

If you ship a truckload of toilet paper,

you're not making a lot of money doing that,

and so you don't wanna ship it long distances.

It makes no sense, therefore,

to import toilet paper from China, right?

If you live in New York City,

your toilet paper is gonna be made somewhere

in the northeast or maybe Mid-Atlantic states.

It's not gonna be made far away.

I'm gonna have factories that are loaded to 90

or 95% churning out toilet paper.

So we're gonna have a well organized,

very tight supply chain that doesn't have a lot of slack.

Then when consumers go in

and buy a lot, you're gonna run out

because there's not a lot of slack capacity to increase

how much you can make when demand suddenly rises,

I'll bring in some more machines, I'll ramp up,

I'll run extra shifts, I'll delay my maintenance, okay,

and they'll make more toilet paper.

Eventually, people who've been stockpiling

all that toilet paper don't have anywhere else

they can store it.

Once you get the five year supply, you know what?

I think we have enough and they'll stop buying it.

Then sales will fall off a cliff.

And you know what?

That's exactly what happened.

@ghucon asks is the supply chain back to normal?

Well, that depends.

A lot of people would tell you the new normal is one

where we constantly have surprises and disruptions.

One example of a shock would be weather

that causes port congestion.

We remember during the pandemic

where we had over a hundred ships waiting

to unload off the ports of Los Angeles and Long Beach.

There's been big congestion off the ports of Shanghai

and Ningbo in China.

Another great example

of the shock was when the Houthis started attacking ships

that were going through the Red Sea to try

to get across the Suez Canal.

That caused a major shock to supply chains

when shipping companies said, huh,

I can't use the Suez Canal anymore.

@BSviagra asked, how fragile is our supply chain

when Houthi pirates can upend it and force us into battle?

What the Houthis did is they occupied a strategic position

on the strait that connects the Suez Canal

with the Indian Ocean.

That's the major trade lane from Asia to Europe.

Historically, most of the shipments from China

go through the Straits of Malacca,

and they would go through the Suez Canal to Europe.

But when the Houthis started attacking container ships

in the Red Sea, that made the Suez unpassable

for many of them.

So then a lot of them had to sail all the way around Africa.

That added maybe 10 or 12 days to the voyage

that also removed 12%

of the global capacity of container ships

just because they were occupied sailing around Africa.

You may remember the movie Captain Phillips,

where they looked at piracy off Somalia

and the East coast of Africa.

Anytime you have a major trade lane, it is susceptible

to disruption just by these incidents like that.

If you look at China for example, they are paranoid

that most of their oil has to flow through the Straits

of Malacca, between Indonesia

and Malaysia right off of Singapore.

They call that the Malacca dilemma.

A lot of China's paranoia

comes from they only have one coast.

They feel hemmed in by the string of islands from Japan

to Taiwan to the Philippines.

So when you study geography,

you can see these choke points on major global trade lanes,

all of which represent important vulnerabilities.

From the AskHistorians subreddit.

At what point in history did a global economy

start to develop?

Let's look at a timeline.

Trade really began with the Romans

who were trading salt and other products.

Remember, salary was money for salt.

That was the original definition.

The next big era was the Venetians.

This is Marco Polo bringing back silk

and ceramics from China across the Silk Road.

We saw a real expansion of trade in the 1700s.

This is when we had the sailing ships

that would go around Africa to the Far East

or they would go to the Americas to bring back gold

or trade in rum.

And then we had a pause between World War I

and World War II where there were a lot of tariff barriers

and kind of a lot of inward looking.

We saw post World War II a big expansion in trade,

and we saw this huge boom starting in the late 1990s,

but really gathering pace in the time

from 2001 until 2010.

The movement of factories for things like textiles,

clothing, consumer products, toys

out of the United States into a low cost region

like China, where labor costs were often one 20th

of what they were in the US.

In more recent times, starting in probably around 2016,

we've seen beginnings of a trade war

between the US and China.

Companies moving, starting to move production out of China.

Countries like the US applying tariffs to Chinese exports

and then getting reciprocal terrorists applied

to American exports.

@Gsw81Donny wants to know why is the United States

importing any food?

The US has one of the best agricultural regions

in the world.

Now, it turns out though that a lot of food

requires a lot of labor to harvest.

For example, fresh fruits and vegetables.

Let's take a crop like strawberries.

We use a lot of labor on temporary immigrant visas,

so-called H-2A visas who can come in to California

to pick strawberries.

But when you're done with all the costs

for that temporary labor, it costs you around 26.50 an hour

to pick strawberries in California.

Whereas if you wanted to pick them in Mexico,

it's about a 1.50 an hour.

That's why it makes economic sense

to import strawberries from Mexico.

The same thing actually applies for things like apples,

blueberries, tomatoes grown in Canada.

It's actually cheaper to grow them in Ontario

and ship them across.

We are a large food exporting country.

In fact, we are the largest food exporting country,

but our food exports tend to be in commodities

where you can have a lot of automation

and you can have a lot of productivity.

Think of things like corn, wheat, soybeans, where a farmer

and a relatively small crew can run a very large farm

and produce enormous quantities

of these products without a lot of labor.

@unormal asks what causes supply chain issues?

The problems come from disruptions.

Disruptions may be caused by any kind

of shortage in parts,

or they may be caused by logistics issues,

moving parts between various links.

What had happened at the beginning

of the pandemic was sales fell off a cliff for cars

and trucks in North America.

Many of the Detroit automakers canceled a lot

of their parts orders, especially for microchips.

Now, when demand picked up again,

they went back to reorder those microchips,

but meanwhile, the suppliers

of microchips sold their capacity

for other uses like in appliances,

in computers and other things.

So all of a sudden,

the car makers couldn't get those microchips.

When you're building a complex product like a pickup truck,

if you're short one part, you don't get to finish the truck.

If you look at a typical car or pickup trucks,

it may have a power steering assembly

that comes from Mexico,

or it may have castings that are used inside

that come from India or China.

A lot of products that we see,

even though they are assembled in the US,

have parts that come from all over the world,

and that's what makes them complicated.

This next question is from Quora.

Which country has bigger ports,

China or the US?

The big ports are all on the east coast of China, and that's

because the Chinese government starting in the late 1990s

and in 2000 invested a lot in this infrastructure.

They wanted to be efficient

and make it easy for all of their manufacturers

to ship goods abroad.

And we're now seeing the consequences of that

because these guys are huge and they're efficient.

Number one is Shanghai.

It's an amazing port.

They built it on a manmade island out in East China Sea,

and they built a bridge to get all the way out there.

You build an island out in the South China Sea

'cause you want deep water, right?

And they want to be able to handle the largest ships.

So Shanghai is the largest.

Ningbo, which is on the opposite side

of Hangzhou Bay from Shanghai,

and those serve that Yangtze River Delta,

which is this huge manufacturing hub.

You have thousands of companies literally

who packaged up their goods in containers

and they take them to those ports.

I visited the port in Shenzhen a couple of years ago

and I asked them, it's like,

how many trucks a day do you handle?

And I said, oh, you know,

we usually get 20,000 trucks a day.

Imagine 20,000 trucks going to the port

of Newark, New Jersey.

That would be like backing up from Newark to Philadelphia.

By the way, I asked the guys in China, it's like,

what's your worst traffic jam you ever had?

It's like, ah, you know, 20 kilometers long.

The US are total imports across all ports

and across the borders bring in between 90

and a hundred thousand containers a day.

That's across the whole country.

A typical port complex in the US

has a handful of slips for docking large ships.

May have as few as two,

may have a half a dozen.

In Shenzhen, they probably have close to 20 slips

for handling these ultra large ships.

The largest port complex in America

is the Los Angeles Long Beach complex.

If we had congestion around Los Angeles Long Beach,

some of them will go up to Prince Rupert in Canada.

When you look at the time it takes to transit from Japan,

it's about two days sooner than it takes to get down

to Los Angeles to Long Beach from Prince Rupert.

And then we have Port of Oakland,

which is actually a major export port

for products from the Central Valley, things like almonds.

Next question, stiletoprincess asks,

why does Trump want the Panama Canal in Greenland?

A lot of that is because these oversee critical sea lanes

in the case of the Panama Canal,

obviously connecting the Pacific Ocean

to the Atlantic on the shortcut through Central America,

Greenland is becoming more important.

As people look at the warming Arctic.

People are already experimenting

with shipping goods from China to Europe

through the Arctic because they can do it.

We don't have ice all year anymore.

Greenland, even though it's mostly covered by ice,

has a wealth of minerals

that are important things like rare earth elements.

So he thinks maybe he wants to have access to those.

We talk about lithium for batteries a lot.

A lot of that lithium comes from places

like Chile in South America.

They bring it to China and then they refine it.

They control the refining capacity for rare earth.

So what was until the mid 1980s,

the world's largest rare earth mine

is actually in Mountain Pass, California,

but since China invested in that refining capacity,

a lot of those rare earths have been going to China

for processing, and then China sells

it to the rest of the world.

Our next question is from Upbeat-Mastodon-223,

is supply chain management

is just basically coordinating supplies

from one place to another by communication,

or is it more than that?

Supply chain management

is all about matching supply with demand.

In other words, customers wanna buy stuff

and I wanna make sure

that all the steps I need everywhere from production

to shipping it around is in place to meet that need.

If you work in supply chains,

you have to worry about your supplier network.

Where are all the components

and all the parts that you use

to make your product going to come from?

How are they gonna get there?

How many do I want to have on hand when I'm assembling that?

All those things you have

to figure out when you look at the customer demand.

Some products have different kind of demand profiles, right?

A lot of them have a big back to school season.

A lot of them sell a lot of their products between October

and end of December for the holiday season.

If you're in supply chain for candy, you have to figure out

how I'm gonna prepare for this huge spike

of demand in the three weeks before Halloween

when most of the candy in the country is sold.

That's the type of job a supply chain professional

has to deal with.

@belikewes ask bro, how does KFC run out of chicken?

Great illustration of supply chain resilience

because back a couple of years ago,

KFC in the UK changed their distribution network.

They shifted over to DHL as their distributor

who had one warehouse for distributing all their chicken

to their stores.

One day there was a string of huge traffic accidents

around that warehouse,

which prevented any trucks from getting out

so they couldn't get any other chicken out to their stores,

and so you have KFC hanging signs in their windows,

sorry, no chicken.

This is a classic example of the trade off

of resilience versus cost in a supply chain.

They only went down to one warehouse,

which is less expensive, but it's less resilient.

Five warehouses meant you take one out,

the other four can still go.

@ChristianSiauwijaya says, imagine having one

of the busiest canals for shipping in the whole world,

but you dead ass never expanded the one cargo ship

wide part of the canal.

Like what do you expect?

Whole global supply chain obviously will grind to a halt.

I think Christian is talking about an incident

in the Suez Canal during the pandemic.

That was when the Ever Given was trying to go

through the canal during high wind conditions

and it got stuck sideways and it blocked the canal.

You say, well, how could one ship block the canal?

Well, this ship is 400 meters long,

longer than a football field.

Remember, a lot of this infrastructure

was built a long time ago

before we had some of these mega ships.

For example, the Panama Canal was built at the beginning

of the 20th century before we even had container ships.

The first container ships

only held like 50 containers at a time.

These days, the biggest ships hold 24,000 containers

and they are 400 meters long,

which is a lot longer than a football field.

So ships have gotten bigger because they're more efficient

and you can move more stuff at a lower cost

and the infrastructure that hasn't kept up.

@ThomasTashjian, how about the broken supply chain

and food processing industry crippled by Trump's elimination

of 2 million legal immigrant visas?

That's a big problem because a lot of jobs in fruit

and vegetable harvesting as well as food processing

are jobs that frankly American citizens don't want.

In the state of California, for example,

half the agricultural workforce is undocumented illegals.

So if we deport those then then the question

is gonna be who's gonna pick those fruits and vegetables?

We see undocumented workers as well in a lot of dairy plants

and a lot of food processing plants, meat processing,

so we're highly dependent on immigrants,

many of them undocumented.

Jade Thomas, Republican asks,

how could the US bring back manufacturing and industry?

What we can do is we have to focus on industries

where either we don't have a lot

of labor content in those products

or areas where we can win on the basis of productivity.

If you're gonna have high labor costs,

that labor has to have high productivity.

The way you do that is with automation, with new designs.

It's a tough problem

because as we move production offshore,

let's say furniture manufacturer,

which really left North Carolina,

those people moved on to other jobs.

So now if you wanna bring production back,

you've gotta train people how to make furniture again.

It would take time and it would take money.

One of the other things that we have

to recognize is when we offshore production,

that means we took a factory and we moved it to China.

When we moved it to China, you had to build the building,

hire the workers, hire the management, train people,

bring in suppliers.

What paid for all of that was lower product cost.

Typically, the amount you would save would pay

for itself within a year or sometimes even less.

That was moving from a high cost country

to a low cost country.

Now, if you wanna move from a low cost country

to a high cost country, what's gonna pay for it?

Because you're not gonna save anything,

but you still have to build the factory.

You still have to hire the workers.

You still have to train the workforce

and your product is gonna cost more,

so it's a very difficult problem.

Next question.

I'm sitting here in my leather recliner

wondering how all the individual parts came together

to deliver this level of chill for me.

That's a great question

because I visited one

of these leather recliner factories in China,

and it in itself is a great story of globalization.

They got their leather from the United States.

They bought their lumber to make the frames from Argentina,

and they bought the chemical foam that they used

to line the chair from the Netherlands.

So all those parts came together

in this factory in Shenzhen.

That factory had a warehouse

that had a half million cow hides that they were using

to make recliners,

and they would fill about 160 shipping containers a day,

stuffed full of leather recliners.

Then they'd send them down to the port.

Historically, a lot of Asian goods

would come from Los Angeles and Long Beach

and come to rail hubs like Chicago or Kansas City or Dallas.

Now, Chicago is a major hub for containers

that come from Asia

and are going to be distributed across the Midwest.

Trucks that will serve as far east as Ohio

and sometimes maybe even New York.

Increasingly what we're seeing is traffic

coming through the Panama Canal

and going to golf ports like Houston

and then coming north outta Houston

to serve the middle of the country.

Then they would go into a distribution center

and from the distribution center,

they might go to the furniture showroom

or they might go to a local warehouse outside of the city.

So when you order that recliner, that last mile delivery

to your house would be from that last warehouse.

@larissaariri asks, how is Temu so cheap?

Two things to remember about Temu.

Number one is Temu and Shein don't have their own factories.

They are actually pure supply chain companies

because what they do is they match demand from you

with suppliers in China

who then send the product directly to you.

The other way they can be cheap is there's this exception

to the import regulations

that's called the de minimus exemption.

Most Shein and Temu products come in

under the De Minimis exemption.

Anything under $800 doesn't have to file customs paperwork.

Just to give you a scale,

De Minimis exemption packages are coming in at the rate

between three and 4 million packages a day,

and that means three to 4 million packages a day

that come in without having to do any customs inspection

or filing any paperwork.

What these guys have discovered is our products

are light enough and the cost is low enough

that we could ship it by air cargo.

If you look at like the last few months of 2024,

these De Minimis shipments from companies like Temu

and Shein were about half

of the air cargo traffic across the North Pacific,

and half the air cargo traffic from China to Europe.

@ConflictedArt wants to know,

I just wanted to go to sleep last night,

and instead I laid there awake for hours thinking,

how is there another GPU shortage?

First of all, we have a huge spike in demand for GPUs

that stands for graphic processing units, a computer chip

that is used in AI applications.

Those GPUs, by and large are manufactured

by one manufacturer in Taiwan.

Taiwan Semiconductor Manufacturing, also known as TSMC,

owns about 95% of the capacity in the world.

The reason we're short is it takes a while to ramp up

that most sophisticated capacity.

The factory to make these GPUs right now,

they started about $20 billion to build one

of those factories, and it takes about two years to build

and equip one of those factories.

Those factories also make chips for iPhones,

personal computers, the servers

that go into the cloud data centers at Amazon

and Facebook and other places.

So there's a lot of demand for those chips

and there's relatively little supply,

and mostly what we're seeing here is the demand spike.

Our next question is from automaticoldace.

Is there any way of knowing

how many shipping containers are in the world?

I would guess there are hundreds of millions

of shipping containers out there.

Now what happens is shipping containers

are mostly made in China 'cause steel is cheaper in China,

and shipping containers are pretty much all steel.

Most of them come out of China to the US to Europe,

and they're filled with goods.

We don't have nearly enough stuff to put in them

to send them back.

So a lot of empty containers end up hanging around.

The container lines all sometimes had ships

to pick up all those empties,

but we tend to have a huge imbalance on empties

and full containers, right?

We have a lot of yards clogged

with empty containers waiting to go back.

@DouglasLumsden1 asked, I'm debating whether

to buy a few of these eight foot wide, 49 foot long,

9.5 foot tall steel shipping containers.

How expensive could they be?

It's probably around a thousand bucks.

The shipping lines all sell their containers

after a certain number of years,

and a lot of people use them for storage and other purposes.

I guess you could buy one.

I once thought about converting one into an apartment.

So anytime I wanted to move, I could call a shipping company

and say, hey, move this to Hong Kong,

and then I'd have my house ready, but I never did that.

For context, there are different size containers, right?

There's some that are 20 feet long, some are 40, some are 53

and a half feet long.

Basically, it's just a steel box.

So if you have a good use for steel boxes,

I guess you could do it.

There will never be a shortage

of used shipping containers.

@BenPo234 asked, WTF do rare earth metals

have to do with my wait time

for my RAV4 Prime.

Rare earth metals show up in a lot of crazy places.

So for example, efficient motors

have this rare earth called neodymium,

and neodymium is what you use to make magnets.

Most of that comes from China, by the way.

And in those batteries, now you have metals like lithium

and cobalt and other metals

which are really controlled by China in that supply chain.

@PrestonBooksSC says, you all bought a damned candy bar

at a gas station recently?

A regular-sized Snickers bar is over $3.

What has the supply chain of creamy nougat

or crunchy peanut been severely compromised

by covid or something?

Let's talk about the chocolate supply chain.

A lot of it comes from the Ivory Coast in Africa,

and because the weather,

the cocoa crop this year was really bad.

So the cost of cocoa went way up,

and that's why your Snickers bar is more expensive.

Peanuts are okay.

No new news on peanuts.

@CHECKYSTOMPER69 asks, wait, wait, wait.

Forget the oil and steel and aluminum lumber,

if the US slaps us with tariffs,

where the [beep] are they gonna get potash?

Potash is a fertilizer that is used by farmers

around the world across the United States,

and we get it all from Canada.

So he's right.

If we put tariffs on Canada

and they retaliate by restricting potash, that will hurt us,

but it will also hurt the Canadian exporters, the potash.

We also get a lot of oil and steel and aluminum from Canada.

One reason aluminum is cheaper to produce in Canada is

because they have a lot of hydropower.

We get oil from Canada, primarily the tar sands,

the Athabasca tar sands in Alberta,

and we have refineries in the US that are very well geared

to that type of refining.

Different oils, depending on

where they are pulled outta the ground,

have a different chemical composition,

and depending on that composition,

refineries have to be geared to that particular composition.

So US Gulf Coast refineries are geared to refining the type

of crew that comes out of Canada.

@EricOdinn asks, what is better alternative

to JIT, just in time inventory,

because clearly that's not working anymore?

Toyota came up with just in time

after World War II when they didn't have a lot

of resources, okay?

And the idea was, don't feed me anything until I need it,

but feed it to me exactly when I need it.

Toyota learned a lot

during the 2011 East Japan tsunami and earthquake

when one factory that was producing 45%

of the world's engine microcontrollers shut down

and it shut down Toyota's production.

And they then realized at the time,

they said, hey, wait a minute.

Our semiconductors come from geologically

and geopolitically unstable parts of the world.

So what we really need to do is we need to think

in terms of lead time.

I'm gonna hold an inventory

that reflects what's the lead time I would need

to replace it if I had a sudden interruption.

So going into the pandemic,

you might've noticed Toyota kept producing cars

almost a year longer than many of their competitors

because they had brought in a lot of inventory.

So just in time plus lead time

is a better way to look at this.

InternalEarly5885 asks,

will global supply chains collapse in a few years

or is that doomerism?

I think that's a little pessimistic

because we are a very interdependent world.

I think we're moving to a world

of more regionalized production.

We may get to a kind of aligned block Americas

and Europe and Japan and Korea versus China,

but I think we are

so dependent on getting things

from other parts of the world.

We can't do it all ourself anymore.

So I don't think it's gonna be collapse,

but they're gonna look different.

Those are all the questions for today.

Thank you for watching.

[brooding music]