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We Can’t be that Short-Sighted. Can we?
Although things have improved, following the national vaccination program, we are still far from the end of this pandemic. India is recovering from a massive surge, and Israel, which seemed to be completely out of the water, just announced that face coverings will again be necessary while indoors, even for those fully vaccinated. But it seems that we are already forgetting some of the lessons we learned in the early days of the pandemic.
I am referring to the shortage of Personal Protective Equipment (PPE). I am sure you remember the shortage of face masks. In the early days of the pandemic, the debate on whether N95 masks were necessary or not revolved around the fact that there was a significant shortage. This shortage complicated the decision process on where and how they should be allocated, prompting some health organizations to be hesitant in recommending their use. In turn, this inflicted considerable damage to the credibility of these health organizations, especially once we realized that the use of N95 masks was essential in limiting the spread of the coronavirus.
On this backdrop, you might be surprised (or not) to read the recent piece on NPR about the fact that some of the factories that manufacture protective masks are actually starting to shut down.
"A year after several American businesses sprang up to manufacture much-needed masks and N95 respirators within U.S. borders, many of those businesses are now on the brink of financial collapse, shutting down production and laying off workers. The nationwide vaccination campaign, combined with an influx of cheaper, Chinese-made masks and N95 respirators, has dramatically cut into the companies' sales and undermined their prices. And while some call it a normal consequence of a free market, a few business owners say they feel abandoned by the same government that relied on them to help save American lives during the COVID-19 pandemic."
Whether you feel angry, pitiful, or indifferent, it’s worth it to try and delve deeper, understand the root cause of this, and ask ourselves whether this situation really was unexpected, but more importantly, if WE can do anything about it.
Let's Understand Why There was a Shortage
A lot has been written regarding the cause of these shortages. We can begin with years of neglect in building sufficient inventory for PPE by hospitals and governments, partially due to the lack of focus and priorities, and partially due to cost-cutting. We can continue with the lack of investment in the production capacity of such protective gear and conclude with significant and unprecedented demand for such equipment, resulting in a temporary (yet long) shortage.
While it is easy, and pretty common, to blame Just-In-Time (JIT) for everything these days, it’s important to say that this is not the case here. JIT is just not a production method that can address emergency products. In situations where you have rare events with high consequences (such as a pandemic), you have to either carry inventory or have sufficient flexibility in capacity, otherwise, you must be willing to bear the consequences. For example, the military does not manage the inventory of F35 combat aircrafts using JIT.
So, let’s go back to the NPR article and first try to understand how manufacturers reacted in the face of these shortages. Lloyd Armbrust, the founder, and CEO of Armbrust, one of the main firms discussed in the article, says:
“We started at the height of the pandemic really, in April, and very, very quickly, in about six months, we were able to scale up to producing about a million masks per day. We believed everyone when they said they would stay with us. ... We're buying a factory, we're building more machines, we're hiring people, but you got to stay with us. And everybody said they would.”
But then, as Susanne Gerson, the executive vice president of Louis M. Gerson Co. describes:
"We ramped up our capacity to such a level based on what we thought were commitments from new customers and people saying, 'No, we're going to need product,' and being told this by the government and by everyone. And then it's just like, poof, they're not sure,"
If we try to understand what's really going on here, we can see two conflating factors. The first is the actual shortage of supplies, both in the US and in China, and the second is the Bullwhip Effect. This is not all that different from what we see in semiconductor manufacturing, where disruptions in one side of the supply chain get amplified in other parts of it. So, let me play it out again and together, so we can discover what makes running supply chains in times of shortage hard:
Initially, we witness a significant surge in demand which leads to a significant shortage of supply. In the case of COVID, as described above, people realize the efficacy of these masks and start wearing them wherever they go, coupled with a shortage of supply.
We then witness the reactions from each market player:
Consumers need the product and place orders with whoever is available. In the case of the pandemic, there was a lot of uncertainty on how long it would take to have an effective vaccine, what the necessary level of protection is, etc., everyone is probably ordering more than they will actually need - inflating their orders.
Manufacturers observe this surge in demand for these masks and while they are aware that this is somewhat inflated, the uncertainty regarding how long it will take for this demand to decline and a solution to be found leads them to take the bet, build capacity, and hire people. They are also functioning as responsible citizens who care about their customers and fellow citizens.
In the meantime, other players read these signals and either build capacity (to build the products themselves) or start importing products, driving supply levels upward.
Then the music stops: We don't need that much PPE now. Orders stop! We may need more products in the future, but for now, we can focus on building inventory rather than maintaining capacity.
Lloyd Armbrust says:
"Let me put this in perspective: We have 28 members who are going to go out of business in the next 60 to 90 days, and when they go out of business, it's not like we turn off the lights and mothball these machines. We send them to the dump. That capacity that we created goes away, Already five of the AMMA members have stopped production”
Was this really inevitable?
The Free Market
The situation above is not all that surprising, but that doesn’t make it right. So, let’s first understand if the decision to start shutting down these plants is indeed the “best” decision.
“Armbrust, like other members of the AMMA, said he knew he took a risk. "I made a stupid decision because I'm an entrepreneur, and I cared about our country and bringing this strategic manufacturing back," he said. "A bunch of people made bad decisions personally to do something that was right at the time, and that to me is the American spirit."
In other words, this is a natural reaction to the situation. Most of these firms have learned, from the past, that once the manufacturing process of a product moves to China, it will take crises at the COVID pandemic level to bring it back, so there is no reason to wait. All of these manufacturers prefer to cut their losses.
So basically, this is just the market. The market (and its inability to match supply and demand) created the opportunity, and the market is now taking that opportunity away. The market has spoken.
Freedom from the Market
The example of PPEs, together with the significant shortage of semiconductor chips, raises important questions on the role of governments, entrepreneurs, and customers in this system.
Friedrich Hayek, an Austrian economist and Nobel Laureate, makes the argument that markets excel in what they are good at, but we cannot ask them to do other things. Specifically, markets are very good at aggregating preferences and reacting quickly (maybe not all that quickly) to signals, but they are not moral. His main argument is that capitalism is amoral. So, if you want to put moral preferences on the market, you can, but you cannot expect it to do so on its own, or be surprised that it does not comply with your moral compass. And this, indeed, seems to be the view of the entrepreneur in the NPR piece, Lloyd Armbrust.
We could allow the free market to be the main arbiter of what's available and what's not and decide on how things are priced, but we must also be willing to accept that this will lead to unfair situations for at least one or more market players. On the other hand, accepting market mechanisms as the dominant frame does not necessarily mean that that is the right path to take for every product or every market. We can also decide to have "freedom from markets" for certain products or services.
The term "freedom from markets" was coined recently by Mike Konczal, in his book “Freedom From the Market: America’s Fight to Liberate Itself from the Grip of the Invisible Hand”. The book doesn’t make a moralistic argument but instead one that identifies situations where collective goods are needed. Situations where the Hayekian logic that relies on “voluntarism” becomes a constraint on adaptation. The collective can be a community, a country, or the entire world. Both the political/moral argument and the collective argument are important and not unrelated.
I wrote this post during the week leading up to the Fourth of July because as the US is celebrating its independence, it’s interesting that governments around the world, including the US, are paying more attention to the fact that through their supply chains they have become less independent. This realization triggered a careful look at these markets and the role governments play in regulating them.
However, while we wait for the government to regulate things or take a more active role, we have to remember that in every market, there are at least two sides. There are producers and consumers, and I think it’s time to have a more thoughtful discussion on our role as consumers within these markets. Or even our roles in deciding not to use market mechanisms to solve every problem.
I wrote about our role as consumers in the gig economy context, but it’s even more relevant here: we have a dual role in these markets. Well, much more than two, but in the next few years, when it comes to supply chains, we will need to realize that we have two roles: one as a consumer and one as a citizen or community member. The unfortunate part is that they may conflict:
The consumer in us likes to pay low prices, may not care about the country of origin of the product, and wants immediate availability. The consumer in us has a very short-term utilitarian view.
The citizen in us cares about other things. A citizen cares about their community. They would like their neighbor to have a job. They would like the neighborhood store owner to be able to afford housing in the same neighborhood. They would like their nation to have the ability to manufacture chips and PPE.
It's acceptable to admit that there is tension between the two roles, and it's OK to acknowledge that there is no simple answer on how to align these two roles.
It's also OK to admit that the notion of comparative advantage, as first conceived by David Ricardo, as the foundation of free international trade, might not address the issues related to community building and collective goods. Countries need to continue and make sure they have viable capabilities for some products, even if they don't have a competitive advantage in them.
Unfortunately, I do not see this issue being discussed in the public domain.
We tend to blame the entrepreneur and the firm, who only operate at the market level and not at the political, moral level. When the entrepreneurs are trying to profit from a situation (say, by increasing prices when there is limited supply), they are shamed by the community for not being responsible, but when they are left with the losses, they are expected to shoulder them alone. We blame the government for its inability to prepare and react, but we rarely blame ourselves.
What Should We Do, as Consumers?
Covid has affected and continues to affect our lives on several levels.
It has us questioning vital decisions like where we really want to work or live.
Personally, I think it's also important to start questioning the products we buy and where we buy them from, to question our role as customers, as citizens, and community members.
I am not advocating for nationalism. I am advocating for balancing the short and long-term, consumerism, and community building. The solution has to come from us, both as consumers and as community members.
We need to decide which products we would like to prioritize, local vs global. Maybe we could buy from a local store rather than order one more widget from AliExpress. Maybe we could support businesses that demonstrate long-term thinking as opposed to those that build their entire business model on cutting costs at the expense of their business partners.
I, personally, am not in the market for semiconductor chips or PPE. I am, however, very committed to buying my coffee from Ethiopia and will continue to do so through a local roaster in Lancaster, PA.
But this is not enough. The question is whether we can get others to follow us. Can we build the r/wallstreetbets Reddit community of responsible citizens taking action as consumers? Can we take COVID as an opportunity to start asking these questions?