Never Break the Chain - the Supply Chain, That Is
The Essentials, Twenty-third Edition
For those who’ve been reading this newsletter since the beginning, you may have noticed that I’ve been publishing it since May of 2023, which means…we are celebrating a year of highlighting and understanding the essential critical infrastructure (CI) sectors, how they overlap, and how they impact our everyday lives! Cue the trumpets! Thank you so much for reading this newsletter and caring about these critical sectors.
In the vein of complete transparency, sometimes I’ve been “less than excited” about sitting down to write these, especially when such writing had to be done in the middle of the night because I procrastinated. Other times, it’s been easier to both get into the mindset and to find the time. I guess that’s why they call these types of things “labors of love.” It turns out that what I’ve loved most is twofold -- getting feedback from my friends and colleagues that they are reading The Essentials and even enjoying it and educating myself about some of the details and history that I had not taken the time to fully understand before.
The What
With the “love” part of this edition complete, I’ll move onto the labor part, which has a double meaning in this instance. As we all unfortunately learned during the pandemic, supply chains are integral to ensuring our CI sectors can deliver what they must. While toilet paper is, arguably, not “essential,” we all learned in March of 2020 that most people thought it was!
But what is a “supply chain" (you didn’t think I would let us proceed without a definition, did you?)? Oxford Languages has this succinct definition: “the sequence of processes involved in the production and distribution of a commodity.” For CI sectors, however, I want to dig a bit deeper. I love this description from Wikipedia:
A supply chain…is a complex logistics system that consists of facilities that convert raw materials into finished products and distribute them to end consumers or end customers. Meanwhile, supply chain management deals with the flow of goods within the supply chain in the most efficient manner.
In sophisticated supply chain systems, used products may re-enter the supply chain at any point where residual value is recyclable. Supply chains link value chains. Suppliers in a supply chain are often ranked by "tier", with first-tier suppliers supplying directly to the client, second-tier suppliers supplying to the first tier, and so on.
The phrase "supply chain" may have been first published in a 1905 article in The Independent which briefly mentions the difficulty of "keeping a supply chain with India unbroken" during the British expedition to Tibet.
For critical infrastructure sectors, I would go a step further and add in the extraction and delivery of the raw materials – not just the conversion of them— to the manufacturing facilities. We know that some of these raw materials, such as certain critical minerals, are primarily extracted in other countries, some of which are antithetical to our democratic ideals. This situation can potentially create or exacerbate supply-chain constraints. As we can all imagine, given the CI sector overlaps I’ve discussed this past year, a “supply chain” is not really a linear process, but rather a series of layered processes. This makes it difficult for end-use CI customers, much less the customers of the CI sectors, to pinpoint where a supply chain constraint may actually exist when it occurs, much less how it can be alleviated.
The How
Given my focus on history and the descriptions I’ve provided in the first series of this newsletter (editions two through nineteen), you won’t be surprised that supply chains have been in place for millennia. However, the truly global nature of supply chains in recent decades has pushed businesses and CI suppliers to create common ways to view and improve these complex processes.
In the late 1990s, the Supply Chain Reference Model (SCRM) also known as Supply Chain Operations Reference (SCOR) model was developed by the Supply Chain Council, now a part of the Association for Supply Chain Management (ASCM). It provides a structure for thinking about how these complex supply chains work and how to optimize them. According to CIO.com, the SCOR model “is intended to help standardize the process and create a measurable way to track results. It works across industries using common definitions that apply to any supply chain process.”
With this framework in mind, five major steps go into supply chain management, according to Investopedia: 1) planning for what the market needs – understanding what the ultimate customers are going to buy; 2) sourcing – arranging for raw materials to be delivered to manufacturing facilities; 3) manufacturing – which is further divided into assembly, testing, inspection, and packaging; 4) delivery – this includes the transportation of products as well as warehousing/stockpiling, which is often done by third parties and is sometimes called “distribution;” and, 5) returns – if a product is unusable, the manufacturer must have a process to replace or refund such mistakes.
With complex industries such as CI sectors, which need everything from personal protective equipment to specialized iPads to heavy equipment to raw materials, the procurement teams must manage different levels of supply chain relationships at any given time. There is also a circular element to this for some CI sectors – for example, manufacturers and mining companies are crucial components of supply chains, but also need to rely on others for their own materials and equipment. Electric utilities enable manufacturing processes while at the same time relying on manufacturers for the equipment that produces power, etc., etc., until my mind starts reeling.
The When
As I discussed in the fifth edition of this newsletter (Critical Manufacturing and Electricity), the concept of “lean manufacturing” or “just-in-time manufacturing,” was first developed by the Japanese in the 1930s and made its way West in the 1970s and ‘80s. It was intended to reduce delivery times between suppliers and customers, tightening the supply chain and reducing reliance on stockpiles.
In speaking with several utility executives who were around when just-in-time manufacturing was implemented in the U.S., a marked shift occurred back then. Utilities reduced their stockpiles, unable to justify the expense of onsite equipment maintenance, inspection, and inventorying when supplies were readily available within months of ordering. The benefits were clear: equipment became less expensive while reliability was maintained. This system worked incredibly well for about 40 years – until the COVID-19 pandemic.
The Who (Not the Band)
Coinciding with widespread adoption of just-in-time manufacturing was the offshoring of various types of manufacturing from North America and Europe to the East – Japan, Taiwan, China, Vietnam, and the Philippines, in particular. Cheaper labor (in China, especially) easily offset the increase in shipping expenses for many products. Although China does not have its own natural gas reserves, coal, or oil, to speak of, it does have certain critical minerals and other raw materials. Over the last 40 years, China has exponentially increased its mining capabilities, displacing other countries, like the U.S., that have such minerals but that lack investors willing to navigate environmental and permitting restrictions when the Chinese operate with minimal restrictions and price their products accordingly.
While some critical manufacturing has remained in the U.S., supplies of other crucial equipment are only available offshore. In the electric sector, large power transformers, for example, have been manufactured offshore for many years. And distribution transformers (lower voltage, used on grids that flow into homes and businesses) have been critically backlogged following the 2020 pandemic, despite a handful of domestic manufacturers still remaining in the U.S.
The Where
Sticking with the distribution transformer example, many in industry, including me, have raised concerns that previous transformer efficiency standards promulgated by the U.S. Department of Energy (DOE) have contributed to the problem – i.e., to the constraint. There are certainly other contributing factors to the root cause of the current supply chain constraint that I will come back to later in the year, but let’s take a dive into DOE’s role, given its latest action. Despite strong industry concerns, DOE has continued to ratchet down transformer efficiency standards, most recently with a final rule issued on April 4. To accommodate industry and labor concerns, DOE did make significant changes from the proposed rule in early 2023 to the final rule a couple months ago. While I applaud DOE for listening to the concerns and making some needed changes – including loosening the requirements for use of amorphous steel versus grain oriented electrical steel and extending the implementation window from three years to five years – I still question the need for the underlying rule.
I believe that thoughtful energy efficiency standards and, especially, energy efficiency incentive programs, can be extremely effective. However, DOE’s own statement upon promulgation of its new transformer efficiency rule says that this new standard will only result in a 10% overall efficiency gain and will have a modest impact on emissions reductions. Contrastingly, manufacturers would have to increase the size and weight of transformers, adding to the costs of the transformers, even with current transformer designs with efficiency ratings above 98 percent. Thus, any potential savings consumers experience from energy use reductions could be offset by these cost increases. Given the ongoing macroeconomic pressures utilities and their customers are facing, such as inflation and high demand for services in a constrained distribution transformer environment, the timing of this new standard is problematic, in my opinion.
Having said all this, transformer efficiency standards are clearly not the only reason that distribution transformer shortages exist. The pandemic tipped this critical equipment into a shortage, and as a result, the electric sector has been reevaluating its posture relative to onshoring of manufacturing, procurement, supplies, and stockpiles ever since. This example is meant to, yes, express my ongoing concern about the DOE transformer efficiency rule, which is likely to have more risks than rewards, but also to highlight the reevaluation of supply chains that many in CI sectors are undertaking, especially as global tensions persist.
The Why
Reevaluations of the just-in-time manufacturing mindset and decisions about onshoring and reshoring manufacturing and mining are ongoing in boardrooms and C-suites across the CI sectors. Materials, facilities, and workforce constraints persist for CI sectors including telecom, transportation, and energy, just to name a few. At the same time, demand is high as industries seek to take advantage of federal subsidies via the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA), as the energy sector continues to transition to cleaner sources, and as Americans engage in post-pandemic activities.
For CI industry participants that are customers themselves, it can be difficult to discern the “why” or root cause of certain supply chain constraints. Much less if you are an end-use consumer – forget about it. This situation again brings to mind the need for collaboration amongst the CI sectors (being mindful of antitrust constraints, of course). Many associations and corporate thought-leaders have sought to illuminate the fact that there are supply chain challenges in the first instance and to identify key drivers. Some have also attempted to “roll up their sleeves” and find solutions to the challenges. Still others who are experts on supply chains are bringing forward their analyses and suggestions about how to solve the challenges. I applaud all of you who are undertaking these needed efforts.
As these various groups continue these efforts and drive toward solutions, we need to make their lives easier by focusing on getting things built and permitted here in the U.S. I’ll address that oh-so-easy (not) topic -- permitting and siting, that is -- in the next edition of The Essentials.