All over the world, healthcare workers face a critical supply shortage of personal protection equipment (PPE) which prevents cross-contamination between caregivers and patients. Life-saving ventilators are in short supply. It’s inconceivable that in 2020, the richest country in the world cannot produce enough masks, gowns, shields and equipment in response to the Covid-19 pandemic for its own use. The problem is that the international supply chain has been engineered to fail during any abnormal spike in demand, let alone a widespread disaster.
President Donald Trump finally acceded to demands that he invoke the Defense Production Act (DPA), which gives the U.S. government the power to require manufacturers to produce critical equipment. GM, for example, has been ordered to produce medical ventilators.
However, the DPA is far from an instantaneous solution. In fact, one of the nation’s leading experts on manufacturing and supply chain, Tim Fiore of the Institute for Supply Management, said the DPA is unlikely to improve domestic supplies. Factories that have been able to respond to PPE demand already have, Fiore said, and planning for the distribution of finished products has not been effective.
“What you really need is a coach [in the middle between finished goods and demand],” he said, “so in this case I don’t think the DPA will help anything.” Fiore has worked in government procurement.
U.S. manufacturing has also changed significantly since the DPA was enacted during World War II. The supply chain is now global, and factories have moved to just-in-time manufacturing, build-to-order, and lean. “Lean factories have equipment that can be rearranged, but not so that employees are six-feet apart,” said Fiore. “Most of those [lines] have shut down.”
The U.S. also depends on China for a lot of materials and PPE, and China can sell its products anywhere. “Either we have to do better with our national stockpiles, or the domestic manufacturing industry will have to make a comeback,” Fiore said. “There has to be a real assessment of what the manufacturing industry has experienced over the past 30 years.”
How does the Act work?
In the weeks before implementation, leading manufacturing associations were unable to provide information on how the DPA is triggered, how manufacturers get paid, and other critical details. It’s a new world in today’s manufacturing industry.
The supply chain is global, complex, and is now confronted with trade restrictions, travel limitations, closed seaports and reduced personnel. Procurement relationships, forged over decades, will be strained as materials and components are diverted to prioritized factories. It could be months before supply meets demand.
A majority of the plastics, chemicals, fabrics and other materials used in PPE and medical equipment must be imported. Manufacturing lines that are calibrated for one product aren’t easily adapted to produce a different item. Most of all in 2020, the global supply chain has adopted just-in-time (JIT), build-to-order (BTO), lean, and other practices that keep inventory at a minimum. There is no magic “on” button that will fulfill healthcare needs.
Here’s how the 2020 supply chain typically works.
Whether you need a protective mask or a printed circuit board, you need raw materials. Petroleum products, plastics, chemicals, steel and aluminum are constantly in transit around the world, as are fabric and paper products. The materials are shipped in bulk, which usually means transport by sea. China is the largest fabric exporter in the world, according to Statista. It’s also the largest exporter of plastics. Bulk ocean shipments from China take between 30 to 40 days, according to logistics expert Freightos.
U.S. imports and exports declined in March, according to the Institute for Supply Management. ISM’s imports index registered 41.1 percent in March, a 0.5 percent decrease from 42.5 percent reported for February. Imports returned to contraction [below 50.0] territory in January, with the index recording its weakest performance since May 2009, when it recorded 38.5 percent.
It is very likely that U.S. factories will not have the materials they need to meet demand.
Manufacturers of all types rarely run at 100 percent capacity; they produce items based on estimated demand. It takes time to restart idle capacity. Employees need to be hired and possibly trained. Materials have to be available. Machinery has to be calibrated and tested. Samples are produced, tested, and checked for quality. For reference, semiconductors take an average of 18 weeks to produce, test, and ship. That’s when everything is in perfect working order.
Manufacturing lines are set up to produce or assemble a single item. This encompasses the physical location of machines, which may or may not be mobile. Equipment that cuts metal, for example, may not be able to cut fabric. If the machinery is adaptable, sampling, testing and QC is still required. A single flaw may cause a line to be shut down, recalibrated, and so on. The standards for PPE and medical equipment are stringent and may require FDA approval before use.
Manufacturers used to produce items and equipment in advance of demand. These products would sit in warehouses until a retailer or customer needed them. Warehouses are expensive to maintain they require workers; power; barcoding systems; robotics, automated delivery lines, QC, and packaging. Moreover, they don’t add value for manufacturers or customers; they are a cost of doing business.
The inventory itself represents revenue — if it doesn’t ship, it doesn’t sell. The electronics industry, for example, eventually realized that pre-configured computer systems did not meet customers’ needs. Dell Computer was the first to adopt BTO for computers, where elements — case, monitor, keyboard, mouse, and power cord — were assembled to customer specs. This evolved to also downloading operating systems and software prior to shipment. This “mass customization” considerably reduced inventory sitting on shelves.
JIT is a similar process. A printed-circuit-board manufacturer has enough bare boards, components, adhesives, metals and other elements on hand based on customer forecasts. These elements can quickly be combined to fit devices ranging from smart phones to mainframes.
These factories used to have in-house stores which monitored component inventory and automatically ordered parts “just-in-time” for a production run. This greatly reduced on-hand inventory —and expense — for commodity manufacturers.
Lean takes these practices a step further. Not only is minimal inventory on hand; it cuts back on workers and floor space. A lean operation may have equipment on wheels that can be moved around as required. Depending on the product, inventory is ordered based on customer forecasts. No matter what system is used – JIT, lean etc.—forecasts are notoriously inaccurate. There’s either too much, or too little, raw materials or components on-hand.
These practices, which are efficient and minimize costs, have reduced on-hand inventory levels drastically. A sudden ramp-up in end-product manufacturing shifts the pressure to materials suppliers, component makers, employees and logistics providers. The providers have to increase their service and production, and so on. In manufacturing-speak, this is called lead-time and is another complicating factor.
In case of PPE, for example, a materials order is placed from the U.S. to China. Chinese textile manufacturers ramp up their production, which may not take a lot of time. The material is packaged and sent by ocean fright, so a month or so elapses. In the meantime, the manufacturer in the U.S. is assembling the components that go around the masks — filters, plastics etc. Those must also be shipped to the factory. If the material arrives but the filters don’t, more time elapses. So, the lead time between the time the order is placed to the time the order can be shipped can be weeks or even months.
There are some fundamental characteristics in procurement relationships that can also strain supply — a polite way of saying that it can easily cause problems. Volume equals clout, so the biggest purchasers of materials and components go to the head of the supply line during shortages. This may divert supply to factories that are still ramping up production and away from smaller manufacturers that are already producing. It also encourages over-buying, because higher volumes equals cheaper prices.
Manufacturers that are sitting on supplies either have to sell that inventory to another factory or return material to suppliers so they can resell it. These processes add cost and time to the transfer, which is also where arbitrage takes place. In a competitive market, bidding wars drive prices up, and manufacturers that have already bought materials are generally free to resell them at any price they want.
The governors of U.S. states are reporting such bidding wars for PPE and ventilators. Some report having to bid against the Federal government — and they inevitably lose. The Trump Administration has been asked to use the DPA to discourage this practice, but thus far has refused. Currently, states are in a bidding war against one another and U.S. government stockpiles are not being released based on need, demand, or number of Covid-19 cases. For DPA to work, relationships throughout the supply chain have to be managed, and the distribution of finished goods be based on defined criteria.
It’s clear that the DPA is not constructed to manage the 2020 supply chain. However, DPA is set up to allow the government to identify, prioritize, and allocate scarce resources in a time of emergency. Thus far, the U.S. federal government has chosen not to get involved in the nation-wide procurement and distribution process. In turn, it is causing necessary products not going to the cities and states in most dire need of them right now.