Why Are Modern Supply Chains So Needlessly Complex? | Economics Explained

this is apn-311 more commonly known as quasiba a cutting-edge pharmaceutical antibody used to treat complex illnesses in hospitals all over the world this is manufactured by iperium biologics an austrian-based firm the raw medicine is then loaded into a canister like this one and shipped to the netherlands to be packaged then onto ireland for warehousing it will then be sold wholesaled to beijing who will label the product for individual markets in their plant in guangzhou before shipping it back to ireland which will in turn ship it to regional distribution centres who will distribute it directly to hospitals who will distribute it to doctors who will distribute it into their patients squishy squishy organs yeah i know right what's more is that this didn't even include the base chemicals needed to actually manufacture this raw medicine and apn311 supply chain isn't even an outlier in the pharmaceutical world if anything it's comparatively straightforward but not as straightforward as making a product and then just shipping it to distribution centers so why add all of this extra complexity and don't think this is a weird quirk of the medical industry either everything from your fridge to your phone to the clothes you are wearing right now have likely been produced bit by bit in dozens of countries in hundreds of different factories involving tens of thousands of workers if i were to ask you where iphones are made you'd probably turn around and say well china but this isn't the whole story the entire iphone supply chain before retail distribution involves 43 countries from battery lithium mined in brazil to semiconductors printed in taiwan all the way down to really obscure things like those lovely little boxes which are produced in the czech republic so when does this all get too much sure there are comparative advantages to producing products in countries with good manufacturing infrastructure or low labor costs or hey even some nice tax policies but at what point does shipping things back and forth across the world end up costing more than the cheap salaries you're able to exploit well to find out we're going to as always look at a few critical factors how do companies come up with these intricate supply chains why are some of these supply chains so convoluted where others are extremely straightforward and will the severe restrictions put on international shipping during the fallout of the coronavirus make companies rethink how far they extend their supply lines this video is brought to you by acorns the investment app trusted by over 9 million people including myself here at economics explained if you guys have been a viewer of this channel for any length of time you already know that i'm a big fan of acorns not only because they actually care about helping people build wealth but also because they make it really easy for anyone to get started with investing thanks to features like recurring contributions you can spend more time in the market and less time trying to time the market more on that later here's how it works just choose the amount that you wish to invest set the frequency like daily weekly or monthly and you're all set just like that you're investing in a diversified portfolio while also lowering your risk exposure by consistently investing over time stay tuned until the end to learn more or sign up now at acorns.com ee and acorns will deposit five dollars into your portfolio to help you get started with investing again that's acorns.com ee the link is on the screen now and in the video description below so the first thing to understand when looking at shipping maps like this one is the factors that can contribute to steps in the process that seem redundant the first and most obvious one to address up front is that most companies actually don't manufacture their own products from beginning to end a company like general motors will of course make some parts in-house from raw materials but even things like sheet metal are in turn purchased from steel manufacturers who purchase raw iron ore off the international commodities market taken a step further using our example of the iphone from earlier we will find that apple doesn't even handle the manufacturing at all themselves instead they subcontract this process to foxconn who in turn deals with the cheapest supplies they can find for individual components the natural push towards more focused component manufacturing is a natural part of efficient production why bother making something yourself when it can be purchased from a supplier who specializes in making these components as cheaply as possible but this raises the question of why anything at all would be manufactured outside of places like china especially when it's a chinese product like the medicine we explored earlier well this is down to technology and regulation this particular drug is manufactured in austria which is one of the most expensive places on earth to produce something but it's still made here because of extensive government contributions towards harboring medical research in the nation the trade-off is that any breakthrough treatment that is developed in one of the nation's sponsored facilities needs to be produced in austria this is still a win-win for the people of austria and the pharmaceutical companies though the companies get a hotbed of medical research which is to pharmaceuticals what silicon values to technology and the people of the nation get a strong employer that pays people extremely well to perform a highly technical role this also works well because things like pharmaceutical products are expensive this one canister can easily contain millions of dollars worth of product so the difference between paying a team three thousand dollars versus fifteen thousand dollars to produce something like this is basically a rounding error what's more is that this item is very cost dense with very high profit margins so paying to ship it all over the world in every which way is not going to have much of an impact on the end price a price that is also most likely going to be paid by an insurance company or a government anyway rather than a cost-conscious consumer compared to say an automobile this kind of product making a few extra stops on the journey to its end destination is not a big deal this should be pretty obvious to most people but what you might not consider is the impact of mergers and acquisitions m a activity is at its highest point in history with total deal volume recently surpassing the record high of 2.4 trillion dollars set in 2007 now there is a lot to be said about what this means for the global economy but one often overlooked impact is how it muddles supply chains if a company buys another company that is either a supplier or distributor of their product this is no big deal this is called vertical integration and in theory the actual supply chain shouldn't change except now it will all be managed by the acquiring company which will make it look longer and more convoluted but the products are really only doing what they would have done anyway for example suppose general motors buys a steel mill that hasn't added any extra steps to the process of manufacturing a car that wasn't there beforehand in that case it just means that the production of steel is now under the control of the supply chain managers at gm however if a company does what is called a horizontal integration where they buy at a competitor things can get more tricky that competitor would have had a supply chain all of their own and assuming that the purchasing business intends to keep the company running this supply chain will need to be maintained at least until such a time that the purchase company's processes can be effectively integrated into the purchasing company's processors or vice versa that's right sometimes companies will buy other companies exclusively to get access to their distribution networks i don't know why i've decided to use this as an example but think of dunder mifflin from the office in season six this fictional paper company got sold to a printer manufacturer specifically because the purchasing company wanted to use their distribution network to reach new customers dunder mifflin was purchased despite being bankrupt specifically for their supply chain this sort of stuff happens all the time in the real world but it does create a problem if the companies want to integrate this whole process into one succinct distribution system they will need to make a lot of changes they will need to expand some warehouses and close others they will need to change barcodes inventory numbers computer systems commission structures and a host of other systems to merge how paper and printers get from suppliers to customers now this is possible but it is extremely difficult especially if you want to make sure that customers can still be serviced while this change is taking place many companies just don't even bother and resign themselves to running two systems in parallel for the different product lines it's not the most efficient solution but it avoids a lot of the effort and operational downtime the ultimate result though is more convoluted supply chains so two things here the first is yes i am the most boring person in the world to watch comedies with because this is what i will be thinking about and the second is that sometimes complexities are just an unfortunate byproduct of running and expanding a business but all of these factors so far have not really been the decision of the company an acquiring company would love to have just one single supply chain pharmaceutical companies would love to be able to produce medicine wherever they wanted and of course it's almost impossible for a company to control everything from raw materials to finished product although don't tempt elon i suppose even still there are times where these factors are not an issue and companies still choose to add extra bits and pieces to a global supply chain that don't look to be necessary so then why do companies add unnecessary moving parts to their supply chains well there are actually a few things but the big ones are skirting around taxes lobbying and genuinely minimizing costs that last point is probably the easiest to cover on a large enough scale even tiny cost advantages to producing products in one country over another makes it worthwhile to do so and just absorb the cost of shipping this becomes more prevalent the more cost dense something is for example something small and expensive like electronics or medicine can afford to skip along multiple destinations as it gets produced because it doesn't cost very much to ship something like this compare that to something like a raw commodity and you will find that the same value of goods will be far heavier and far larger therefore far more expensive to ship minimising or eliminating any advantage of anything outside of going as directly as possible from the mine to the furnace to the end user you wouldn't mine iron ore in australia and then ship it to china to have it mixed with zinc and carbon before shipping it to korea to be smelted into steel and then finally to japan to be formed into rebar i mean you could theoretically do this but you would be out of business very quickly wasting that much shipping money on a heavy low margin product now where this might start to make a bit more sense is in avoiding certain taxes countries have trade deals with one another which will often mean that trade between the countries involved in said deals does not incur import taxes that are levied on most other countries import taxes can be steep and make a big difference in the final price tag of a product part of the reason why foreign cars have such a bougie connotation is because they have historically been far more expensive in most markets than locally produced alternatives for example in england a new corvette costs about as much as a new aston martin however if companies can move products around these trade deals they can avoid these taxes altogether consider the medicine that we were studying earlier austria is part of the european union which means products can be traded between austria and ireland ireland is home to a specific duty-free zone which we explored in our video on ireland's economy this zone means it can export goods to china with no tariffs to be packaged and then suddenly it's not an austrian product it's a product of china which just so happens to contain an austrian component with its new designation as a chinese product it can now be distributed to any country that has made trade deals with china which is a lot of them now of course this is a massively oversimplified example and these companies don't actually disclose the exact systems that they use to work through these regulations for obvious reasons so this goes to show most people know that supply chain engineers design supply chains but accountants and lawyers also have a big part to play and so too to lobbyists you see manufacturers that rely on favorable government legislation or government dollars have been known to spread out their facilities over multiple election districts in order to be a more influential employer if a party doesn't support a contract for oh i don't know let's say a new fighter jet then the involved company might have to shut down these facilities and lay off workers in crucial districts creating enough laid off and angry workers to swing the next election vox did a fantastic video on exactly this phenomenon and i'll leave a link to that in the video description if you want to learn more about that process in more detail however the ultimate end result of this is a supply chain that is needlessly spread out not because it makes economic sense to do so but because it makes political sense to do so this brings us on to maybe the most important thing to consider does all of this even make sense in the post-lockdown world the answer is of course we don't know for sure yet global supply chains have been massively altered because of two opposing forces the inventory bull whip and the push to minimize stock if one step in a supply chain is delayed for whatever reason like let's say a facility had to be shut down due to a covert case being contracted by one of its workers then this affects all of the other steps in this process downstream from that factory if an electrical insulator factory is shut down then it means that a capacitor manufacturer is going to need to haul production until it can find a new supplier which means circuit boards can't be produced to put on graphics cards and then the proverbial whip crack will be that nobody can buy any graphics cards now the solution to all of this would just be to keep more inventory on hand so that minor delays like this one can be filled in with spare stock to keep the whole machine chugging along the problem with this though is that it is expensive take an example like amazon at the end of 2020 they had 24 billion worth of inventory on hand if hypothetically they were able to half that amount they would free up 12 billion dollars which could be reinvested into the future growth of the company or just invested into the market itself if we assume a generous market return of 10 that would be 1.2 billion dollars that they could add as profit every year or put another way that would be a five percent increase in total net profit over their largest year on record so yeah to stock up or not to stock up there really is no right answer but covert has certainly made a few companies ask the question once again but something that you shouldn't have to debate over is how important it is to save for your future and fortunately this is all made a lot easier with acorns thanks to acorns you can spend more time in the market and less time trying to time the markets that's not just a cute slogan it's sound investment wisdom investment wisdom based on data for instance according to one study by jp morgan which analyzed the last two decades of equity market data they found that being out of the market for just a handful of the best trading days had huge consequences on portfolio performance another fascinating correlation that was revealed by this study was how fast markets rebound following declines like how in 2019 six of the best days to be invested in the market occurred within only two weeks of the worst trading days with the largest dips usually occurring right before the largest rebounds case in point march 12 2020 a market decline of nearly 10 you probably remember it well it was the second worst day for the market in over 20 years only to be followed the very next day by a gain of nearly 10 percent which just so happened to be the fourth best day for the markets in over 20 years the bottom line if you study the history of the stock market you'll find that investing consistently in a well-diversified portfolio and not succumbing to your emotions by selling out when things get painful is a tried and true wealth building strategy and that's the beauty of acorns thanks to features like recurring contributions you can invest funds into your diversified portfolio every day week or month there are so many other features of their app and i look forward to covering them all in later videos feel free to download the app today at acorns.com ee and they'll deposit five dollars into your portfolio to help you get started with investing again that's acorns.com ee the link is on the screen now and in the video description below thanks for watching mate bye

Channel: Economics Explained

Views: 655,905

Keywords: supply chain, supplychain, supply chain economy, supplychain economy, supplychain economics, supply chain economics, supply chains, supplychains explained, supply chains explained, supply chain network explained, what is supply chain, supply chain trends, supply chain definition, the supply chain economy, supply chain management, scm, economics, economics explained, supply chain logistics, supply chain issues, what is supply chain management, supply chain backlog

Id: DxELVyTyrtw

Length: 16min 37sec (997 seconds)

Published: Tue Mar 16 2021