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August 25, 2020

The Perfect is Not Only the Enemy of the Good

It’s dangerous in its fragility.

Before the pandemic we had developed almost perfect supply chains. Perfect meant that great quantities of product were manufactured or extracted in whatever places could deliver the end product most cheaply to the consumer considering transportation, tariffs, warehousing and distribution costs. Most products are made from various inputs; the supply chains are complex since the subcomponents also have to be the cheapest that can be delivered to the manufacturing site. Prices were generally low and supply adequate.

What’s not to like?

Fragility.

The supply chains were optimized for price. Having a single source of products is often cheaper than multiple sources since only one source can be the absolute lowest price. Inventory costs money to finance and store so the perfect supply chain is “just in time.” If any link in the perfect chain breaks, the perfect chain fails.

The pandemic broke lots of links. The chains failed. Why weren’t there any makers of low-cost surgical masks in the US? Because it was cheaper to have surgical masks made in Asia even including transportation. Why weren’t there stockpiles of surgical masks and other needed equipment for the pandemic? Because there was just in time delivery whenever you needed something. What happens if manufacturing and delivery for some items needs to increase by an order of magnitude? Can’t be done; the optimal factory is running at near capacity and so are its suppliers. What happens when Asia decides it needs the surgical makes it makes more than its customers do? The answer to that is history.

Perfection almost did us in. Couldn’t even get toilet paper because the supply chain which gets TP to the home was differentiated from the supply chain that gets TP to the office; but TP use is all at home during a lockdown. Couldn’t make masks in large quantities at home for a while because the elastic material that hold them on your ears wasn’t made in the US and wasn’t immediately available.

Nature’s way of dealing with the fragility of perfection is based on imperfection. Suppose there is a plant species which has evolved to become highly dependent on the current ratio of nitrogen to oxygen in the atmosphere. Optimized plants will evolve and even dominate if conditions stay stable long enough. All the time, however, mutations (imperfections in gene replication) are occurring. When conditions are stable, almost all the mutations are harmful and die out – who wants to mess with perfection. But all of a sudden there is a higher amount of oxygen available. The plants that are too specialized will die out.  The few mutants who either happen to be optimized for the new mix or are just less dependent on the old mix flourish. Give me adaptability over perfection any day.

If gene replication were perfect, there’d be no complex life –   perhaps no life at all – on earth.

As we return to a new normal, how do we avoid a return to fragile perfection? It won’t be easy since, in the short run, “perfect” supply chains deliver cheaper goods and cheaper goods win in the market. For some customers, like hospitals, we can set up alternate manufacturing and insist on adequate local and regional stockpiles through regulation – cost of these precautions shows up in medical insurance prices; but this is insurance.  Do we go back to protectionism to assure that there is always some local production? Do we assure that we always have enough print on demand capacity ready to spool up and produce whatever’s in short supply? Who pays for that? How does the owner of the standby capacity make money before the crisis; in the crisis, how does she avoid getting accused of gouging?

We have a lot of questions to answer before we reflexively try to go back to the old normal.

See also: The Internet Turbocharged Globalization

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