On demand 1h 2m 51s Intermediate

Why is Everything Broken? Understanding Pandemic Supply Chains

4.9 out of 5 Excellent(15 reviews)
Start your free 7-day trial
* Claim credit(s) for one free course during your 7-day trial.
  • Credit information
  • Related courses

Why is Everything Broken? Understanding Pandemic Supply Chains

This presentation will discuss the causes of the current supply chain logjams, put them into historical context, and discuss some of the ways forward to help attendees better deal with supply chain partners, solve problems expeditiously, and be knowledgeable about commercial rights and responsibilities.

Transcript

- Hi, everyone. My name is Sarah Rathke. I'm a partner at the international law firm of Squire Patton Boggs, operating out of our Cleveland office. My practice focuses on both supply chain and litigation issues. And our subject today is "Why is Everything Broken? Understanding Supply Chains in 2022." Remember when you hadn't ever really heard that much about supply chains? Well, welcome to 2022, where the question of our age is why is everything broken? Now, before the pandemic, supply chains used to hum more or less seamlessly in the background, but not anymore. Supply chains are so much in the news now that at the end of last year on October 7th, 2021, well after I had decided to call this talk, which I've given elsewhere, "Why is Everything Broken," The Atlantic Magazine, which typically specializes in upscale urban think pieces published an article entitled, "America is running out of everything." Since the supply chain... Sorry, since the pandemic began, supply chain issues have become a matter of common political and even normal human parlance. We are in the middle of a Black Swan tsunami. Now a Black Swan event is described by economists as an extremely negative event or occurrence that is impossible to predict even by knowledgeable market experts. COVID-19 has produced multiple Black Swan events all happening at the same time. starting with changes in consumer consumption patterns, which have partly precipitated and partly coincided with changes in available labor, which have partly precipitated and partly coincided with changes in global diplomatic relationships, which have partly precipitated and partly coincided with changes in logistics networks worldwide. Now we'll talk about each of these Black Swan events in a moment, but first, let's talk about supply chains before COVID-19. Now supply chains before COVID-19 were predicated on the concept of what was called just in time manufacturing. Just in time manufacturing was before the pandemic as much a microeconomic orthodoxy as it was at operational strategy. Under just in time manufacturing, economic output was thought to be and actually was maximized if there was little to no excess inventory anywhere in the system. So instead, orders of goods and services along the supply chain were timed to meet a company's expected production schedule as closely as possible, so that companies did not have to store and care for excess inventory or expend the capital necessary to store and care for excess inventory. Now, how much of anything that was needed was determined by historical analytics that were relatively stable over time, coupled with the ability to make relatively minor short term adjustments at the demand of the buyer. This prevailed an American manufacturing for a long time, at least since the 1980s. And it was informed and strongly linked to a manufacturing philosophy developed by Toyota, called "The Toyota Way", which was part of Japan's ascendancy as a manufacturing and engineering power in the 1980s, and which sought to rationalize all stages of production to the greatest extent possible. Now just in time manufacturing under the pandemic circumstances has translated into just in case manufacturing, where companies have begun to build in excess inventory to prevent against shortages in the future. This is a very different model. Now this is... Just in time manufacturing was a system that prevailed against the background of the dominance of relatively harmonious-free trade, and this is where China comes in. Another principle that modern pre-COVID supply chains were built upon was the dominance of relatively harmonious-free trade. So after the second World War, United States' preference, and frankly it's policy, was to establish trade rules on a worldwide basis and not on the basis of individually negotiated trade deals with other countries. Now with the Cold War, the United States got the idea that it could economically incentivize some nations, friendly nations, and punish others using trade policy. This was our way of opposing centrally planned economies within the former Eastern Bloc. So as a result, more individualized trade deals began to be extended. Now what happened next is in the 1980s, the United States wanted to launch a new round of global trade negotiations, but for reasons pertaining to its economic circumstances at the time, Europe proposed doing that. Now at the same time, Canada, in a very surprising move to the United States, reversed its longstanding protectionist trade stamps with the United States and sought out a bilateral, in other words, one-on-one, trade agreement with the United States, and that came into effect in 1988. Then what happened is that Mexico surprised everyone by wanting one too, and you probably see where this is going. These trade negotiations and circumstances are what gave rise to the NAFTA treaty in 1993, under President Clinton. After that, bilateral investment treaties began to dominate global trade with literally thousands being in effect today. Now against this backdrop of free trade, China arose to manufacturing dominance and became central to global supply chains. And it makes sense now to examine, how did the... How did that happen? Now that it happened however, is not in question. Today China has the largest manufacturing output of any nation in the world at 30% and growing, even with its pandemic restrictions. Looking at the timeline on your screen, China was not part of the global economy until the late 1970s. Before that time, China went directly from World War II, which started in 1937 for China, not the 1941 that it started for the United States, into years and years of Civil War, where Mao Zedong's Communist Party emerged victorious over Chiang Kai-shek's Nationalist Party in 1949. Now, as you may know, because it's of current relevance, Chiang Kai-shek's party escaped into Taiwan. The Communist Party controlled what is now considered to be Mainland China. However, under chairman Mao, China's first chairman, China's economy was state controlled, and eventually came to be dominated by The Cultural Revolution, which forced most able bodied workers, which China took a very broad view of who that was, into rural areas to work on farming collectives, and which shut down China's universities for an entire generation. So for instance, in the late 1970s, 69% of China's labor force was agricultural. However, in September 1976, Mao Zedong died. And after an interim period, his successor, called the paramount leader, was Deng Xiaoping, the unlikely opener of China's economy. A pragmatist, Deng Xiaopeng was reportedly five feet tall, which one diplomatic commentator at the time remarked was, quote, "Probably an exaggeration." Henry Kissinger once called Deng a nasty little man, but Kissinger's treatment of Deng softened markedly over time, as has histories generally. A man of contradictions, Deng fought for the communists in the Chinese Civil War, even though he was born to a landlord family that was the richest in his village, which under most circumstances would have subjected him to lifelong social and economic isolation. Although Deng Xiaoping was eventually the Chinese leader who opened China's economy, under chairman Mao, he personally led the purge of many party members that he suspected of having capitalistic sympathies. He was 74 years old when he came into power, and was presumably just supposed to be a placeholder after Mao. But in fact, he held power until 1992, 14 years. Now under Deng, in the 1980s, there was some nascent commercial economic development in China, but what direction the Chinese economy would likely grow in was still politically contested. By the end of the 1980s, 50% of Chinese enterprises were still entirely state owned. In the 1990s, the Chinese GDP, gross domestic product, grew at least 7% per year, and often had growth in the double digits, making that one of the most sustained GDP growths for any country in modern history at that time. Now in 1990, the beginning of the decade, US trade with China was only half of its trade with Taiwan. But by 1999, the end of that decade, US trade with China was four times what it was with Taiwan. In this decade, China's exports to the US increased seven times over, but they were mostly very basic non-complex manufactured goods like textiles, furniture, and toys. And indeed, any economy that is beginning to become expert in manufacturing starts with these simpler manufacturing commodities. Now in the early 2000s during this, what was thought of as Second Industrial Revolution, China made the decision to welcome even more foreign investment into its manufacturing sector, and specifically for more sophisticated products. Now, during that decade, law enforcement was notoriously, perhaps even hilariously lax. There was little regulation and it was always possible to renegotiate taxes with local authorities. As a matter of fact, it was a common joke among Western companies investing or operating in China that they had received their tax bills, but then they sent their secretary to go ahead and renegotiated, showing how easy it was to renegotiate tax obligations, and frankly, regulatory obligations generally, in China at that time. During that decade, China gained expertise in manufacturing for Westerners, and began also of course, to help itself to Western technologies and intellectual property. However, during this time, China indisputably became the manufacturing powerhouse of the world. Also at around this time, China determined that in order to steadily work towards its goal of what it said, "moderate prosperity," it needed to add 24 million jobs to the economy each year. And that statistic is quoted pursuant to James Kynge's "China Shakes the World". Now in 2001, China joined the WTO, the World Trade Organization. Now that was a watershed moment for China's involvement in the global economy. As a developing nation, quote-unquote, "Developing nation," China received special benefits that were not available to, quote-unquote, "Developed nations under the WTO rubric." For instance, China was permitted uniquely to restrict imports, impose higher tariffs, and provide export subsidies on its goods. It was however, required to make its laws more predictable and transparent, a tension that has always existed within Chinese economic regulation. Now, the results can be shown on the maps that are included in slides eight and nine of your presentation. So slide eight, the first map shows countries who trade more with the United States in blue, and those that trade more with China in orange. And this depicts the state of affairs in 2000, as you can see a very large portion of the world is blue. The next slide however, shows what happened or where the world moved to 20 years later in 2020. As you can see, the large majority of the global economies now trade more with China than they do with the United States, with the exception of course, of the United States' closest neighbors. Now currently, China's ruled by its president, Xi Jinping, who has advocated for more economic centralization, more communist party involvement and representatives in foreign and private businesses, and more involvement with external investment in the China economy. Not only that, Chinese practices now in the pandemic have included more shutdowns of manufacturing plants, more shutdowns owing to energy shortages, and more restrictions on foreign operators in the Chinese economy. So what happens in the future is simply not known, but it is unlikely that the world's harmonious trade-driven relationship with China will continue as it currently has been... As it existed before the pandemic. Now China has some internal operating conditions that have made it possible for its unique manufacturing rise. First of all, economic liberalism, coupled with political centralism has made it possible for China to simply nationally resolve to attain manufacturing excellence. In countries like the United States, for instance, that operate under more or less democratic ideals, China simply by virtue of its political authoritarianism has the ability to, as they say, turn the aircraft carrier much faster than Western democracies do. That allows China the ability to impose national resolve on its citizens in ways that Westerners do not really have an ability to relate to. In addition, China's enormous population of over a billion people provides it with population resources to carry out its national resolve, and its need to add millions of jobs per year to its economy provides incentive for China to continue expanding its manufacturing capabilities. Now it is against this backdrop that COVID-19 hit, ushering in the Black Swan tsunami that I mentioned at the beginning of this talk. And here on your slide 12, shows some of the consequences to this new mayhem. And I'll pause and give everybody a moment to review some of these snippets. Now, each of the phenomenon depicted on slide 12 hits home for everybody. We all might remember in fourth quarter 2021 and first quarter 2022, the enormous backlogs in the Los Angeles and Long Beach ports, the biggest ports in the United States. We may remember also the increased container shipping costs back and forth from China to the United States. That's had effects also on trucking costs, as have not the fact that United States does not have enough truckers. There has been a trucker shortage in the United States and what was thought to be a 100,000 driver trucker shortage in the UK. United States government under the Biden Administration has intervened with several of the West Coast ports, and has increased... I should say, decreased waiting time. However, even today, labor unrest at the ports threatens to shut down or slow down those ports again. Now, in addition with the Ukraine crisis and Russia, we're beginning to see, and Europe in particular, is beginning to see energy shortages, which will undoubtedly impact the way people operate and what they need worldwide. Inflation is a phenomenon that we have seen in the first and second quarters of 2022, the first meaningful inflation that the United States economy has seen in at least 40 years. And indeed, mid 2022, oil prices were at the highest level that they'd been in, in three years. These phenomenon have resulted in and shown disruptions in many different... For many different products and industries. We can all recall the baby formula shortage in the United States owing to the shutdown of one plant and the unavailability of product from other plants. Chicken has been at an all time high, resulting in higher prices at the grocery store. During the 2021 Christmas season, it was complained that prices for artificial trees, Christmas trees was up 25%. And for a time in 2021, they began rationing alcohol purchases in Pennsylvania because there simply wasn't enough to go around. So let's talk about what we identified as our first supply chain Black Swan event, which was changed consumer consumption patterns. Now, first and foremost, COVID-19 fundamentally changed how consumers consume, not just in the United States, of course, but worldwide. And the slide on the screen, number 13, should bring out PTSD in all of us, the great toilet paper scare at the start of the pandemic in 2020. Now what this illustrates is two things. First, at various points in the pandemic, we have experienced and seen panic buying, consumer over buying products because they worry about products shortages. And then the second... The second phenomenon is just simply a fundamental change in what we buy. Now, the pandemic is likely the first time that most of us reflected on the fact that the kind of toilet paper that's used in stores and office buildings is not the same as what people use at home. They don't use the same production lines or even the same manufacturing facilities. And therefore, they can't be easily retooled. It's a fundamentally different product. And there was a change throughout the pandemic of exactly what was needed of each type of product. Now, similarly, at various points in the pandemic, food consumption patterns have changed. Now food consumption at home is fundamentally different from food consumption in restaurants. When you're at home more, priorities change. So behold, the boom in home construction products and home furnishings in the beginning of the pandemic, and then the rapid downgrading of that phenomenon near the end of the pandemic when people finally started investing less in goods and now have started investing more in services. Things change. Consumer consumption patterns change now in ways that are faster and less predictable, and not able to be captured in traditional company demand and supply analytics. This has created a major bull web effect for some products. For example, in the lumber market. In the beginning of the pandemic builders faced shortages, so they panic bought. This drove home construction material prices up, which caused lumber manufacturers to increase production. But then due to construction firms over purchasing, demand for lumber went way down. And so therefore, did the lumber prices, back and forth, all over the place. Now also, because of COVID consumers also purchased a lot more goods on the internet than they did before, with delivery going straight to their homes. Now this represents a large, significant, and fundamental change in what's called the last mile, quote-unquote, "Of the supply chain." When consumers to stores more often to do their shopping, that last mile was handled by consumers themselves. They would go get the products, and therefore, sellers would make products in manufacturing plants, ship them to a small number of distribution centers, large distribution centers around the country, and ship from there to stores. Very simple. Now with consumers buying on the internet for home delivery, stores became less useful and consumers expected product manufacturers to take care of that last mile of product delivery without of course, raising product prices for consumers. Now this required more smaller scale distribution centers and more truck delivery, a fundamentally different operation. All right. Our next Black Swan event precipitated due to COVID is changes to the available labor market. Now, when COVID-19 hit, we were already midstream through the process of baby boomers retiring from the workforce. We were also nearing the end of the United States pivot to a largely service-based economy from being a manufacturing-based economy. Now, meanwhile, when the pandemic first hit and through its first year, we had a situation where schools and childcare were suddenly not reliably open, making it difficult for parents, particularly mothers, to work. And during periods in the pandemic, women's participation in the workforce in the United States became as low as it ever was since the 1980s. Furthermore, for a period of time, stimulus money also contributed to keeping people out of the workforce. And also, there's been a sudden surge in the need for specific type of workers, mainly in logistics and transportation. All right, let's go to the next Black Swan event. Changes to logistics and strained logistics. And here, I think it's helpful to simply offer a few statistics. In 2022, at the end of 2021, let's say, the cost of shipping containers from China to the US East Coast increased more than 50% from the year prior according to Forbes. Shipping times during that period increased 83%. In fourth quarter 2021, shortages in port workers at the Los Angeles and Long Beach ports, the two largely continuous with each other and largest ports in the United States meant that a record breaking at one point in time over 90 ships were unable to unload, and the backlog is stayed over 60 ships for many months. An answer to your question, why is it taking so long to get my patio furniture? Now in response to this buildup of containerships, the Biden Administration met with port operators and encouraged them to extend their operating hours to 24 hours a day from 16, which is what most major ports in Europe and Asia do. Long Beach initially agreed to give it a try, but in the first three weeks or so that it was operating at increased hours, almost no customers used the new hours. And the reason that they determined that was because not many truckers worked the overnight hours and their hours are limited. And also, warehouses weren't open to accept goods 24 hours a day. So the Biden Administration had to engage in many iterations of back and forth negotiations with the many different players in the logistics supply market to get the situation so that there was more movement at the ports and also across the country. Now, after that monumental negotiation with the various West Coast port operators, the United States started to see East Coast port congestion. So the system, the cycle begins all over again. Now warehouse occupancy rates in Southern California have been hovering somewhere around 98% for at least the last nine months. Occupancy rates are 96.4% or there arounds in the Western United States generally, and industry experts project that there has been for the last, at least six months, 25% less warehouse space than is actually needed. Truck shipment costs are still three to four times what they were in pre-pandemic times. And at various times throughout this year and 2021, the Omicron and Delta viruses shut down many Asian ports, most notably in Vietnam, whose government was slow to move on obtaining vaccines. And at the time of the Delta variant, only 1% of whose population was vaccinated. The biggest retailers such as Walmart, Costco, Home Depot, and Target, and Ikea have begun therefore chartering their own shipping vessels. But this is a solution that is likely prohibitively expensive for smaller operators. Okay. Our fourth Black Swan event relates to change diplomatic relationships. And as you can likely imagine from the first part of this talk, this mostly means China. Although the war between Russia and Ukraine has eclipsed that in the news, our relationship with China is going to have a much bigger impact on our supply chain relationships, and on the availability of the goods that we are accustomed to enjoying at the prices that we're used to enjoying them. All right, we are in, or at the very least, we are near a Cold War with China. This has happened before, but this time, the likelihood is that relations with China will not get better. And the only thing that has operated to slow down that trend, frankly has been China's occupational preoccupation with dealing with the consequences of COVID that has stalled their more hard line approach to dealing with the United States, not just politically, but also economically. Now, while we are waiting for the Biden Administration to fully outline its China policy, China is steadily losing its manufacturing advantages by the day on a global basis. Between 2005 and 2006, in a sense, China became a victim of its own success, and owing to the fact that its goal of achieving moderate prosperity was largely succeeding, Chinese manufacturing labor costs tripled to... And different people have different statistics on this. But one statistic that I've seen is tripled to $3.60 per hour. By 2018, this had gone up to $5.51 per hour. Meanwhile at that time, Mexico's manufacturing labor costs were at $4.45 an hour. China is therefore losing its cost competitiveness, which is a logical and natural result of its own successes. And it is not by an... It's not by itself, pathological, but you know, there are consequences associated with that. Now the Biden Administration has signaled that it intends to take a hard line with China, including the fact that the tariffs that were complained of at the end of 2019, that we imposed, are not going away. Now, of course, tariffs don't really bother China all that much since the Chinese Government simply steps in and covers the cost of the tariffs, unlike in the United States. Now, before it became distracted by the pandemic, China was imposing economic retribution on the United States. For instance, China had blocked its airlines from buying billions of dollars of aircraft products from Boeing over a two-year period. Many other examples exist from many other industries. Now China knows full well that it's changed approach to the United States will drive Westerners out. And it also knows that it can no longer count on Western economic relationships. But at the same time, because of China's economic successes during the last four decades, it is consciously choosing to focus on its own consumer markets and those of its closest neighbors, which has never happened before. However, China knows because it's done it intentionally, China knows that it is very, very difficult to move manufacturing out of China. For instance, in China, Western companies may not simply lay off workers. Rather, companies in China are legally required to pay workers throughout the duration of their contracts, which is how it works in China. And these are often several years long. Production equipment and other manufacturing infrastructure typically is not allowed to leave China territory, which means that us companies pulling out of China, quote-unquote, "Often have to leave equipment costly and specialized and bespoke equipment behind." And of course it is well known that factory operators many times have, or will steal as much IP as they can from Western companies. Now, for companies leaving China and going to other manufacturing sources in Asia, they need to expect dramatically increased product defect rates. China didn't spend four decades becoming the manufacturing powerhouse that it is for no reason. And other companies, Vietnam, Indonesia, have not yet had this experience. So sometimes often even simple manufactured goods, such as clothing and textiles, Western companies need to expect defect rates that are sometimes as high as 40% of production. Now, are there new alternatives to China? They are, but they will never be, at least not in the nearer to mid future, they will not be as easy as China. One of the benefits of doing business with China as a manufacturer is that the system set up a one stop shop. Manufacturing got to delivery, got to logistics, and it wasn't difficult to do. Any interaction with any other emerging manufacturing economy will likely require a much more do it yourself approach, where Western companies are going to have to employ a lot more manufacturing, overseas manufacturing specialists to ensure not just that the manufacturing goes well, but that there's the logistics and government relations functions to support manufacturing in these new countries as well. So for instance, in Vietnam there's a statistic that says that something like 80% of companies that move production there from China, principally again, making low difficulty manufacturing items have since left Vietnam. This of course was accelerated due to, for instance, Vietnam's port closures during the summer of 2021, the lockdowns owing to COVID. All right. So let's talk about some of the most promising looking alternatives to China, starting with Thailand. Now Thailand is actually Southeast Asia's second largest economy. And one of its benefits is that it brings to the table its own 70 million person consumer market, which means that not only can you produce items there, but you may also be able to sell a large amount of items there. That market is considered to be widely underserved. Now Thailand is thought to have good investment policies for foreign companies and a good transportation infrastructure, allowing goods to be shipped out of the country and wherever they need to go. It has a favorable geographic location relative to the Pacific Ocean, and is open to tax and non-tax incentives for doing business there, such as special four-year visas for what they consider to be skilled workers. Thailand is currently trying to move to more sophisticated technological manufacturing and are therefore open to any kind of training, incentives, government policy, and things of that nature. Perhaps the best potential alternative to manufacturing in China, at least for American companies, is Mexico. Now 10 years ago, wages in Mexico were something like 600% higher than in China. Now they're thought to be only 30% higher, if even that, and Mexico's worker productivity is considered to be higher than China's worker productivity. Not only that, but the United States dollar buys more in Mexico and buys more consistently in Mexico. China, as many of you might know, is often thought to engage in currency manipulation. It's indisputable that, that goes on. So the United States dollar, what it will buy in Mexico is very reliable and not influenced by nefarious government policy. Moreover, of course, Mexico's proximity to the United States makes it very, very attractive from the perspective of manufacturing items for purchase in the US market. And Mexico is a diplomatic friend to the United States. Mexico, in fact is also uniquely open to free trade and has more free trade agreements than almost any other country in the world. And uniquely for the United States, Mexico has the maquiladora system, which essentially means that there's an operating area, production area in Mexico that is considered for economic trade purposes to be part of the United States. So that cuts through regulatory and bureaucratic issues with getting products from Mexico into the United States, as well as tax advantages. Another possible manufacturing alternative to China is Columbia. You might recall back to those slides about who does business more with China versus the United States. Columbia is the one country, one of the few countries that stayed blue as between 2000 and 2021, which means they're a close diplomatic friend, indeed. I was there recently and noticed a United States army base that I don't recall seeing on any official map that I'd seen of the United States. Columbia has a very... A relatively educated workforce and many tax and investment incentives. Columbia knows that its development and its trade development has been stalled by virtue of what seen to be its NARCO past, and is conscious of that. They are also consciously trying to overcome that with friendly relationships with, in some instances, individual states, in some instances, industries, and in some instances, individual companies. Columbia is the fastest growing large economy in Latin America. And it has educated and very skilled workforce with proven aptitude in particular, in pharmaceutical and technological products. The United States is already Columbia's top trading partner, which is not true of it's large neighbors in South America, such as Brazil, Chile, Argentina, and Peru, all of whose top partner is China. And it has unique proximity, both to the Pacific Ocean and to the Atlantic Ocean, which means that goods can move easily to either side of the United States. Now one headwind that Columbia faces has to do with infrastructure. It's a very mountainous territory, and it never had its moment like the United States has had of war readiness. United States has the developed highway system that it has because Dwight D. Eisenhower realized that there might be a need someday to roll tanks across the United States to fight a war if necessary. Columbia never saw it that way and never had to see it that way. So it's difficult to get from non-coastal Columbia to coastal Columbia. That's a headwind that makes it very difficult to envision that one could set up manufacturing facilities anywhere in the middle of the country. In fact, even Columbia's not as large as the United States by far and folks traveling from between the three largest cities in Columbia, it's typical to use low price airliners rather than simply drive, because there is no developed highway system. This is a headwind, but Columbia has focused on developing some of its infrastructure, including interesting projects, such as in Medellin, creating a system where folks from the poorer neighborhoods could easily get towards the neighborhoods where there were jobs by virtue of a... Like a SkyLift system. I actually just... I cannot right now remember what the name for the thing is, but tourists believe it's a tourist installation so that it's not easy to see Medellin area. But no, it's actually public transportation in the very, very traditional sense. All right. So the next question that I think that is logical to ask is are things ever going to get back to normal? And if by normal what you mean is a pre-pandemic consumption, demand, supply, production system, where everybody goes to work for 40 hours a week at a workplace, not from home, the answer's probably not. It is not often that people at the precipice of a historical inflection point actually know that they're at the precipice of a historical inflection point. But I think that we do know this. In terms of historical analogs, we might be able to liken this time to the beginning of the second World War. Now at that time, US war production led directly to many of the aspects that are now foundational to our way of life, such as mass production. Now mass production was first used to create war materials, but then was transition to create consumer goods, which were readily available and needed to be readily available to the many, many families that baby boomers were starting having returned from... Whose parents had returned from fighting. Fathers had returned from fighting in the second World War. The US Interstate System, as I mentioned, was created by President Eisenhower originally for purposes of national defense. Now, that same infrastructure system is how we move goods around the country and also form the origin of the notion unheard of before, of a family vacation, where folks, for instance, drive to Disney world. Also an invention of the 1950s, essentially. Disney was anyway, as were hotel chains, McDonald's and other fast food chains, and things that enabled American families to go on the road. That also was a product... Was a consequence of the early 1940s inflection point. The US Interstate System also gave birth to suburbia, the United States family auto industry. So who knows how everyday life will change as a result of our adjustment to today's supply chain and production challenges? There's been indeed a conscious effort propagated by the United States Government and also many state governments to increase manufacturing within the United States. And this extends to critical industries, such as those relating to pharmaceuticals, tech, national defense issues. And then also things just that people don't necessarily, or the country doesn't necessarily need, but things that people want. Recently within the last month, California adopted legislation that will phase out gas vehicles by 2035. 6 States generally is a matter of course, adopt whatever type of automotive or environmental legislation that California adopts. This will change the supply chain dramatically. Not only will there be less need for oil, which typically comes not from within the United States. But the special metals and materials needed to power electronic batteries, those will need to be made somewhere. And there's a push that they be made from in the United States. Now increasing manufacturing within the United States will undoubtedly have impacts on labor patterns, what we pay for, largely a lot more automation, and who knows what other consequences will emerge from that? Now the keys to moving forward. Keys to moving forward towards a more productive future out of our uncertain present include, first, to some degree, automation. Warehouses in the United States exploded very quickly owing to the pandemic, and they are still largely manpower-driven. However, they don't have to be. So automation will very likely catch up to this industry very quickly. Other industries are likely to follow, and the automation innovations that occur within the warehousing industry will largely occur in other places in logistics, will operate to increase the productivity of operations at ports, although that will obviously have to be negotiated with the longshoreman's and other unions that operate there. But automation is likely to experience a tremendous increase in the next 20 years. Innovation, developing successful technologies to adapt to a new manufacturing ecosystem. For instance, digital twin technology is one example of a supply chain innovation that has occurred over the pandemic period, which allows companies to essentially twin their supply chains and run war games to see what would happen if various changes are implemented. Innovation also will drive the solution to something that has been happening legislatively, which is that more and more countries, including the United States, are enacting legislation prohibiting the import of certain manufactured products, specifically those that include forced or child labor. Now United States doesn't simply take a stab at figuring out what these are. It relies on complex software that has imported data from the intelligence community around the world and customs to predict and know exactly what products are likely to use forced labor. For example, from the Nawagar region in China. The United States doing that will likely mean that companies will also come to develop and rely on this kind of technology to understand what is going on in their supply chain so that they are not unpleasantly surprised. Another phenomenon is end to end supply chain transparency. Now the best way to get closer to just in time manufacturing, which prevailed before COVID, is to increase our visibility as to where available components and services are, but it has to be done in a secure way. So we can expect innovation relating to end to end transportation transparency, which allows companies, manufacturers, producers, to know of likely roadblocks in the supply chain system and adjust to them so that production schedules can be met. America's most important resource though, has always been the innovation and inventiveness of its people. And that is what has always enabled us to successfully deal with change. It's done it many instances in the past. And while we occasionally stumble as a political system and as an economic dealer in the world, at the end of the day, the innovation of the American people and the American ecosystem has always enabled us to deal effectively with any changes that occur, and this is no different. So that more than anything else, will be the key to securing a successful future. Now, this concludes our talk on why are supply chains... "Why is everything broken? Understanding supply chains in 2022." As we roll into 2023, we will likely see even more changes as people change how and where they go to work as the larger millennial and Generation Z become and remain part of the workforce. And as the part of a population that is the baby boomers, continue to age and need different products and services themselves. So this talk may look very different next year than it does this year. Except for that the chaos is not likely to decrease over time. Chaos, I think, is with us in the short to midterm. And then of course, the thing that also interjects another aspect, very important aspect of this is climate change. How we deal with that, how we continue producing goods in a way that is less impactful on our economy as we go forward will also be the subject of our innovation, our transparency, and our automation, and has to be the focus of our government moving... Our national policy moving forward. You probably do an entire other hour long talk about what that looks like in response to the recently adopted Innovation Act that signed into law by President Biden. But will conclude our talk here for now and say whatever it is that we think will happen, probably won't, but something else unexpected probably will. Of course, the fact that we are moving into new territory as far as supply chain work and supply chain contracting is concerned, does not mean that we are safe abandoning our fundamentals. And let's use the last few minutes of this program to describe what our fundamentals are. Supply chain in the world of contracting has traditionally been regarded as somewhat of a a backwater in terms of legal exercise. Is this correct? It's not. Now drafting a supply chain contract and working with supply chain contract partners is a critical aspect of a company's organization. It requires foresight, discipline, and precision. And a supply chain agreement forms the basis of every aspect of the supply chain relationship going forward. While it's theoretically possible to address new issues and renegotiate contract provisions later in the relationship, in reality, this rarely happens. Nevertheless, companies often fail to give supply chain contracts the attention they require during the drafting phase, and end up paying the price later in their relationships. Just think about it. If an American manufacturing company plan to enter into a mergers or an acquisitions deal valued at, say, a $100 million, the transaction would be crawling with consultants and lawyers. Negotiations would be conducted formally, with full due diligence. And the parties would insist on a formal signing and closing before transferring whatever was being required. Yet, parties rarely proceed with the same care when drafting supply chain contracts of equal or greater value, even though supply chain relationships sometimes last for decades. And even today, many companies enter into multimillion dollar supply chain agreements without dedicating much attention to the terms of those contracts. Supply chain agreements are considered to be boiler plate based on preexisting forums, and are often are coupled with technical specifications that are written by engineers without meaningful executive or legal review. Even when supply chain agreements are strategically important or involve nonstandard features, many are nonetheless consummated using only purchase orders in standard terms and conditions. And as the former legal UCC commentators, James J. White and Robert S. Summers once described, it is a sad fact that many sales contracts are not fully bargained, not carefully drafted, and not understandingly signed or otherwise acknowledged by both parties. Often here's what happens. Underlings of seller and buyer each sit in their offices with a telephone and a stack of form contracts. Now, of course, forms and standard terms and contracts can save time for busy purchasing departments in commodity transactions, but relying on them too much risks conflict and confusion that translates negatively to the company's bottom line. Both suppliers and buyers can become so eager to begin work, that they do not take the care that they should to protect their interests and to plan for contingencies. So within companies, there are three main constituencies, at least three main constituencies that should have awareness of any supply chain contract of significant size. First, of course, is the engineers or technicians who will be delivering the products that issue. This is particularly important with complex specially engineered parts. Those people will understand from a technical perspective, what can be engineered, what is going to be delivered, and on an operational level, what the warranty and service life aspects are likely to involve. However, having your engineers be solely responsible for negotiating a supply chain contract risks missing to other fundamental aspects. And so the second group that must be involved is of course the legal aspect. Sometimes engineers and people without legal training can use words and phrases are not understand the impact of legal sequencing or legal terms in phrasing. So legal people have to be fully conversant and fully discussing internal to a company with their engineering counterparts. And then the third group of people that needs to be involved with any supply chain contract of any size is of course your finance department, so that they can understand the financial impact of the deals being negotiated and agreed to. Oftentimes what we see when people get into trouble with the supply chain contract is a function of these three subgroups within a company not adequately communicating. And so the engineers will agree to something where they don't understand the legal ramifications, or the legal people will approve a term or condition that doesn't actually work operationally with what is being designed, or one or both of these two groups can make decisions without fully understanding how it risks impacting the financial bottom line of the company. Now, those are just the internal fundamentals of working with the supply chain. There are fundamentals when working with your supply chain partners as well. And although we're dealing with two, typically two commercially sophisticated companies negotiating at arms length with each other, purportedly adverse and each looking out for their own interests, in reality, the reality on the ground is often different. Buyers in a supply chain contract often assume that their purchasing power means that they can pressure suppliers to accept the buyer terms, and that buyer terms will always prevail. So here's another quote from JJ white and Robert Summers. "Under the present state of the law, we believe that there is no language that a lawyer can put on a form that will always assure the client of forming a contract on the client's own terms. So both parties to a supply chain agreement need to engage meaningfully in a contract negotiation and drafting process." Now more than that, buyers also need to understand that it is actually often counterproductive to force terms on suppliers if those terms lead to performance issues and damage the relationship, and that it's usually better to negotiate a deal that guarantees a viable program. Similarly, suppliers need to understand that it is counterproductive to take on a new program that's difficult or impossible to perform, and that it is usually better to direct resources towards programs that are achievable and profitable in the long term, or that are achievable and profitable at the chosen price point. Butting up against sales quotas and quarter and pressure, sales people often feel the need to close a deal to please their senior managers. But this is when senior managers must step in to protect the company no matter what week of the quarter or the year that it is. Fundamentally, the number one goal of supply chain contracts is certainty. If the expectations for both parties are clearly established, supply chain partners are generally able to avoid disputes. A second fundamental goal is mutual success. If one supply chain partner suffers economically, both will suffer eventually. That is the nature of commercial dealing. A supply chain partner losing money will often find ways to cut corners, sacrificing quality, reliability, or technical compliance. At the very least, a losing partner will start looking for ways out of the relationship. This is a destructive dynamic. Thank you for listening to our program. Thank you for your interest in the supply chain.

Presenter(s)

SR
Sarah Rathke
Partner
Squire Patton Boggs

Practice areas

Credit information

Jurisdiction
Credits
Available until
Status
Alabama
  • 1.0 general
Unavailable
Alaska
  • 1.0 voluntary
October 27, 2024 at 11:59PM HST Available
Arizona
  • 1.0 general
October 27, 2024 at 11:59PM HST Available
Arkansas
  • 1.0 general
October 27, 2024 at 11:59PM HST Approved
California
  • 1.0 general
October 27, 2024 at 11:59PM HST Approved
Colorado
    Not Offered
    Connecticut
    • 1.0 general
    October 27, 2024 at 11:59PM HST Available
    Delaware
      Not Offered
      Florida
      • 1.0 general
      Pending
      Georgia
      • 1.0 general
      Unavailable
      Guam
      • 1.0 general
      October 27, 2024 at 11:59PM HST Available
      Hawaii
      • 1.0 general
      October 27, 2024 at 11:59PM HST Approved
      Idaho
        Not Offered
        Illinois
        • 1.0 general
        October 29, 2024 at 11:59PM HST Approved
        Indiana
          Not Offered
          Iowa
          • 1.0 general
          Pending
          Kansas
            Not Offered
            Kentucky
            • 1.0 general
            Pending
            Louisiana
            • 1.0 general
            Pending
            Maine
            • 1.0 general
            December 31, 2026 at 11:59PM HST Pending
            Minnesota
            • 1.0 general
            March 15, 2025 at 11:59PM HST Approved
            Mississippi
            • 1.0 general
            Pending
            Missouri
            • 1.0 general
            October 27, 2024 at 11:59PM HST Available
            Montana
              Not Offered
              Nebraska
                Not Offered
                Nevada
                • 1.0 general
                December 31, 2025 at 11:59PM HST Approved
                New Hampshire
                • 1.0 general
                October 27, 2024 at 11:59PM HST Available
                New Jersey
                • 1.2 general
                January 16, 2025 at 11:59PM HST Approved
                New Mexico
                  Not Offered
                  New York
                  • 1.0 areas of professional practice
                  October 27, 2024 at 11:59PM HST Available
                  North Carolina
                    Not Offered
                    North Dakota
                    • 1.0 general
                    October 27, 2024 at 11:59PM HST Available
                    Ohio
                    • 1.0 general
                    Unavailable
                    Oklahoma
                      Not Offered
                      Oregon
                      • 1.0 general
                      October 27, 2025 at 11:59PM HST Approved
                      Pennsylvania
                        Not Offered
                        Puerto Rico
                          Not Offered
                          Rhode Island
                            Not Offered
                            South Carolina
                              Not Offered
                              Tennessee
                              • 1.0 general
                              Pending
                              Texas
                              • 1.0 general
                              Pending
                              Utah
                                Not Offered
                                Vermont
                                • 1.0 general
                                October 27, 2024 at 11:59PM HST Approved
                                Virginia
                                  Not Offered
                                  Virgin Islands
                                  • 1.0 general
                                  October 27, 2024 at 11:59PM HST Available
                                  Washington
                                    Not Offered
                                    West Virginia
                                      Not Offered
                                      Wisconsin
                                        Not Offered
                                        Wyoming
                                          Not Offered
                                          Credits
                                          • 1.0 general
                                          Available until
                                          Status
                                          Unavailable
                                          Credits
                                          • 1.0 voluntary
                                          Available until

                                          October 27, 2024 at 11:59PM HST

                                          Status
                                          Available
                                          Credits
                                          • 1.0 general
                                          Available until

                                          October 27, 2024 at 11:59PM HST

                                          Status
                                          Available
                                          Credits
                                          • 1.0 general
                                          Available until

                                          October 27, 2024 at 11:59PM HST

                                          Status
                                          Approved
                                          Credits
                                          • 1.0 general
                                          Available until

                                          October 27, 2024 at 11:59PM HST

                                          Status
                                          Approved
                                          Credits
                                            Available until
                                            Status
                                            Not Offered
                                            Credits
                                            • 1.0 general
                                            Available until

                                            October 27, 2024 at 11:59PM HST

                                            Status
                                            Available
                                            Credits
                                              Available until
                                              Status
                                              Not Offered
                                              Credits
                                              • 1.0 general
                                              Available until
                                              Status
                                              Pending
                                              Credits
                                              • 1.0 general
                                              Available until
                                              Status
                                              Unavailable
                                              Credits
                                              • 1.0 general
                                              Available until

                                              October 27, 2024 at 11:59PM HST

                                              Status
                                              Available
                                              Credits
                                              • 1.0 general
                                              Available until

                                              October 27, 2024 at 11:59PM HST

                                              Status
                                              Approved
                                              Credits
                                                Available until
                                                Status
                                                Not Offered
                                                Credits
                                                • 1.0 general
                                                Available until

                                                October 29, 2024 at 11:59PM HST

                                                Status
                                                Approved
                                                Credits
                                                  Available until
                                                  Status
                                                  Not Offered
                                                  Credits
                                                  • 1.0 general
                                                  Available until
                                                  Status
                                                  Pending
                                                  Credits
                                                    Available until
                                                    Status
                                                    Not Offered
                                                    Credits
                                                    • 1.0 general
                                                    Available until
                                                    Status
                                                    Pending
                                                    Credits
                                                    • 1.0 general
                                                    Available until
                                                    Status
                                                    Pending
                                                    Credits
                                                    • 1.0 general
                                                    Available until

                                                    December 31, 2026 at 11:59PM HST

                                                    Status
                                                    Pending
                                                    Credits
                                                    • 1.0 general
                                                    Available until

                                                    March 15, 2025 at 11:59PM HST

                                                    Status
                                                    Approved
                                                    Credits
                                                    • 1.0 general
                                                    Available until
                                                    Status
                                                    Pending
                                                    Credits
                                                    • 1.0 general
                                                    Available until

                                                    October 27, 2024 at 11:59PM HST

                                                    Status
                                                    Available
                                                    Credits
                                                      Available until
                                                      Status
                                                      Not Offered
                                                      Credits
                                                        Available until
                                                        Status
                                                        Not Offered
                                                        Credits
                                                        • 1.0 general
                                                        Available until

                                                        December 31, 2025 at 11:59PM HST

                                                        Status
                                                        Approved
                                                        Credits
                                                        • 1.0 general
                                                        Available until

                                                        October 27, 2024 at 11:59PM HST

                                                        Status
                                                        Available
                                                        Credits
                                                        • 1.2 general
                                                        Available until

                                                        January 16, 2025 at 11:59PM HST

                                                        Status
                                                        Approved
                                                        Credits
                                                          Available until
                                                          Status
                                                          Not Offered
                                                          Credits
                                                          • 1.0 areas of professional practice
                                                          Available until

                                                          October 27, 2024 at 11:59PM HST

                                                          Status
                                                          Available
                                                          Credits
                                                            Available until
                                                            Status
                                                            Not Offered
                                                            Credits
                                                            • 1.0 general
                                                            Available until

                                                            October 27, 2024 at 11:59PM HST

                                                            Status
                                                            Available
                                                            Credits
                                                            • 1.0 general
                                                            Available until
                                                            Status
                                                            Unavailable
                                                            Credits
                                                              Available until
                                                              Status
                                                              Not Offered
                                                              Credits
                                                              • 1.0 general
                                                              Available until

                                                              October 27, 2025 at 11:59PM HST

                                                              Status
                                                              Approved
                                                              Credits
                                                                Available until
                                                                Status
                                                                Not Offered
                                                                Credits
                                                                  Available until
                                                                  Status
                                                                  Not Offered
                                                                  Credits
                                                                    Available until
                                                                    Status
                                                                    Not Offered
                                                                    Credits
                                                                      Available until
                                                                      Status
                                                                      Not Offered
                                                                      Credits
                                                                      • 1.0 general
                                                                      Available until
                                                                      Status
                                                                      Pending
                                                                      Credits
                                                                      • 1.0 general
                                                                      Available until
                                                                      Status
                                                                      Pending
                                                                      Credits
                                                                        Available until
                                                                        Status
                                                                        Not Offered
                                                                        Credits
                                                                        • 1.0 general
                                                                        Available until

                                                                        October 27, 2024 at 11:59PM HST

                                                                        Status
                                                                        Approved
                                                                        Credits
                                                                          Available until
                                                                          Status
                                                                          Not Offered
                                                                          Credits
                                                                          • 1.0 general
                                                                          Available until

                                                                          October 27, 2024 at 11:59PM HST

                                                                          Status
                                                                          Available
                                                                          Credits
                                                                            Available until
                                                                            Status
                                                                            Not Offered
                                                                            Credits
                                                                              Available until
                                                                              Status
                                                                              Not Offered
                                                                              Credits
                                                                                Available until
                                                                                Status
                                                                                Not Offered
                                                                                Credits
                                                                                  Available until
                                                                                  Status
                                                                                  Not Offered

                                                                                  Become a Quimbee CLE presenter

                                                                                  Quimbee partners with top attorneys nationwide. We offer course stipends, an in-house production team, and an unparalleled presenter experience. Apply to teach and show us what you've got.

                                                                                  Become a Quimbee CLE presenter image