On Supply Chains in Post Brexit Britain
Aug. 1st, 2018 03:02 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
danieldwilliamHow does your bus driver get to work if the permits officer at the petrol refinery is on strike because the coffee machine has run out of limescale remover and won't boot up?
I have been thinking a little bit about supply chains and how they might be affected by a botched Brexit. And I don't know what will happen with them but I thought it might be useful to lay out why I don't know and what this implies for the ability of the government to know. Or to plan or to act.
Some of the important principles that I think apply to supply chains are below.
Supply chains are expensive. Firstly they require an investment in fixed assets. Warehouses, lorries, IT systems. This requires an investment of capital. Secondly, things that are in a supply chain are working capital. Capital costs money. If you have a Weighted Average Cost of Capital of 15% then each additional £1million is costing you £150,000. A year. Each warehouse or each additional day of stock you need costs you money.
So much money do supply chains cost that one could plausibly describe the post-war economic history of the West as the organised attempt to optimise supply chains for the lowest cost.
Supply chains are also dependent on external socially provided capital. Public roads, the electricty grids that carry the power to the cranes, railways. This is also expensive and big and slow to provide and subject to political processes, like planning permission.
Supply chains are the result of an evolutionary process. A process of exploration. Three things follow from this.
Firstly, there is a constant search for better supply chains. Better in the Darwinian sense of being best fitted for surviving in to the next time period. Supply chains are optimised over short periods. They have been developed incrementally. Their current position is dependent on the path they have taken to get there. The resiliance of your supply chain to a once in a 50 year event is not going to keep you in business if you can not pay this quarter's dividend or settle your rent bill. They are constantly being optimised in real time.
Secondly, they are being optimised by individual economic actors mostly against a background of the current state of optimisation by everyone else. This is being done in conditions of limited knowledge and bounded rationality. Those economic actors are acting in their own perceived best interests. They are acting in a state of a mix of co-operation and competition with other economic actors. The "Supply Chain" is not being optimised. Each individual's position is being optimised, within the supply chain.
Thirdly, a large part of the background against which supply chains have evolved is the stability of other market and political structures. People will supply goods on credit because courts exist. People will not insist on being paid in cash on delivery because internet banking exists. People will not come in person to your factory to buy goods because ordering by post or email exists. People will invest in capital goods because they have a reasonable expectation that things tomorrow will be similar to things today and that they can trust other economic actors to continue to behave like they did yesterday.
As a consequence of the above supply chains have become very, very lean with as little spare capacity as possible in them, by design. As a consequence of the above supply are vulnerable to the positions taken by every individual in them. As a consequence of the above there is no holistic system with a writen down plan of "The Supply Chain". The Supply Chain is lean to the point of brittle, dependent on many of the organisations in it and unknown.
Supply chains for many organisations are also dependent on the transport system. The transport system is a chaotic system. Chaotic in the sense that it is subject to sensitive dependence on initial conditions and its behaviour is non-linear. How the transport systems will respond to an external shock or to signficant increases in volume is anyone's guess and perhaps unmodellable.
Supply chains and transport networks are often run, or managed, by large, complex organisations. I do not subscribe to the Heroic models of Leadership or Entrepreneurship. A key challenge in large organisations is managing the flow of information. The people leading large organisations don't fully understand how their organisation operates or what it is currently doing. Large organisations are also political organisations and subject to the goals of any individual or group in the organisation who has power or influence. Parts of an organisation may well be optimised for the benefit of the people in that part of the organisation and not for the organisation as a whole, let alone optimised for the benefit of the supply chain - and optimised in the context of a steady environment.
The Supply Chain is being managed by organisations which are uncertain of their own position and velocity.
Supply chains are also mostly still managed by people. There are people at both ends. People are subject to all sorts of planning defects up to and including blind panic.
On the other hand, supply chains have a degree of automation in them, either formal automation or the automation of habit and custom and practice. That automation is designed to optimise parts of the supply chain for low cost against a stable background.
Supply chains are also resting on a legal, regulatory and financial framework. Do you have cash? Do you have credit? Is your cash the right currency? Will your insurance cover this action? Is this action legal? Do you have the legal authority to take this action? How do I know that this is what it says it is? How does this framework operate in a situation of chaotic stress and frantic action?
My conclusion is that no one knows, no one can know, with much certainty, how "The Supply Chain" is currently set up and what are the vital parts of it. There is no model that will allow you to work out what the end result of something changing will be. There can be no comprehensive plan for mitigating the impact of Brexit on "The Supply Chain" because there is not such a thing as "The Supply Chain." No one fully understands it and no one fully controls it.
This is a two part question. Do we understand our own supply chains and what is about to happen to them? What is the impact on supply chains of a botched Brexit?
We don't know what chain of events a botched Brexit will trigger. We don't know what secondary events will flow from the initial disturbance.
It is straight-foward enough to think about what happens if there are delays moving lorries through ports. Traffic jams, delays, perished food, lorries not where they ought to be the next day. Drivers not where they ought to be the day after.
What happens if Gresham's Law applies to lorries and anyone with a lorry wants it to be inside the EU and not stuck in a traffic jam in Kent and so refuses to send their lorry to the UK after the 20th of March?
What happens if the impact of Brexit is more left-field? A currency crisis caused by a bot trader responding automatically to a panicked sell off of the pound. The currency crisis causes a margin call for currency traders and a liquidity crisis and suddenly no one in the UK can buy dollars any more. Which is a problem if you need dollars to pay for oil to turn in to petrol. Or if the impact of a petrol shortage is that teachers can't get to work and lots of primary schools are shut and parents also can't go to work. And some of those parents work in the National Grid control centre. Or during the black out caused by a grid failure someone steals the lorry which has the shipment of consumables for the tachographs that go in to every lorry in the UK and now no one is sure if they can legally drive their lorry any more.
Or a group of the kids whose school is shut and are left unsupervised decide to play chicken with a passenger express train on the East Coast Mainline and lose and the railway is closed for a day.
Or anyone of a dozen plausible complications which might be easily dealt with if everything else were working well.
So, I think it's very difficult to see how our supply chains will work in the event of a disorderly Brexit.
I have been thinking a little bit about supply chains and how they might be affected by a botched Brexit. And I don't know what will happen with them but I thought it might be useful to lay out why I don't know and what this implies for the ability of the government to know. Or to plan or to act.
Some of the important principles that I think apply to supply chains are below.
Supply chains are expensive. Firstly they require an investment in fixed assets. Warehouses, lorries, IT systems. This requires an investment of capital. Secondly, things that are in a supply chain are working capital. Capital costs money. If you have a Weighted Average Cost of Capital of 15% then each additional £1million is costing you £150,000. A year. Each warehouse or each additional day of stock you need costs you money.
So much money do supply chains cost that one could plausibly describe the post-war economic history of the West as the organised attempt to optimise supply chains for the lowest cost.
Supply chains are also dependent on external socially provided capital. Public roads, the electricty grids that carry the power to the cranes, railways. This is also expensive and big and slow to provide and subject to political processes, like planning permission.
Supply chains are the result of an evolutionary process. A process of exploration. Three things follow from this.
Firstly, there is a constant search for better supply chains. Better in the Darwinian sense of being best fitted for surviving in to the next time period. Supply chains are optimised over short periods. They have been developed incrementally. Their current position is dependent on the path they have taken to get there. The resiliance of your supply chain to a once in a 50 year event is not going to keep you in business if you can not pay this quarter's dividend or settle your rent bill. They are constantly being optimised in real time.
Secondly, they are being optimised by individual economic actors mostly against a background of the current state of optimisation by everyone else. This is being done in conditions of limited knowledge and bounded rationality. Those economic actors are acting in their own perceived best interests. They are acting in a state of a mix of co-operation and competition with other economic actors. The "Supply Chain" is not being optimised. Each individual's position is being optimised, within the supply chain.
Thirdly, a large part of the background against which supply chains have evolved is the stability of other market and political structures. People will supply goods on credit because courts exist. People will not insist on being paid in cash on delivery because internet banking exists. People will not come in person to your factory to buy goods because ordering by post or email exists. People will invest in capital goods because they have a reasonable expectation that things tomorrow will be similar to things today and that they can trust other economic actors to continue to behave like they did yesterday.
As a consequence of the above supply chains have become very, very lean with as little spare capacity as possible in them, by design. As a consequence of the above supply are vulnerable to the positions taken by every individual in them. As a consequence of the above there is no holistic system with a writen down plan of "The Supply Chain". The Supply Chain is lean to the point of brittle, dependent on many of the organisations in it and unknown.
Supply chains for many organisations are also dependent on the transport system. The transport system is a chaotic system. Chaotic in the sense that it is subject to sensitive dependence on initial conditions and its behaviour is non-linear. How the transport systems will respond to an external shock or to signficant increases in volume is anyone's guess and perhaps unmodellable.
Supply chains and transport networks are often run, or managed, by large, complex organisations. I do not subscribe to the Heroic models of Leadership or Entrepreneurship. A key challenge in large organisations is managing the flow of information. The people leading large organisations don't fully understand how their organisation operates or what it is currently doing. Large organisations are also political organisations and subject to the goals of any individual or group in the organisation who has power or influence. Parts of an organisation may well be optimised for the benefit of the people in that part of the organisation and not for the organisation as a whole, let alone optimised for the benefit of the supply chain - and optimised in the context of a steady environment.
The Supply Chain is being managed by organisations which are uncertain of their own position and velocity.
Supply chains are also mostly still managed by people. There are people at both ends. People are subject to all sorts of planning defects up to and including blind panic.
On the other hand, supply chains have a degree of automation in them, either formal automation or the automation of habit and custom and practice. That automation is designed to optimise parts of the supply chain for low cost against a stable background.
Supply chains are also resting on a legal, regulatory and financial framework. Do you have cash? Do you have credit? Is your cash the right currency? Will your insurance cover this action? Is this action legal? Do you have the legal authority to take this action? How do I know that this is what it says it is? How does this framework operate in a situation of chaotic stress and frantic action?
My conclusion is that no one knows, no one can know, with much certainty, how "The Supply Chain" is currently set up and what are the vital parts of it. There is no model that will allow you to work out what the end result of something changing will be. There can be no comprehensive plan for mitigating the impact of Brexit on "The Supply Chain" because there is not such a thing as "The Supply Chain." No one fully understands it and no one fully controls it.
This is a two part question. Do we understand our own supply chains and what is about to happen to them? What is the impact on supply chains of a botched Brexit?
We don't know what chain of events a botched Brexit will trigger. We don't know what secondary events will flow from the initial disturbance.
It is straight-foward enough to think about what happens if there are delays moving lorries through ports. Traffic jams, delays, perished food, lorries not where they ought to be the next day. Drivers not where they ought to be the day after.
What happens if Gresham's Law applies to lorries and anyone with a lorry wants it to be inside the EU and not stuck in a traffic jam in Kent and so refuses to send their lorry to the UK after the 20th of March?
What happens if the impact of Brexit is more left-field? A currency crisis caused by a bot trader responding automatically to a panicked sell off of the pound. The currency crisis causes a margin call for currency traders and a liquidity crisis and suddenly no one in the UK can buy dollars any more. Which is a problem if you need dollars to pay for oil to turn in to petrol. Or if the impact of a petrol shortage is that teachers can't get to work and lots of primary schools are shut and parents also can't go to work. And some of those parents work in the National Grid control centre. Or during the black out caused by a grid failure someone steals the lorry which has the shipment of consumables for the tachographs that go in to every lorry in the UK and now no one is sure if they can legally drive their lorry any more.
Or a group of the kids whose school is shut and are left unsupervised decide to play chicken with a passenger express train on the East Coast Mainline and lose and the railway is closed for a day.
Or anyone of a dozen plausible complications which might be easily dealt with if everything else were working well.
So, I think it's very difficult to see how our supply chains will work in the event of a disorderly Brexit.
no subject
Date: 2018-08-01 05:27 pm (UTC)