Efficiency and resiliency

Here is a simple (and woefully incomplete, as the challenges are multi-varied) primer on our supply chain issues, as well as some practical application to your life.

The other day, I heard a macroeconomist discussing the current chaos in our supply chains. She explained that for several decades now, the world has enjoyed relative global peace (e.g., no world wars), compared with the last 120 years or so. That has greatly impacted what we are experiencing today.

As a result of this geopolitical tranquility, our supply chains were able to take aim at efficiency. “Just in time” manufacturing, for example, became popular. Raw materials or component parts could be delivered daily or sometimes hourly, and on an as-needed basis to producers. This was highly efficient, as manufacturers were able to work with one or two cost-effective suppliers and minimize inventory, the latter of which is generally a depreciating asset and expensive to store and maintain.

These corporate decisions were based on expedience and made in light of short-term economic circumstances.

The problem with this arrangement is that the opportunity cost of efficiency is often resiliency. Europe’s heavy reliance on Russian natural gas, for example, made economic sense after the collapse of the Soviet Union. The importation of various products and components from China to the West has been financially pragmatic for 30+ years based on the cost of goods.

But now that Russia is in a kinetic war with Ukraine, and in something of a financial war with the United States and Western Europe, suddenly reliance on Russian energy seems like a very bad idea. The problem is that the infrastructure to leverage Russian commodities is already in place for many countries (e.g., Germany), and unwinding from this dependency is expensive, time-consuming, and nearly impossible in the short-term. That is, the logistical infrastructure we have today is merely efficient. Building out resiliency in the supply chain will be painful and take time, assuming the West and its corporations are conscious that they should build in the first place.

On one hand, this is simply fascinating (and concerning) to me on its own. On the other hand, it got me thinking about the efficiency-resiliency tradeoffs I make in my own life.

A simple example. To secure my home, I lean heavily toward resiliency. We have locks, door jambs, an alarm system, a 130-pound dog, pepper spray (for my wife), and several firearms (for me) scattered throughout the house (out of reach of children, of course). None of this is particularly efficient, as we have to lock doors, make sure we turn on and off the alarm as necessary, feed an enormous dog, and secure our multiple handguns. But is sure is resilient. This is a tradeoff I’m comfortable with because protecting my family is a top priority.

On the other hand, my wife and I only purchase enough food to last us through a week. If things were to truly to hit the proverbial fan and legitimate food shortages struck, we’d last only until the following Sunday or Monday, and then we’d be in trouble. My family’s food supply is built for efficiency, not resiliency. This is the kind of tradeoff that I’m less comfortable with. I’m not interested in a 10-year food supply and a row of deep freezers in my garage, but I also know that I’m under-prepared to take on food shortages that are likely. I say “likely” because Russia and Ukraine are major wheat and commodity suppliers, and because fertilizer, which is necessary for food production elsewhere, requires an abundance of one of Russia’s most prominent exports – natural gas.

Make your decisions on efficiency and resiliency deliberately. Relationships, safety, careers, and nearly every aspect of your life are a balance of these two attributes. Neither is inherently better, and there is no perfect balance anyway. But neglect of either has consequences in different areas of life.