Supply chain collapse in the age of pandemic

As time passes the world gets smaller and smaller due to globalization. The walls in international trade have fallen and goods, information, and technology move almost free and extremely fast between organizations in different countries and continents. There is almost no large organization that has not gone international or multinational, outsourcing the work that it can either be done cheaper in other countries or for which they might lack the expertise. This frees capital and allows them to focus at home on their core competencies. 

This delocalization has lead to the perfecting of supply chains. Some goods, such as respirators, gloves, or ventilators,  are not only manufactured in low-cost countries but often their constituent parts come from different countries and continents only to be assembled in one of these low-cost countries.  Organizations have so fine-tuned their supply chains that even these essential goods can be delivered just in time, making inventories a thing of the past. 

This seems to be working perfectly fine under normal circumstances, but when a pandemic hits the advantages of the modern economy are quickly canceled, as the protectionist walls come back up, grinding international travel and trade to a halt.  Factories that supply these essential goods (or parts for these goods) might be crippled by a pandemic and their output is diminished or turned to zero. If they manage to keep production going they may end up with them in stock as international logistics are now either totally stopped or subject to severe (and necessary) cautionary steps that ensure the products do not become carriers for the pathogens that started the pandemic. Also, the states where these products are manufactured might turn protectionist and decide to stop the export of such necessary items, in order to use them to protect their own citizens. 

Regardless of which of these scenarios happen, the outcome is that when a pandemic hits essential PPE and equipment will be in short supply. 

Obviously there is no easy fix to this. The outsourcing, insourcing, and supply chains are mechanisms that have led to our scale economies and are here to stay. But due to these severe and deadly shortcomings in time of pandemics governments have to do a better job in emergency response planning. In my view, there are at least two solutions to this:

1. The simplest, though not necessarily the most cost-effective option, is a return of the inventories. Sure, they are costly to acquire and maintain and they expire, which not only locks capital but requires continuous expenditure. This, especially from a fiscal conservative perspective, doesn’t make them very attractive. But, on the other hand, the expense to create and maintain the inventories are small when compared to the human and financial cost of not having them in time of crisis. 
2. The better alternative would be for each nation to determine what these essential goods are and develop capabilities to manufacture them internally. While this will certainly increase the cost of the goods it will have the following benefits:

• The closing of the national borders will not have an impact on the availability of the goods since protectionist policies will not be at play and, provided production is ramped up immediately when a pandemic is deemed imminent, the equipment and PPE should be supplied in adequate quantities and in time for the affected population. Over-production should not be a problem since, unhappily, there will always be a country that is not adequately prepared.
• The national logistics have already proved resilient during the COVID-19 pandemic, so internal distribution should not be problematic. 

Another benefit would be that the creation of such capacity would create local jobs, which will also offset to a degree the higher cost when compared to international manufacturing and acquisition, making this solution very attractive for all color of the political spectrum.

Of course, there might be other solutions to this, including a combination of the two above. But the key is that the world population, affluence, and mobility will continue to increase, which each on their own are causal factors for pandemics. COVID-19 will not be the last, nor the most severe pandemic in the future of humanity, and we should plan adequately for such reoccurrences. 

As Paul Romer, the 2018 Nobel prize for the economics award co-recipient, remarked: 

“A crisis is a terrible thing to waste” (Friedman Thomas, 2006, The World is Flat, Farrar, Straus and Giroux, New York).