We are about to learn once again that lack of resilience is the flip side of efficiency. The world’s seventh largest shipping firm, Korean-based Hanjin Shipping Co. Ltd., failed to rally the support of its creditors last week and was forced to file for bankruptcy. Retailers and manufacturers worldwide are in a bit of a panic as the fate of goods on Hanjin ships shifts into the hands of courts and lawyers for creditors intent on seizing Hanjin assets in order to ensure payment of outstanding bills. Much of Hanjin’s fleet is chartered, that is, owned by others, and those owners want to make sure they get paid their charter fees or get their ships back pronto. The result has been that half of Hanjin’s container vessels are currently blocked from the world’s ports for fear that the ports will not be paid for their loading and unloading services. Other shippers which include trucking companies which carry containers to their final destination are reluctant to take on Hanjin freight for fear of not getting paid. (You are perhaps seeing the main theme here.) Meanwhile, the sudden drop in available shipping containers and ships has caused shipping rates to soar as businesses scramble to make other arrangements for items still to be shipped. U.S. retailers are so panicked that they have asked the U.S. Department of Commerce to step in to help resolve the breakdown which is likely to hurt those retailers during the upcoming Christmas shopping season.
Let’s take a step back to understand how this all happened. Clever business owners have learned to run so-called “lean” operations to compete with their equally lean competitors. One way to be lean is to reduce idle inventories which just sit in expensive warehouses by arranging to have what the business needs delivered practically every day. The approach is often referred to as a warehouse on wheels and also as just-in-time delivery. With little or no inventory of essential goods and raw materials retailers and manufacturers are subject to disruptions all along their supply chains which reach around the globe. A breakdown at any step can quickly bring activity to a halt on the factory floor or on the sales floor. Just-in-time is very efficient financially (until, of course, it isn’t). Little money is tied up in inventories or the space to warehouse them. But just-in-time is not very resilient. It used to be that businesses stockpiled goods and critical resources to ensure against disruptions. But the advent of computerized tracking combined with more efficient shipping practices worked to end the stockpiling of inventories. I wrote about the vulnerabilities of just-in-time delivery systems back in 2006, 2008 and updated the 2006 piece in 2011. My suggestion back in 2006 that just-in-time systems were likely to recede in the wake of repeated shocks has proven to be premature. But the wisdom of running hospitals, for instance, on just-in-time supply principles seems foolhardy. It seems logical for hospitals as emergency facilities to be prepared for a mass catastrophe (earthquake, hurricane, etc.) with substantial medical supplies. Along these lines, does a three-day supply of food now available in most metropolises seem like wise planning? The Hanjin bankruptcy also calls into the question the wisdom of allowing so much freight–7.8 percent of all trans-Pacific U.S. freight–to be handled by one carrier. And yet large size and just-in-time systems create what economists like to call economies of scale. Goods and services are provided more cheaply. But such systems are not resilient. Resilience often requires redundancy and that spells inefficiency in today’s business climate. It is, however, what we see in nature. Humans have two kidneys, but can survive with just one. Some genes are redundant, able to perform the same functions. There are 4,186 known species of diving beetles, lots of redundancy to ensure survival and biodiversity.
Two organizations worldwide practice redundancy on a major scale. Space exploration agencies build multiple redundant systems, especially for manned flight, to ensure the survival of spaceships, probes and people. Space exploration is so hazardous that even these redundancies don’t always ensure survival as the loss of two space shuttles has shown. The world’s militaries also practice redundancy to ensure survivability and deterrence. The United States, for example, continues to maintain a trio of nuclear armaments on land, on and under the sea and in the air at all times on the theory that in order to maintain a credible nuclear deterrent, the U.S. military must have nuclear arsenals that are difficult to destroy in a first strike. If some of those arsenals are deep in the oceans in nuclear submarines or on bombers in flight, some of those will likely survive to strike back–though sane people will ask what of human civilization will be left after such an exchange. And when it comes to oil, the lifeblood of the world economy, countries across the globe now have what are called strategic petroleum reserves, oil reserves controlled by or mandated by governments to ensure against disruption of oil deliveries. All of these redundancies would be considered “inefficient” in the business world. But they create much more resilient systems. Tightly networked systems with little redundancy such as the worldwide logistics system we now live under are highly efficient but vulnerable to widespread breakdowns from small hiccups. What seems rational on the surface is deeply irrational underneath.
The Hanjin bankruptcy is unlikely to bring down the world logistics system. At most it will shutter some factories temporarily and result in store shelves that are a little less diverse this fall. But the Hanjin affair will make clear that efficiency does not always come cheap, and that efficient systems are only efficient if they function continuously. Should the pressures we saw in 2008 return, we may wish that just-in-time systems had been abandoned or least modified so as not to create the large and cascading disruptions that are an inevitable cost of such “efficiency.” And should the financial uncertainty experienced at the end of 2008 after the financial crash return, we may find far more Hanjin’s filing for bankruptcy and far more serious disruptions occurring than we are experiencing today.
