Therein lies the problem. Global supply networks, as they are currently constituted, are complex, decentralized and wound tightly in order to maximize efficiency and minimize waste. But, while this approach works in normal times, it cannot handle major shocks or perturbations. Decentralization, in particular, leads to underinvestment in resilience, because the private returns on such investments are much smaller than the system-wide returns or benefits.
Another consequence of decentralization is subtler, and perhaps most easily explained with an analogy to weather forecasting. Although weather is the result of an incredibly complex and interconnected system, forecasting has become increasingly precise and accurate over time, thanks to highly sophisticated models that capture the way relevant factors—such as wind, atmospheric and ocean temperatures, and cloud formation—interact.
Global supply networks are similarly complex. But, while we might be able to anticipate broad trends—such as that demand will increase—there is no model or set of models that enable us to predict with any precision how such trends might affect specific elements in supply chains. We have no way of knowing, for example, where new bottlenecks will occur, let alone how market participants should adjust their behavior.
When forecasts are not specific enough to be actionable, the system cannot adjust in a timely or efficient manner. The system is essentially myopic: It discovers the blockages when they occur. And because there is relatively little slack built into it, large deviations from normal patterns produce delayed responses, shortages, backlogs and bottlenecks, like those we are seeing today.
The conclusion is clear: We need better models for predicting how supply chains will evolve, including their likely responses to shocks. These forecasts need to be publicly available so that all participants can see them and adapt. Artificial intelligence would likely be the key to success; indeed, this is a natural application of the technology. But international cooperation, with countries sharing real-time data generated by supply-chain networks, would also be needed.
The costs of a hurricane or tsunami are greatly reduced when accurate forecasts enable people to plan ahead. Supply-chain disruptions are no different.
Michael Spence, a Nobel laureate in economics, is Professor of Economics Emeritus and a former dean of the Graduate School of Business at Stanford University. He is Senior Fellow at the Hoover Institution, serves on the Academic Committee at Luohan Academy, and co-chairs the Advisory Board of the Asia Global Institute. He was chairman of the independent Commission on Growth and Development, an international body that from 2006-10 analyzed opportunities for global economic growth, and is the author of The Next Convergence: The Future of Economic Growth in a Multispeed World.