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I'm Harvard Business School professor Willie Shei. I study supply chains. Let's answer your questions from the internet. This is supply chain [Music] support. First question, an immortal kid asks, "How do tariffs work?" Well tariffs are a search charge that are applied on top of the cost of your import. Right? So when you buy an import from some company abroad that's selling it to you, the US government, for example, would add what amounts to a tax on top of that value. So if you bought
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something that was worth $100 and you have a 25% tariff, then the US government would collect $25 from you in order for you to receive your package. The people who pay that tax are the people who buy the products, you and me the consumers. at Michael Hughes 1. But seriously y'all, what's with egg prices? First of all, we should recognize there are two different supply chains for chickens and eggs, right? Chicken meat is one supply chain, eggs are another supply chain. The hens that lay those
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eggs have suffered a lot from this aven bird flu. And that's led to the calling of a lot of those hens. When we call all the egg laying hens, the egg supply has gotten tight. That's why we've seen a huge increase in the price of eggs. So what we have to do is we have to rebuild the flock. There's another interesting aspect about chickens and hens. If you're an egg laying hen, you need biotin in your chicken feed. And that biotin by and large comes from China. So, if we get into a trade war with
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China and China decides that they maybe want to restrict exports of biotin, all of a sudden our hens are not going to be as productive laying eggs. That guy B. Mills asks, "Are we in a trade war?" Yes, we're in a trade war and it's getting worse. The purpose of a trade war is to favor your producers versus those of another country. The trade war really started with the first Trump administration by applying tariffs to China. The Biden administration also maintained a lot of those tariffs and
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added some tariffs and other trade restrictions. President Trump is imposing tariffs because he says, "I want companies to make things in the United States. And by making imports more expensive, I'm going to encourage you to make stuff in the US. Maybe it'll be cheaper." The problem with the tariff argument is the cost of doing things in the United States is very high. Even today, when you look at the cost of labor in the United States versus the cost of labor in a place like Mexico or
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China, it's still four, five times more expensive to do something in the United States. What can you then make in the United States and be competitive? You can make things in the United States where you don't have a lot of labor content in your products. An example of that might be a jet engine where there's significant labor cost, but as a percentage of the total value of the product, it's relatively lower. If I wanted to assemble an iPhone, the typical labor content would be probably
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about 4 hours in China today. So, say it's $6 an hour times four labor hours that's $24. 4 hours of labor in the US that'll probably cost me $40 an hour. Okay? So that would be maybe $160 versus $24 to assemble that phone. It's not going to happen. At Papa asks "Hi, as hell thinking why the was toilet paper the first thing to go when this co hit." Okay, let's talk about toilet paper. There are two things to understand about toilet paper. Number one, demand is flat. There's not like
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there's some seasons you use more toilet paper. The second thing to think about is economists say it's not very tradable. And what that means is it's kind of low value and it takes up a lot of space. If you ship a truckload of toilet paper, you're not making a lot of money doing that. And so you don't want to ship it long distances. It makes no sense therefore to import toilet paper from China. Right? If you live in New York City, your toilet paper is going to
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be made somewhere in the Northeast or maybe Mid-Atlantic states. It's not going to be made far away. I'm going to have factories that are loaded to 90 or 95% churning out toilet paper. So, we're going to have a well organized, very tight supply chain that doesn't have a lot of slack. Then, when consumers go in and buy a lot, you're going to run out because there's not a lot of slack capacity to increase how much you can make when demand suddenly rises. I'll bring in some more machines. I'll ramp
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up. I'll run extra shifts. I'll delay my maintenance. Okay? And they'll make more toilet paper. Eventually, people who've been stockpiling all that toilet paper don't have anywhere else they can store it. Once you get the 5ear supply, you know what? I think we have enough and they'll stop buying it. Then sales will fall off a cliff. And you know what? That's exactly what happened. At GUN asks, is the supply chain back to normal? Well, that depends. A lot of
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people would tell you the new normal is one where we constantly have surprises and disruptions. One example of a shock would be weather that causes port congestion. We remember during the pandemic where we had over a 100 ships waiting to unload off the ports of Los Angeles and Long Beach. There's been big congestion off the ports of Shanghai and Ningpa in China. Another great example of the shock was when the Houthies started attacking ships that were going
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through the Red Sea to try to get across the Suez Canal. That caused a major shock to supply chains when shipping companies said, "Huh, I can't use the Suez Canal anymore." At BS Viagra asked "How fragile is our supply chain when Houthie pirates can upend it and force us into battle?" What the Houthies did is they occupied a strategic position on the strait that connects the Suez Canal with the Indian Ocean. That's the major trade lane from Asia to Europe.
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Historically, most of the shipments from China go through the straits of Malaka and they would go through the Suez Canal to Europe. But when the Houthies started attacking container ships in the Red Sea, that made the Suez unpassable for many of them. So then a lot of them had to sail all the way around Africa. That added maybe 10 or 12 days to the voyage. That also removed 12% of the global capacity of container ships just because they were occupied sailing around
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Africa. You may remember the movie Captain Phillips where they looked at piracy off Somalia and the east coast of Africa. Anytime you have a major trade lane, it is susceptible to disruption just by these incidents like that. If you look at China for example, they are paranoid that most of their oil has to flow through the straits of Malaa between Indonesia and Malaysia right off of Singapore. They call that the Malaa dilemma. A lot of China's paranoia comes
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from they only have one coast. They feel hemmed in by the string of islands from Japan to Taiwan to the Philippines. So when you study geography, you can see these choke points on major global trade lanes. All of which represent important vulnerabilities. From the Ask Historians subreddit, at what point in history did a global economy start to develop. Let's look at a timeline. Trade really began with the Romans who were trading salt and other products. Remember salary was money for
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salt. That was the original definition. The next big era was the Venetians. This is Marco Polo bringing back silk and ceramics from China across the Silk Road. We saw a real expansion of trade in the 1700s. This is when we had the sailing ships that would go around Africa to the far east or they would go to the Americas to bring back gold or trade in rum. And then we had a pause between World War I and World War II where there were a lot of tariff barriers and kind of a lot of inward
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looking. We saw post World War II a big expansion in trade and we saw this huge boom starting in the late 1990s but really gathering pace in the time from 2001 until 2010. the movement of factories for things like textiles clothing, consumer products, toys out of the United States into a lowcost region like China where labor costs were often 120th of what they were in the US. In more recent times, starting in probably around 2016, we've seen beginnings of a trade war between the US and China
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companies moving starting to move production out of China, countries like the US applying tariffs to Chinese exports and then getting reciprocal tariffs applied to American exports. At GSW81, Donnie wants to know, why is the United States importing any food? The US has one of the best agricultural regions in the world. Now, it turns out though that a lot of food requires a lot of labor to harvest, for example, fresh fruits and vegetables. Let's take a crop
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like strawberries. We use a lot of labor on temporary immigrant visas, so-called H2A visas, who can come in to California to pick strawberries. But when you're done with all the costs for that temporary labor, it costs you around 26.50 50 an hour to pick strawberries in California. Whereas, if you wanted to pick them in Mexico, it's about $1.50 an hour. That's why it makes economic sense to import strawberries from Mexico. The same thing actually applies for things
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like apples, blueberries, tomatoes grown in Canada. It's actually cheaper to grow them in Ontario and ship them across. We are a large food exporting country. In fact, we are the largest food exporting country. But our food exports tend to be in commodities where you can have a lot of automation and you can have a lot of productivity. Think of things like corn wheat, soybeans, where a farmer and a relatively small crew can run a very large farm and produce enormous
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quantities of these products without a lot of labor. At Norormal asks, "What causes supply chain issues?" The problems come from disruptions. disruptions may be caused by any kind of shortage in parts or they may be caused by logistics issues moving parts between various links. What had happened at the beginning of the pandemic was sales fell off a cliff for cars and trucks in North America. Many of the Detroit automakers canled a lot of their parts orders especially for microchips. Now when
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demand picked up again they went back to reorder those microchips. But meanwhile the suppliers of microchips sold their capacity for other uses like in appliances, in computers, and other things. So all of a sudden, the car makers couldn't get those microchips. When you're building a complex product like a pickup truck, if you're short one part, you don't get to finish the truck. If you look at a typical car or uh pickup trucks, it may have a power steering assembly that comes from Mexico
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or it may have castings that are used inside that come from India or China. A lot of products that we see even though they are assembled in the US have parts that come from all over the world and that's what makes them complicated. This next question is from Quora. Which country has bigger ports, China or the US? The big ports are all on the east coast of China. And that's because the Chinese government starting in the late 1990s and 2000s invested a lot in this infrastructure. They wanted to be
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efficient and make it easy for all of their manufacturers to ship goods abroad. And we're now seeing the consequences of that because these guys are huge and they're efficient. Number one is Shanghai. It's an amazing port. They built it on a man-made island out in the East China Sea and they built a bridge to get all the way out there. You build an island out in the South China Sea cuz you want deep water, right? And they want to be able to handle the largest ships. So Shanghai is the
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largest. Ningbo, which is on the opposite side of Hcho Bay from Shanghai. And those serve the Yangty River Delta which is this huge manufacturing hub. You have thousands of companies literally who package up their goods in containers and they take them to those ports. I visited the port in Shenzen a couple of years ago and I asked them it's like how many trucks a day do you handle and they said oh you know we usually get 20,000 trucks a day. Imagine 20,000 trucks going to the port of
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Newark, New Jersey. That would be like backing up from Newark to Philadelphia. By the way, I asked the guys in China. It's like what's your worst traffic jam you ever had? It's like uh you know 20 km long. The US our total imports across all ports and across the borders bring in between 90 and 100,000 containers a day. That's across the whole country. A typical port complex in the US has a handful of slips for docking large ships. May have as few as two, may have a half a dozen. In Shenzen, they
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probably have close to 20 slips for handling these ultra large ships. The largest port complex in America is the Los Angeles Long Beach complex. If we had congestion around Los Angeles, Long Beach, some of them will go up to Prince Roupert in Canada. When you look at the time it takes to transit from Japan it's about 2 days sooner than it takes to get down to Los Angeles to Long Beach from Prince Roert. And then we have Port of Oakland, which is actually a major export port for products from the
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Central Valley. things like almonds. Next question. Still Princess asks why does Trump want the Panama Canal in Greenland? A lot of that is because these oversee critical sea lanes. In the case of the Panama Canal, obviously connecting the Pacific Ocean to the Atlantic on the shortcut through Central America. Greenland is becoming more important as people look at the warming Arctic. People are already experimenting with shipping goods from China to Europe through the Arctic because they can do
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it. We don't have ice all year anymore. Greenland, even though it's mostly covered by ice, has a wealth of minerals that are important, things like rare earth elements. So, he thinks maybe he wants to have access to those. We talk about lithium for batteries a lot. A lot of that lithium comes from places like Chile in South America. They bring it to China and then they refine it. They control the refining capacity for rare earths. So what was until the mid 1980s
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the world's largest rare earth mine is actually in Mountain Pass, California. But since China invested in that refining capacity, a lot of those rare earths have been going to China for processing and then China sells it to the rest of the world. Our next question is from upbeat mastadon 223. Is supply chain management is just basically coordinating supplies from one place to another by communication or is it more than that? Supply chain management is all about matching supply with demand.
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In other words, customers want to buy stuff and I want to make sure that all the steps I need everywhere from production to shipping it around is in place to meet that need. If you work in supply chains, you have to worry about your supplier network. Where are all the components and all the parts that you use to make your product going to come from? How are they going to get there? How many do I want to have on hand when I'm assembling them? All those things
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you have to figure out when you look at the customer demand. Some products have different kind of demand profiles right? A lot of them have a big back tochool season. A lot of them sell a lot of their products between October and end of December for the holiday season. If you're in supply chain for candy, you have to figure out how I'm going to prepare for this huge spike of demand in the 3 weeks before Halloween when most of the candy in the country is sold.
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That's the type of job a supply chain professional has to deal with. At Be Like Wes asks, "Bro, how does KFC run out of chicken?" great illustration of supply chain resilience because back a couple years ago KFC in the UK changed their distribution network. They shifted over to DHL as their distributor who had one warehouse for distributing all their chicken to their stores. One day there was a string of huge traffic accidents around that warehouse which prevented
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any trucks from getting out. So they couldn't get any of their chicken out to their stores. And so you have KFC hanging signs in their windows, sorry no chicken. This is a classic example of the tradeoff of resilience versus cost in a supply chain. They only went down to one warehouse, which is less expensive, but it's less resilient. Five warehouses meant you take one out, the other four can still go. at Christian Suji says, "Imagine having one of the busiest canals for shipping in the whole
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world, but you dead ass never expanded the one cargo shipwide part of the canal. Like what do you expect? Whole global supply chain obviously will grind to a halt." I think Christian is talking about an incident in the Suez Canal during the pandemic. That was when the Evergiven was trying to go through the canal during high wind conditions and it got stuck sideways and it blocked the canal. You say, "Well, how could one ship block the canal?" Well, this ship is 400 m long, longer than a football
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field. Remember, a lot of this infrastructure was built a long time ago before we had some of these mega ships. For example, the Panama Canal was built at the beginning of the 20th century before we even had container ships. The first container ships only held like 50 containers at a time. These days, the biggest ships hold 24,000 containers and they are 400 m long, which is a lot longer than a football field. So, ships have gotten bigger because they're more
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efficient and you can move more stuff at a lower cost and the infrastructure hasn't kept up. At Thomasia, how about the broken supply chain and food processing industry crippled by Trump's elimination of 2 million legal immigrant visas? That's a big problem because a lot of jobs in fruit and vegetable harvesting as well as food processing are jobs that frankly American citizens don't want. In the state of California for example, half the agricultural workforce is undocumented illegals. So
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if we deport those then then the question is going to be who's going to pick those fruits and vegetables. We see undocumented workers as well in a lot of dairy plants, a lot of food processing plants, meat processing. So we're highly dependent on im immigrants many of them undocumented. Jab Thomas Republican asks how could the US bring back manufacturing and industry. What we can do is we have to focus on industries where either we don't have a lot of labor content in those products or areas
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where we can win on the basis of productivity. If you're going to have high labor costs that labor has to have high productivity. The way you do that is with automation with new designs. It's a tough problem because as we move production offshore, let's say furniture manufacturer, which really left North Carolina, those people moved on to other jobs. So now, if you want to bring production back, you've got to train people how to make furniture again. It would take time and it would take money.
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One of the other things that we have to recognize is when we offshored production, that means we took a factory and we moved it to China. When we moved it to China, you had to build the building, hire the workers, hire the management, train people, bring in suppliers. What paid for all of that was lower product cost. Typically, the amount you would save would uh pay for itself within a year or sometimes even less. That was moving from a high-cost country to a lowcost country. Now, if
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you want to move from a lowcost country to a high-cost country, what's going to pay for it? Because you're not going to save anything, but you still have to build the factory. You still have to hire the workers. you still have to train the workforce and your product is going to cost more. So, it's a very difficult problem. Next question. I'm sitting here in my leather recliner wondering how all the individual parts came together to deliver this level of chill for me. That's a great question
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because I visited one of these leather recliner factories in China and it in itself is a great story of globalization. They got their leather from the United States. They bought their lumber to make the frames from Argentina and they bought the chemical foam that they used to line the chair from the Netherlands. So all those parts came together in this factory in Shenzen. That factory had a warehouse that had a half million cowhides that they were using to make recliners and
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they would fill about 160 shipping containers a day stuffed full of leather recliners. Then they'd send them down to the port. Historically, a lot of Asian goods would come from Los Angeles and Long Beach and come to rail hubs like Chicago or Kansas City or Dallas. Now Chicago is a major hub for containers that come from Asia and are going to be distributed across the Midwest. Trucks that will serve as far east as Ohio and sometimes maybe even New York. Increasingly, what we're seeing is
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traffic coming through the Panama Canal and going to Gulf ports like Houston and then coming north out of Houston to serve the middle of the country. Then they would go into a distribution center. And from the distribution center, they might go to a furniture showroom or they might go to a local warehouse outside of the city. So when you order that recliner, that last mile delivery to your house would be from that last warehouse. at Larissa Ariri asks, "How is TEU so cheap?" Two things
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to remember about Teu. Number one is Teu and Shien don't have their own factories. They are actually pure supply chain companies because what they do is they match demand from you with suppliers in China who then send the product directly to you. The other way they can be cheap is there's this exception to the import regulations that's called the dimminimous exemption. Most Shien and Teu products come in under the dimminimous exemption. Anything under $800 doesn't have to file
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customs paperwork. Just to give you a scale, dimminimous exemption packages are coming in at the rate between 3 and 4 million packages a day. And that means 3 to 4 million packages a day that come in without having to do any customs inspection or filing any paperwork. What these guys have discovered is our products are light enough and the cost is low enough that we could ship it by air cargo. If you look at like the last few months of 2024, these dimminimous
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shipments from companies like Teu and Shien were about half of the air cargo traffic across the North Pacific and half the air cargo traffic from China to Europe. at conflicted art wants to know I just wanted to go to sleep last night and instead I laid there awake for hours thinking, how is there another GPU shortage? First of all, we have a huge spike in demand for GPUs. That stands for graphic processing units, a computer chip that is used in AI applications.
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Those GPUs by and large are manufactured by one manufacturer in Taiwan. Taiwan Semiconductor Manufacturing, also known as TSMC, owns about 95% of the capacity in the world. The reason we're short is it takes a while to ramp up that most sophisticated capacity. The factory to make these GPUs right now, they started about $20 billion to build one of those factories, and it takes about 2 years to build and equip one of those factories. Those factories also make chips for
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iPhones, personal computers, the servers that go into the cloud data centers at Amazon and Facebook and other places. So there's a lot of demand for those chips and there's relatively little supply. Mostly what we're seeing here is a demand spike. Our next question is from automatic cold days. Is there any way of knowing how many shipping containers are in the world? I would guess there are hundreds of millions of shipping containers out there. Now, what happens
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is shipping containers are mostly made in China cuz steel is cheaper in China and shipping containers are pretty much all steel. Most of them come out of China to the US to Europe and they're filled with goods. We don't have nearly enough stuff to put in them to send them back. So, a lot of empty containers end up hanging around. The container lines all sometimes had ships to pick up all those empties. But, we tend to have a huge imbalance on empties and full
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containers, right? We'd have a lot of yards clogged with empty containers waiting to go back at Douglas Lumsden one asks, "I'm debating whether to buy a few of these 8 foot wide, 49 ft long 9.5 ft tall steel shipping containers. How expensive could they be?" It's probably around a,000 bucks. The shipping lines all sell their containers after a certain number of years, and a lot of people use them for storage and other purposes. I guess you could buy one. I once thought about converting one
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into an apartment. So, anytime I wanted to move, I could call a shipping company and say, "Hey, move this to Hong Kong." And then I'd have my house ready. But I never did that. For context, there are differentiz containers, right? There's some that are 20 ft long, some are 40 some are 53 1/2 ft long. Basically, it's just a steel box. So, if you have a good use for steel boxes, I guess you could do it. There will never be a shortage of used shipping containers. at Benpo234
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asks, "WTF, do rare earth metals have to do with my weight time for my RAV 4 Prime? Rare earth metals show up in a lot of crazy places?" So, for example efficient motors have this rare earth called neodymium. And neodymium is what you use to make magnets. Most of that comes from China, by the way. And in those batteries now you have metals like lithium and cobalt and other metals which are really controlled by China in that supply chain. At Preston Brooks SC
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says you all bought a damn candy bar at a gas station recently. A regularsiz Snickers bar is over $3. What has the supply chain of creamy nougat or crunchy peanuts been severely compromised by CO or something? Let's talk about the chocolate supply chain. A lot of it comes from the Ivory Coast in Africa. And because of weather, the cocoa crop this year was really bad. So the cost of cocoa went way up. And that's why your Snickers bar is more expensive. Peanuts are okay. No new news on peanuts at
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Chucky Stomper 69 asked, "Wait, wait wait. Forget the oil and steel and aluminum lumber and the US slaps us with tariffs. Where the are they going to get pod ash?" Pod ash is a fertilizer that is used by farmers around the world across the United States. and we get it all from Canada. So he's right. If we put tariffs on Canada and they retaliate by restricting podash, that will hurt us, but it will also hurt the Canadian exporters, the podash. We also get a lot of oil and steel and aluminum from
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Canada. One reason aluminum is cheaper to produce in Canada is because they have a lot of hydro power. We get oil from Canada, primarily the tar sands the Aabaska tar sands in Alberta. And we have refineries in the US that are very well geared to that type of refining. Different oils depending on where they are pulled out of the ground have a different chemical composition. And depending on that composition refineries have to be geared to that particular composition. So, US GF Coast
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refineries are geared to refining the type of crude that comes out of Canada. And Eric Odin asks, "What is better alternative to JIT, just in time inventory?" Because clearly that's not working anymore. Toyota came up with just in time after World War II when they didn't have a lot of resources. Okay? And the idea was don't feed me anything until I need it, but feed it to me exactly when I need it. Toyota learned a lot during the 2011 East Japan tsunami and earthquake when one factory
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that was producing 45% of the world's engine microcontrollers shut down and it shut down Toyota's production. And they then realized at the time they said hey wait a minute our semiconductors come from geologically and geopolitically unstable parts of the world. So what we really need to do is we need to think in terms of lead time. I'm going to hold an inventory that reflects what's the lead time I would need to replace it if I had a sudden interruption. So going into the
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pandemic, you might have noticed Toyota kept producing cars almost a year longer than many of their competitors because they had brought in a lot of inventory. So just in time plus lead time is a better way to look at this. Internal early 58.885 85 asks, "Will global supply chains collapse in a few years or is that doomerism?" I think that's a little pessimistic because we are a very interdependent world. I think we're moving to a world of more regionalized production. We may get to a kind of
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aligned block, America and Europe and Japan and Korea versus China. But I think we are so dependent on getting things from other parts of the world. We can't do it all oursel anymore. So I don't think it's going to be collapse but they're going to look different. Those are all the questions for today. Thank you for watching. [Music]
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