In late February, deep disruptions in the global movement of critical goods prompted President Biden to take steps toward reducing the country's dependence on foreign materials. The New York Times reported Feb. 24, "Biden issued an executive order requiring his administration to review critical supply chains, with the aim of bolstering American manufacturing of semiconductors, pharmaceuticals and other cutting-edge technologies."
One of the cornerstones of the "Just in Time" economy of the 21st century is "lean" manufacturing and services, which lower inventory at every stage of the supply chain.
Companies have powerful incentives to reduce their inventory of parts and finished goods to increase working capital and to spur the organization to be nimble and responsive to customers.
If a manufacturer was perfectly optimized, it would in theory need an inventory of one, to be continually replenished as needed. Of course, in the real world, uncertainty makes that level of fine-tuning foolhardy, and manufacturers routinely add a "buffer" of extra components to allow for unforeseen circumstances.
So if a lean economy is more efficient and dependable, how much buffer is appropriate? One of Warren Buffett's core investment principles is to ask how you would manage an investment if you owned 100% of it. A sole owner could not sleep at night if the company's supply chain didn't balance efficiencies with long-term insulation for inevitable crisis.
Each individual company has the responsibility to shareholders to increase profits, not to guard society against a potential crisis. And government is unlikely to enhance the resiliency of a market economy through top-down micromanagement.
But even a free market fundamentalist ought to be aware of the unseen obstacles on which the global economy could run aground. Governments and corporations can mitigate risk through crisis contingency planning, and government may have a role in stockpiling a "virtual buffer" — for example subsidizing excess capacity in strategic industries such as vaccines.
A lean supply chain will inevitably triumph over an overweight one. But for long-term resilience, bet on the big-boned against the scrawny.
Isaac Cheifetz, a Twin Cities executive recruiter, can be reached through catalytic1.com.
