"The Danger of Scrawny Supply  Chains", Minneapolis Star Tribune, July 3,  2006
 
"I'm not fat, I'm big boned" -  Eric Cartman, South Park
 
The 21st century economy can be described as the  "Just-in-Time" economy. One of its cornerstones is "lean" manufacturing and  services, which drastically 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 more nimble and responsive to customers.
 
A classic case is Dell Computer. Dell builds a PC only after a  customer has ordered it, and the parts for that PC are purchased from  suppliers on a "just-in-time" basis, cutting out the depreciation of parts and  PCs. By aggressively pursuing this business model, Dell came to dominate the  PC industry and decimate nearly all its competitors.
 
If a manufacturing operation 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 the same way a back-country expedition will  take food for nine days rather than seven.
 
But some analysts are beginning to express concern that the  level of "buffer" in international supply chains might be dangerously low and  therefore risky, in both corporate and public health settings.  
 
In its June 17 edition, the Economist magazine said "being too  lean and mean is a dangerous thing." The article details supply chain  disruptions with causes ranging from overreliance on a single vendor for a  critical component to typhoons, tsunamis and the SARS health crisis of 2003.  
 
The public policy implications of a disrupted supply chain  might be even more serious. Michael Osterholm, a professor at the University  of Minnesota and Director of the Center for Infectious Disease Research and  Policy, describes the danger in an article titled "Preparing for the Next  Pandemic," in the summer 2005 Foreign Affairs magazine.  
 
According to Osterholm, influenza pandemics have occurred with  regularity throughout history, 10 in the past 300 years. They cannot be  avoided, only lessened in impact. "The pandemic-related collapse of worldwide  trade and its ripple effect throughout industrialized and developing countries  would represent the first real test of the resiliency of the modern global  delivery system. Given the extent to which modern commerce relies on the  precise and readily available international trade of goods and services, a  shutdown of the global economic system would dramatically harm the world's  ability to meet the surging demand for essential commodities such as food and  medicine during a crisis."
 
For example, Osterholm said, "two U.S.-based companies supply  most of the respiratory protection masks for health care workers around the  world. Neither company would be able to meet the jump in demand, in part  because the component parts for the masks come from multiple suppliers in  multiple countries."
 
Osterholm concludes: "The resources required to prepare  adequately will be extensive. But they must be considered in light of the cost  of failing to invest: a world economy that remains in a shambles for several  years."
 
How big a buffer?
 
This is not to suggest that a large, inefficient buffer would  hedge against a shortage in the event of a crisis. On the contrary,  inefficient logistics systems can perpetuate famines and natural disasters,  despite massive contributions of aid from external donors.
 
So if a lean economy is more efficient and dependable, how  much buffer is appropriate?
 
In a corporate setting, it is the responsibility of executives  to shareholders to appropriately calculate that risk, rather than blindly  reduce cost without considering how the company is positioned for stormy  waters.
 
One of Warren Buffet's core investment principles is to ask  how you would manage an investment if you owned 100 percent of it. A sole  owner could not sleep at night if the company's supply chain strategy didn't  balance short-term efficiencies with long-term insulation for inevitable  crisis.
 
In public health, no single constituent is responsible for  maintaining sufficient buffer across the economy to protect society's health  in the event of a crisis like a flu pandemic. 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 micro-management.
 
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 havea role in stockpiling a "virtual buffer" -- for example  subsidizing excess capacity in strategic industries such as vaccines and other  critical medical supplies.
 
A lean supply chain will inevitably triumph over an overweight  one. But for long-term resilience, bet on the big-boned against the scrawny.