For a while, the most visible signs of a supply chain crisis were people having to wait a long time for a new couch. Today, supply chain failures stand in the way of access to medical testing, infant formula and, in some parts of the world, food.
The challenges in the supply chain have also contributed to this highest inflation the United States have experienced in 40 years. A misguided belief that supply chains would soon heal themselves contributed to the fall of the Federal Reserve behind the curve in its efforts to fight inflation. Everyone is feeling the pinch now, and some are suffering outright.
However, current efforts to alleviate the crises and return to “normal” as quickly as possible could only worsen the problem and cause more damage in the long term. Neither the pandemic nor Russia’s invasion of Ukraine caused the problems that are now emerging. Rather, these shocks revealed fundamental weaknesses that had developed over decades due to the complexity of our supply chains. Patching up supply chains in the hope of a return to 2019 would not be a success, neither for companies, nor for politics or society.
youngest Lack of medicinal dyes used to diagnose and treat heart disease, cancer, and other ailments illustrate the problem. To minimize costs, many hospitals relied on a single supplier for their dyes, but failed to understand how this dependency left them vulnerable. When a wave of COVID-19 infections caused a GE Healthcare plant in Shanghai to close, hospitals across the US faced shortages. Other manufacturers and hospitals, concerned about serving their own customers and patients, refused to share. Procedures were delayed for patients across the country as hospitals and doctors tried to figure out how long the shortages would last.
Automakers, too, thought they were doing the right thing when they cut semiconductor orders early in the pandemic. In the face of uncertainty, cutting costs to cushion the bottom line seemed like the smart move. However, by lowering their costs, they are also denying revenue to the suppliers on which they depend. This damaged those relationships and discouraged production of the semiconductors automakers need, which ultimately cost them $210 billion in 2021 alone, by one estimate, much more than the amounts they had saved. The lack of vehicles was also a major contributor to the rapid onset of inflation this year.
Short-termism is nothing new, but the consequences are amplified when a company is embedded in a complex ecosystem such as that created by today’s interdependent, globalized supply chains.
Due to the complexity of these systems, most manufacturers understand only a fraction of the risks they face. For example, when automakers cut back on their semiconductors, many didn’t realize how quickly manufacturers would scale back production — and the extent of the risk they were taking.
This complexity also limits organizations’ ability to work together to minimize disruption and prevent further damage. For example, the Shanghai plant managed to ramp up production of medicinal dyes significantly within weeks of its closure, so overall supply wasn’t impacted as badly. But due to the complexity of the system and the fact that each hospital – and even regulators – had only a partial view of it, nobody knew or trusted that there was enough stock. This contributed to the usual hoarding and other panic reactions that only compound the problem.
Many efforts to address supply chain vulnerabilities fall short of this big picture: how complex supply chains and incomplete information create new sources of fragility. As a result, well-intentioned “solutions” could only make things worse.
For example, many companies are now trying to fix vulnerabilities in their supply chains by turning those chains into webs. Sourcing key inputs from multiple locations and companies can reduce risk should issues arise with one supplier, but it also widens the overall system more Complex. Introducing even more complexity will only emphasize the opacity that makes it so difficult for companies or policymakers to identify vulnerabilities in a timely manner.
Multisourcing can also weaken relationships along the supply chain, making it even more difficult to achieve the collaboration that is often key to minimizing disruption in the face of a new shock – be it a pandemic, natural disaster or war. Multisourcing offers no protection against shocks that hit all suppliers at the same time. While it can be part of a thoughtful, long-term solution deployed as the most readily available patch, multisourcing could also make things worse.
If we’ve learned anything over the years, it’s that the unexpected can happen – and it can hurt. Recognizing the complexity of the current system and how that complexity has contributed to current challenges is the first critical step in identifying the type of investment and risk management strategies needed to protect yourself from the next shock to protect.
Kathryn Judge is the Harvey J. Goldschmid Professor of Law at Columbia Law School and the author of Direct: The rise of the middleman economy and the power to go to the source.
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