COVID-19 has exposed the cost of trade-offs in the agricultural and food systems. It shows, once again, valuing efficiency at the expense of resiliency only works well when you do not have large shocks or system disruptions. COVID-19 has shown that inventory is not a liability but a necessary and valuable shock absorber. Excess inventory is considered a waste, but the problem comes from defining something as excessive. The first question people should ask when confronted with numbers is “compared to what”? All numbers imply relativity. The “just-in-time” inventory revolution from the 1970s and 1980s continues to gain momentum thanks to better enterprise planning software and cheaper and more real time measurements to fuel it. It reduces redundant resources and frees up capital for other important initiatives. Unfortunately, the just-in-time mindset recently became a victim of its own success, if something works well then keep repeating it until it fails. People tend to focus on their corner of the world, and without thinking about the system, they can miss big changes. As the agricultural and agribusiness supply chain spread to include ocean spanning levels with ever longer lead times, prizing efficiency over resiliency was a problem waiting to be exposed.
As the impacts of COVID-19 work their way through our daily lives, successful adaptation will come from thinking about how our interlocking systems work together and not from further reductionist thinking. Reductionism approaches problems by breaking things into ever-smaller elements that are easier to measure and understand. I have told more audiences than I care to think about, “our educational system has failed us because it emphasizes reductionism over systems thinking.” This reductionism has yielded amazing insights into static elements of scientific knowledge. To a large degree, success has led to failure. Almost always, we are more interested in the system’s behavior and outcomes than its parts, but the parts are easier to understand so we go down the easy path.
COVID-19 came along and exposed the problem. Take the meat processing industry, in normal times, programming just-in-time deliveries of chickens, hogs, and cattle to allow for cost minimization. Additionally, processors have demanded ever-greater uniformity of animals to help speed throughput in the processor facilities. The accompanying graph shows the metronomic precision of U.S. agriculture. The total variation in average weekly hog weights throughout the year usually varies by less than 10 pounds per hog. There is a seasonal swing with the hot summer months causing the weight to drop. At the very end of the graph, you can see that the backup in hog slaughter due to COVID-related plant shutdowns this spring caused hog weights to rise by 5 pounds per hog. The industry’s focus on standard weights for efficiency led them to euthanize hogs rather than delay them and deal with heavier hogs. That represents the penalty for not thinking about adaptability along with efficiency.
Now that COVID-19 has exposed this problem and its cost, companies have moved or are moving to build additional flexibility into their systems. Specifically, they’re building capacity to hold hogs longer if needed and formulating feeding rations that keep the hogs within specified weights. Once again, they will balance the cost of the resource against the expected penalty for not having that ability. Good systems analysis acknowledges the trade-off between tight and loose systems. Loose systems with lower efficiency are not inherently worse than tight systems higher efficiencies. Loose systems can be cheaper and sturdier (able to cope with bigger shocks) than tight systems, but they only seem to be less efficient during periods of limited volatility. Most companies think that the last year is representative of the volatility they will see, and they assume it will not change. That assumption creates a danger to the company.
My opinion that cost accountants are among the most dangerous people in any company will probably surprise you. Most cost accountants are unfailingly considerate and sober minded individuals with a burning passion for data. Unfortunately, they represent the living embodiment of reductionism, and they have an unhealthy (for businesses) attachment to spreadsheets. They believe that they can calculate what anything costs or what anything is worth based on their data. The problem comes from the fact it all represents a point in time and space thinking. The problem of SKUs (stock keeping units) illustrates this challenge of reductionism versus the system thinking.
Most manufacturers have a love/hate relationship with SKUs. The sales side of the organization loves SKUs because they represent variety the customer wants or appreciates. The operational side of the organization hates SKUs because they represent complexity and additional effort for sometimes-marginal results. The trade-offs make for a messy system with a back and forth between the cost and the benefits. The cost accountant enters the picture when they calculate the cost of SKUs based on factors such as line change overs, additional packaging, additional warehousing and transportation. They can use their spreadsheets to show the cost to a fraction of a penny. Their static snapshot in time reduces the complexity to a seemingly simple and clear picture. Based on the false simplicity, decisions get made, changes happen, and then the unintended consequences emerge later. For example, you lose an important customer because they really needed that pesky SKU that didn’t make enough money according to the spreadsheet view of the world. It turns out the situation was not as straightforward as the cost accountant’s spreadsheet showed it.
COVID-19 is exposing the same problem in supply chains and the overall economy. In the short-term and a normal economy, resiliency represents a waste of time and resources. It adds cost compared to the competitor that chooses a tightly coupled system with a burning focus on efficiency and cost reduction. The first day of microeconomics teaches the axiom that the lowest cost producer always wins in the commodity market. However, microeconomics fails to teach that outcome is only true in a static and deterministic world, and COVID-19 should reinforce the lesson to the U.S. agricultural community that it lives in dynamic and random real world. Hopefully, producers and agribusinesses will remember to value resiliency as much or maybe more as efficiency the next the cost accountants sing their siren song about pennies to be saved.