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OK, another story about pandemic driven lines. But this one has a twist. Yes, the virus is forcing lines to form outside of stores, but what would you give to be able to see the line before you left the house? Apparently, if you live across the street from a Trader Joe’s, your friends pester you enough about the current line situation that you set up a web cam or just tweet regularly (Is There a Line at Trader Joe’s? Social-Media Spies Are Keeping Track, Jun 12, Wall Street Journal).

The die-hard fans of Trader Joe’s may be waiting the longest. The grocery chain is known for its specialty items, cultlike following and ubiquitous lines that were bad enough before the pandemic. Now, even as the economy reopens, queues at several locations can stretch for blocks beyond the entrance.

Coming to the rescue is an informal network of Good Samaritans who are quarantined with prime views of a local Trader Joe’s. As a public service, they regularly tweet or broadcast updates on the lines outside.

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I hear a lot about how many things are going to change posts COVID-19, including supply chains (and global supply chains in particular). I have already expressed skepticism of, what I see, as primarily wishful thinking. So, view the next post as just one more data point, strengthening my confirmation bias.

The NY Times had an interesting article a few days ago and GQ magazine covered it a bit earlier. The story begins with the following interesting observation, telling the story of two trainers.

After the stay-at-home order was put in place, the two began holding virtual workout sessions. But clients would need to supply their own basic equipment. The problem? Basic workout equipment was all but impossible to find. “I did not see this coming,” said Meron Tamrat, 32, a Harlem resident and JTW Fit client. She purchased a dumbbell and kettlebell immediately after the stay-at-home order was announced in March. But a few weeks later, when she needed more weights, she hit a dead end. “Everything was just gone,” she said.

In trying to understand the root cause, one has to start going upstream through the supply chain, as well as down memory lane to the previous recession.

Take, for example, Rogue Fitness, a U.S. manufacturer and retailer of strength and conditioning gear:

Rogue prides itself on manufacturing and selling American-made goods, but the company’s kettlebells are normally manufactured overseas. Most of the kettlebells that you could have ordered before March 13 were; it’s probably not surprising that, in 2020, there are few American foundries eagerly pumping out large bulbs of iron.

When Rogue ran out of Chinese made Kettlebells, they turned to Rhode Island’s Cumberland Foundry.

The irony is that Cumberland Foundry doesn’t really want to be in the kettlebell business. Cumberland isn’t automated, and its president, Tom Lucchetti, estimates that it takes a full day to produce 40 to 50 kettlebells (with Rogue handling last steps, like painting the bells). Rogue typically buys internationally-produced kettlebells by the shipping container. “I’ve been clear with them from the start that isn’t something we can keep up with,” Lucchetti says.” Besides, Lucchetti has no illusions about the current, likely fleeting situation. Foundries in America have, since the ’80s, been decimated by globalization.

If you ask yourself, why I am not too optimistic that this is a sea change and the beginning of a new renaissance of U.S. manufacturing? The same story happened in 2008. And what was the outcome: 

Around 2010, Lucchetti says, the gym owner started selling his one-piece kettlebell to Rogue. Rogue, in turn, quickly figured out it could instead mass-produce its own kettlebell design. Cumberland helped Rogue prototype that design—then Rogue took that design overseas to be manufactured, a fate Cumberland anticipated.

So, let’s review what we just went through: customers view Kettlebells as a commodity and thus are looking for the cheapest option. Manufacturing Kettlebells is more complicated than it seems and not insignificant capital investment, and given the relatively small scale of U.S. foundries, it is much cheaper to manufacture these overseas. This creates a cycle by which the local manufactures do not invest in scale (but are more responsive), and the retailers are unwilling to pay for responsiveness (which is not valued on most days) until it’s too late, and when responsiveness is needed, we can’t scale it.    

What’s the solution? 

Kettlebells — which are valued for their versatility and used in endurance, cardiovascular and weight training — are so hard to come by some New Yorkers have paid mysterious vendors nearly $400 for one set, more than four times what the average kettlebell cost two months ago.

Some people call this price gauging; I call that just the value of responsiveness. If you are unwilling to pay on the day-to-day to maintain a responsive supplier, you should be prepared to overpay when you are in crisis. If you are not thinking proactively, you should be “willing” to pay the penalty of being reactive.  

Two stories today. Both revolve around operating strategies that complicate adapting to the pandemic. One’s about IKEA, the other is about sex toys. Yes, sex toys. We have almost 900 posts on this blog and I think we have never discussed the supply chain for vibrators. But I also never expected The Old Gray Lady to run a story titled “Sellers of Sex Toys Capitalized on All That Alone Time” (Jun 7).

The article starts with the not too surprising revelation that sales of sex toys have spiked during the pandemic but the benefits have been uneven across retailers.

But while big, corporate sex toy retailers seem to have thrived, the same can’t necessarily be said for brick-and-mortar sex shops. As consumers rush to buy sex toys from websites, businesses that usually rely on foot traffic and interpersonal connections with customers are suffering.

Sid Azmi, 37, the owner of Please, a store in Brooklyn that’s been open for roughly six years, explained that despite having an accompanying online shop, she can’t compete with bigger online retailers.

Ms. Azmi said that small businesses often charge more for sex toys: They don’t get bulk-buying discounts from distributors, and they can’t afford to have huge sales on their products. Customers are usually willing to pay more, she said, because of the friendly service and education stores like Please can offer.

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As the country re-opens, there is the question of how workers can return to offices. How can firms be sure that employees follow appropriate social distancing?

Office furniture maker Allsteel has some thoughts on this. And they start with the Toyota Production System concept of poka-yoke. That is, they suggest designing the layout of the office so that the obvious way to use the space conforms to distancing requirements.

Check out their recommendations here: Poka-Yoke: Mistake-Proof Your Space

The British are famous for queuing. The stereotype has them as embracing orderly waiting their turn. But what if it’s waiting to vote in Parliament?

The powers that be in London have decided that online voting won’t do and that MPs should vote in person. There was consequently an in-person vote on a measure mandating this but the actual vote was executed with the appropriate social distancing guidelines. Here is how Politico described what went down (House of Commons bans virtual voting, opts for a queue, Jun 2):

Standing in a long line stretching from the chamber through to Westminster Hall and out of the building, roughly two-thirds of MPs slowly edged their way into the chamber to cast their votes in a process that took just over 45 minutes.

The system replaces the usual “divisions,” which see MPs walk through either the Aye or No lobby and usually take around 15 minutes, even if all 639 voting members are present.

What might that look like? Check out the video from the Guardian:

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Bloomberg had an interesting article a few days ago Coronavirus Will Stretch, Not Break, Global Supply Chains” which is very much related to Marty’s yesterday’s post.       

The article starts with the following assertion:

Modern supply chains are often likened to biological systems in their complexity and interdependence. As with the coronavirus itself, a weakness in one part can metastasize into a sickness that causes the entire organism to collapse. As the pandemic has spread, limits on exports of medical supplies grew from a few locations to near-global prevalence. Problems with food trade, such as the restrictions on rice exports that Vietnam imposed in March and the closure of some of America’s vast meatpacking plants after virus outbreaks among workers, threaten a seizure in the food supply chains on which billions of people depend.

This is maybe one of the most interesting aspects of this crisis from the supply chain point of view. Networks are much more resilient than chains. The reason is obvious: in a chain, any point is a single point of failure. You can attack a network in one location, and supposedly, very little should happen.

However, the underlining assumptions are critical:

  1. The network is optimized: For networks to be more resilient, you need to have a centralized management and planning authority that ensures the network is indeed optimized for maximum resilience. If each node actually only optimizes for its own profit, I don’t think it’s clear that this is indeed the case.  
  2. Full visibility into the network: everyone within the network knows how everyone else is connected, so if one needs to hedge against risks, they understand how their actions impact others, and they know to what extent they depend on other (and usually deeper) tiers of the supply chain.

It is evident that this crisis has demonstrated that both assumptions are violated. We see a lot of short terms “local” decision making in different nodes, and how it impacts others.  When it comes to supermarkets, many of them reduced inventory levels with the assumption that their vendors are going to carry this inventory and will allow them to be “just-in-time”. We see the same behavior when it comes to personal protective equipment, where hospitals carried very little inventory (even though, their mission is to prepare for a crises), again, in the name of cost cutting and being “lean”, not considering the fact that their suppliers are probably weaker than them financially and will not be able to respond in time to any crises. We observe the same in the automotive and electronic supply chain worlds.

We also understand that many firms scramble only now to start mapping their supply chains. Many of them only now realize that their strategic supplier is not necessarily, their at-risk suppliers. So, we see Ford offering loans to lower tier suppliers.  The advantage of a simpler supply chain (with the emphasis on “chain”) is that you know exactly who does what and there is very little diffused responsibility.

And that brings me back the article, which ends on a positive note:

Still, the lesson of the decade or so encompassing the 2008 financial crisis and the trade drama of the Trump administration is that, in spite of the efforts of governments and managers, supply chains in both physical goods and intangible assets have a remarkable ability to heal themselves and continue along their previous paths. The world is struggling to come to grips with one willful biological entity right now. We shouldn’t expect intricate trading networks to be any more tractable in our efforts to bring them under control.

And this might be really the main redeeming quality of networks. While they might not be as resilient as we think to attacks and outside disruptions, the fact that they are locally optimized and built around many decision-makers reacting and responding to the situation around them may have the ability to heal in the long run, sometimes faster than what a central planner can achieve. If this theory is correct, only time will tell. But in many ways, this is where our supply chain theory, epidemiology, and political theory meet.

The Financial Times has an interesting set of articles on how the ongoing pandemic impacts supply chains (Trade Secrets: Supply Chain Disruption). These hit on things like toilet paper, firms pivoting to new markets or switching from a business-to-business focus to serving retail customers. The one I want to highlight deals with how any fragility exposed by the pandemic will impact supply chain strategy going forward (Be wary of scapegoating ‘just-in-time’ supply chains, May 27) that links to a post that Gady wrote a few weeks ago.

Here is the gist of the article:

A lot of intellectual momentum is building behind the idea that the Covid-19 pandemic has revealed the foolishness of corporate executives in extending their supply chains without properly assessing the risks. Companies have been thinking of “just-in-time” when they need to be thinking about “just-in-case”. …

The reality is complex, and — a crucial point — differs with each industry. Some, like the car industry, have such sophisticated supply chains involving thousands of different components, some manufactured to extremely low tolerance, that diversifying into different suppliers is totally impractical through effort and cost. Sure, you will have a more resilient supply chain, but you’ll also go bust before the next pandemic arrives.

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There are some things that simply cannot be solved with an online FAQ. And if you have a question that needs to be answered or a technical problem that needs to be resolved, that likely means you need to call into a call center. Demand at many call centers should be relatively unaffected — or even boosted — by the ongoing pandemic. The call volume at an ISP’s tech support has to go up as more people are working from home and every hiccup in their connection becomes clear to them.

Unfortunately, call centers are not great places to be during a pandemic. Management has an incentive to pack agents like sardines. Business Insider had an article about a South Korean call center which had a significant Covid-19 outbreak and whether you got sick was really determined by where you sat. That seems to suggest that call center agents should just be allowed to work from home. As Vox explains, many firms have tried that (One nation, on hold, May 13).

Many call centers have scrambled to send thousands of customer service representatives to work from home for the first time, a process fraught with logistical and technical hurdles. Others have continued to tell employees to come into the office — which they can do, since call centers have been designated as an essential service — but at reduced numbers. A growing number have seen workers get sick with Covid-19.

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A short follow up on Gad’s post from earlier this week on Uber’s interest in Grubhub. There’s a blogpost on The Margins about pizza arbitrage via Doordash (Doordash and Pizza Arbitrage, May 17) that has gotten some attention this week. In a nutshell, the story concerns a pizza shop run by the author’s friend who discovered that (a) Doordash had posted the shop’s menu and started placing orders without telling the pizzeria and (b) Doordash had posted the wrong prices. Wrong as in Doordash was selling a $24 pie for $16. So if the pizzeria owner were to have an accomplice order ten underpriced pizzas through Doordash, he would quickly pocket an extra $80 relative to selling the same pizzas to a real customer. Since Doordash was doing this on their own, that would be $80 of Doordash’s finest venture capitalist supplied cash.

It’s a fun read and worth checking out if only to enjoy the line “Was this a bit shady? Maybe, but fuck Doordash. Note: I did confirm with my friend that he was okay with me writing this, and we both agreed, fuck Doordash.” But there is also an interesting analysis of whether Doordash and its ilk have a feasible business model.

How did we get to a place where billions of dollars are exchanged in millions of business transactions but there are no winners? My co-host Can and my restaurant friend both defaulted to the notion “delivery is a shitty margin business” when discussing this post. But I don’t think that’s sufficient here. Delivery can work. Just look at a Domino’s stock chart. But, delivery has been carefully built as part of a holistic business model and infrastructure. Maybe that’s the viable model.

After the start of this pandemic, my friend actually launched in-house delivery at one of his restaurants. He said he’s starting to get a sense of the economics and explained he’s starting to get a sense of the volume required per location to make the economics reasonably work. That’s what is so odd to me about third-party delivery platforms. The business of food delivery clearly is not intrinsically a loser. Domino’s figured it out. Every Chinese restaurant in New York City seemed to have it figured out long before any platform came along. My friend is figuring it out.

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The Verge had an interesting article “Facebook will pay $52 million in settlement with moderators who developed PTSD on the job”

The article documents the details of the settlement and the situation leading to it,

“Each moderator will receive a minimum of $1,000 and will be eligible for additional compensation if they are diagnosed with post-traumatic stress disorder or related conditions. The settlement covers 11,250 moderators, and lawyers in the case believe that as many as half of them may be eligible for extra pay related to mental health issues associated with their time working for Facebook, including depression and addiction.”

The moderators were hire, through consulting firms, after the 2016 elections when Facebook was criticized for failing to remove harmful content from the platform. 

Multiple interesting aspects can be learned from this case (before I get to the PTSD aspect). Still, the most important one is the sheer number of moderators needed to moderate content for a tech-driven platform.  

Three key assumptions are driving this situation:

  1. Facebook is not a media company, but a platform, and in that sense, it cannot and should not police content. That was the initial point (and still to this day, the legal point) Facebook was making.
  2. If it tries to police anything (and it clearly polices some content by virtue of showing us some and not showing us other content), it should be done algorithmically. Why? Machine learning is better than humans.
  3. Humans, if can actually do that work, will deem it as non-scalable, which is antithetical to anything Facebook (and I should say, anything Silicon Valley).

It’s the last part I want to focus on, so why did Facebook resort to humans? The fundamental dichotomy that has usually been discussed in the tech sector is Bits vs. Atoms.  Atoms are the physical assets of a business, such as inventory, property/infrastructure, and people. Bits are digital or otherwise intangible assets, including software and intellectual property. In my scaling course I discuss the “Scalability paradox”: in an attempt to become more scalable firms, tend to rely on tech solutions (and in that sense, Bits), even in a situation where technology is premature in addressing a vital aspect of the service, in many cases slowing their ability to scale and enjoy these key benefits. 

Why do I think technology is premature here (I know… machine learning)?

“In the settlement, Facebook also agrees to roll out changes to its content moderation tools designed to reduce the impact of viewing harmful images and videos. The tools, which include muting audio by default and changing videos to black and white, will be rolled out to 80 percent of moderators by the end of this year and 100 percent of moderators by 2021.”

The fact that technology is going to be rolled (slowly) with the ability to mute and move the content to black and white shows

  1. How little technology can do
  2. How good humans are in tricking these systems, so human judgment is actually needed to do a good job.

So, it’s clear: the solution is a mixture of humans and technology. The question is, how can you reduce the complexity of the task, reduce the need for human intervention, and increase the predictability. Astonishingly, most of the inroads were in providing straightforward tools to minimize the impact, post-trauma, rather than reducing the likelihood of encountering the trauma.

So why is Facebook even engaging in this, after claiming all these years that it’s not a media company and that algorithms are superior to humans: Trust is an existential threat to FB. And this is the scalability paradox for Facebook.

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