How could everyone, every manufacturer, seemingly every retailer be caught short so much of everything? Was everyone just stupid? Did they simply underestimate the comeback of the country and what their order books showed?
As I go through the quarterly reports as this earnings season draws to a conclusion, amazingly, I can come up with just one company, Target (TGT) , that had the right inventory and, more importantly, the right amount of the RIGHT inventory, to be considered smart and ready. One company. How could they be so wrong?
Part of what you need to consider is how Target could have been so right. CEO Brian Cornell made sure he was incredibly close to what his store managers even at the lowest level needed. Plus he has an innate sense of optimism about the American consumer that could have been disastrous if the pandemic had not waned and the death toll not be diminished.
More important, though, was the just-in-time philosophy of so many industries. The auto companies, for example, learned their lesson years ago about the expense and needless waste that comes from being vertically integrated. Time and again, because of shortages of cash, they spun off these units in order to bring in capital or they forced suppliers to keep their wares on their books so as not to keep capital tied up so it could be returned to shareholders.
The supply chain was ruptured in the name of just-in-time inventory, something that works until the suppliers don't have what is needed, which is what happened to the auto industry. The Chinese became huge creators of automobiles and they hoarded chips in fear of exactly what happened, a shortage of semiconductors that go into cars and trucks. They were low-level chips made by only a couple companies; there was no spare capacity because the gross margins were too low to open more capacity.
Worse, something that's not talked about much: the big cuts in airline traffic from East Asia. Previously, the Asian semiconductor companies would ship more urgent chips on the big passenger planes that shuttled back and forth. But the illness shut those routes down so they were stuck using boats, and we know that the ports weren't capable of handling all the traffic. The shipping companies seemed incapable of adopting any other route to get product to America and the automation of U.S. ports isn't up to snuff. Too many people. Too many expensive people. Too many sick people. All unfortunate.
But I think something else played a much bigger role, and that's an innate skepticism about science and what it could really accomplish against COVID-19.
There were two reasons for that skepticism. The first was the historic inability to make safe vaccines quickly. The second was a disbelief in government's ability to partner with private industry to get something done.
Most executives I talked to thought Operation Warp Speed was just a gigantic P.R. stunt to help the previous president get re-elected. They didn't understand that if you took the risk off the table that it would incentivize the companies to participate in a wholehearted way, which is just what happened. I understand the reluctance to believe. It's not like President Trump showed any real faith in science in any part of his administration. I think he was the most anti-science president in history. The drug companies I spoke to were all reluctant to criticize the president as they feared his vicious retribution. A tweet could destroy their reputation. A critical Fox News story could erode needed trust.
The result? Most businesses I know were totally caught flat-footed by Moderna (MRNA) and Pfizer (PFE) . The latter they knew; it was the former that shocked people. Moderna actually had success all the way back in February, not long after the pandemic first caught people's attention. But so few believed. That, right then, was the biggest mistake. As the president touted nostrums and so many drug companies seemed baffled, Moderna and then Pfizer's partner BioNtech (BNTX) figured it out. They broke the sound barrier to get this done.
Now we are all paying the price. Part of the price is shortages, something that's got the inflationistas in an uproar, causing tremendous pressure on a man who has gotten it right at every turn: Fed Chief Jay Powell. Part of it is a recognition that many companies will just fail to deliver.
Ultimately our companies will get on track. But right now? We've been caught with our pants down, almost all because we had no faith in the smartest people in the country. What a shame.