Lately, I’ve heard a lot about how governments should regulate supply chains and impose more transparency as a way to solve supply chain issues. But what if governments are not the best option when it comes to supply chain management and, contrary to their intentions, inflict even more damage on already fragile and volatile supply chains?
Let’s look at COVID testing as a case study.
Those who planned to travel or meet family members during the holiday season know how difficult it was to get tested. The test sites were overwhelmed. It was difficult to find an available niche – along with quick results – and purchasing a home testing kit was nearly impossible.
Although we have already experienced shortages in 2021 for many products, I choose now, in early 2022, to say that the government is doing a terrible job to address it. Let me explain.
When there is a shortage of iPhones or kettlebells or, God forbid, coffee grinders, we can deal with it. But when there is a shortage of COVID testing, things get a little trickier. Without sounding too controversial, in many cases it can be a matter of life and death. Although the US government announced the planned distribution of 500 million home test kits last month, we do not have the capacity to manufacture that number of tests in such a short time.
Gigi Gronvall of the John Hopkins Center for Health Security says it’s because “there are a lot of components that go into a home testing kit.” This includes the packaging, test strip, cotton swabs, and the liquid used to administer the test. But the roots run deeper than that, and the reality is the government has botched the home test kit market, according to a ProPublica survey.
Initially, the Food and Drug Administration (FDA) made it very difficult to approve home testing and relied on only a few companies, Abbott being one of them. Smaller players encountered difficulties getting their tests approved and allegedly inappropriate prioritization.
The situation worsened when the FDA flagged the effectiveness of the vaccines and the potential “end of the pandemic”. In fact, Abbot slowed down manufacturing of its home test last summer after the Centers for Disease Control and Prevention (CDC) announced the vaccines were so protective they would alleviate the need for frequent testing.
Thus, government action exacerbated the shortage. No, this did not cause the increase in demand, but it did increase the volatility of the supply chain. There are, however, a few things that can be done to improve the situation.
The federal government can purchase large quantities of tests from companies that can manufacture them in bulk, and then offer those tests to end customers at low cost or free of charge. This means that they can commit to purchasing home tests from any company that can meet the necessary standards and is willing to manufacture them.
The demand for home testing is quite volatile. When trying to decide how much stock to transport, retailers such as drugstore chains need to balance the risk of overstocking and under-stocking. To do this, they typically target a certain level of service (for example, a 95% level) to support the average demand plus a certain amount of safety stock. For a 95 percent level, this will be equivalent to about 1.6 times the standard deviation of demand.
I’m not an epidemiologist, but I would expect the government to be more risk averse than a regular business when it comes to inventory and the possibility of product out-of-stock. If it is too expensive for a business to provide over 95% service, I would expect the government to be willing to tolerate the additional cost of over 99% level of service. For 99%, the government has to bear 2.3 times the standard deviation of demand. For a service level of 99.9%, you need 3 times the standard deviation. In the midst of a pandemic, that doesn’t seem too much to me.
The government can also centralize inventory and distribution. While pharmacy chains must have a safety stock in every store, even in areas where there is no major epidemic, the government can mobilize these tests in areas of need and instead have a safety stock at national level, instead of a local one.
The government has the scale to deliver these tests quickly and efficiently – but because it has been reluctant to try anything too ‘socialist’, expecting something like this to be almost anti- American.
It’s pretty symbolic that 2021 ended in shortage in the midst of a pandemic that defines our current century. Supply chains and COVID. COVID and supply chains. 2021 has been a year that has given supply chain experts and researchers a lot to think about – and even more to work on. As 2022 opens, I think we are all more than ready to return to supply chain obscurity.
Gad Allon is director of the Jerome Fisher Program in Management and Technology at the University of Pennsylvania.