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Recently, an aluminum plant in New York
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State caught fire, destroying a large
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section of the facility. That plant was
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a supplier to several automakers in the
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development of their vehicles. Events
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like that and others have an impact on
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the supply chain and force companies to
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have to make adjustments. Of course, the
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pandemic really challenged the supply
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chain and forced many entities around
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the supply chain to rethink how they
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would operate on a daily basis. As for
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where we are at the moment when we think
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about supply chain, pleasure to welcome
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in Gad Alon who is a professor of
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operations, information and decisions
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here at the Wharton School. Gad, great
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to catch up with you again.
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>> Yeah, great to be here. Then
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>> what do you think is the general state
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uh of supply chain right now and and
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what did the pandemic teach companies
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about their supply chains?
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>> It's a it's a great question and two
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different question and one question. I
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will say most supply chains are are I
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won't say deep trouble that that's that
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will be probably an exaggeration but
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there are still there are suffering from
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some implication of what started even
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before the pandemic which is you know
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more and more issues that are more and
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more frequent from climate to
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geopolitical risk to demand fluctuations
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to suppliers having issues to now you
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you add tariffs to that and then so most
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firms are are struggling to just get
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their supply chain to stabilize
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but then you have continuously the other
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issues that just happened and that's of
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like the the fire that you're describing
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is just an illustration of one more
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issue that one needs to prepare for.
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>> Okay. So for the automakers that uh did
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get aluminum supply from that plant, how
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are they adjusting to not having that
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access that they've had or and are used
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to having for such a long period of
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time?
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>> Yeah, I think so for many of them I
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think that's going to take a very very
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very long recovery and and I think
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that's to some extent really the the
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first question. So just to get the
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numbers right so 40% of the aluminum to
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US manufacturers come from that plant.
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So we might ask why do we have such a
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concentration in one place but then my
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understanding is only Q1 in 2026 they
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will be able to recover back to
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the full capacity and even then it's
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questionable. So here multiple things
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need to happen. So the first thing is
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many places many of these manufacturers
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will have to think about we like what we
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like to call time to recovery. How long
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will it take until they can recover? And
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then you start rationing. You start
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saying, "Okay, which models are going to
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get the aluminum they need and which
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models not so much." But you remember in
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during the COVID days, one of the things
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that we had shortage of were
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semiconductors
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chips. And there what you saw is that
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most manufacturers prioritized more
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expensive models. So Audi prioritized Q7
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and and Toyota prioritized the Lexus and
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the like. And and so that's potentially
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what we're going to see. We might see
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cascading effects of suppliers that are
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now going to get, you know, fewer orders
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and now they're going to reduce their
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manufacturing only to get caught back
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again where the aluminum is going to be
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back at capacity. Firms are currently
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probably scrambling to find spot markets
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that as we know has implication on price
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as well. So what you'd expect is
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expensive models will become potentially
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more expensive, cheap models to either
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not exist or becoming expensive.
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It will take a while for for this market
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to recover or what we're going to see is
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is those who actually were impacted will
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have to shrink their margins while those
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who are not impacted will be able to
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actually gain market share. Let me go
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back to something you said at the
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beginning of that answer and about the
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fact that such a a large percentage of
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the supply is in one location. So
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obviously that's something that needs to
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be looked at as well when you think
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about we're talking about a period of
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time of growth in this economy right now
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that there needs to be a consideration
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of not only repairing the facility that
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was damaged by fire but looking at
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another facility the potential of a
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larger buildout uh in this sector.
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>> Right. So I think that goes back to what
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something you asked me in the beginning
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which is what did we learn from the the
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pandemic and and I'm sad to say nothing
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but it's not that
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we didn't try to learn there's just a
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inherent trade-off between resilience
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and cost cost efficiency and one of the
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things that many CEOs came out of COVID
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is with the idea that we need to build a
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more resilient supply chain but most of
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them do not understand or don't
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appreciate the fact that to build a more
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resilient supply chain you need to to
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increase costs. You need to have excess
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capacity. You need to have redundancy.
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You need to have many a small
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overlapping plans rather than one big
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ones.
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The main reason that we have such a
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concentrated risk in one place is that
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firms optimize for economies of scale as
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a way to reduce cost. They try to
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optimize for quality and compliance and
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it's very hard to qualify multiple
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suppliers. You try to be just in time.
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So you try to concentrate everything in
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one location. All of these are best
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practices if what you try to do is
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reduce cost. This is not what you try to
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do when you try to be more resilient.
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But as long as the customer still wants
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cost and unwilling to pay for
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resilience, that's what we're going to
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get.
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>> How will artificial intelligence play a
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role in supply chains as we move
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forward?
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>> Yeah. So it's a great question.
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As we know, AI is the solution for
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everything.
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Well, not so much. So, AI cannot prevent
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the the fire. I don't think so at least.
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But it can prevent concentration. It can
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help. You know, one of the things that
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has been always the big promise is this
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notion of digital twin. And digital twin
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is the idea that you can actually run
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continuously simulation real time and
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understand the implication of everything
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you do. These are what very very hard to
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build and underutilized because most
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humans just do not understand the
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implication of what they see. And but
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now we're going to see more and more AI
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agents run supply chains and we're still
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a few years away from that. But there
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are already firms that are developing AI
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agents. Then these AI agents are are
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actually capable of saying that. So we
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might see inventory that's more
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strategic and more in better places.
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It's trying to understand the
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implication of this longtail
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implications. So you know we're not
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preparing for a fire, but we should
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prepare for the fact that 40% of our
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supply is going to come from one
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location and and maybe we we may want to
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hedge that. maybe. So I think AI is
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going to make us more predictive so
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easier to predict things. It's going to
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be easier to try to orchestrate things
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and potentially also do more preventive
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maintenance and predictive maintenance
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and and and so that's and and that
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potentially may prevent some of these
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longtail events. We cannot prevent
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tariffs but we can prevent some of these
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things. And I think the other side to
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this is that you know so many of the
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stories around supply chain obviously
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because of the pandemic and and
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recovering from the pandemic have been
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negative and the excess cost and and the
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negative impact that you know we've seen
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because of supply chains. If you flip it
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the other way, thinking about how
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positive a strongly run, efficiently run
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supply chain, what that can mean to not
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only economies but to cultures around
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the globe.
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>> Yeah. So that's a it's a great question
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to some extent. I mean I think it's a
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there there are two sides again to that
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story. One is that of course we read
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only negative things because it's a
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little like okay you don't read about a
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great defense. you read about great
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difference only when about difference
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only when they many there are many goals
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scored on them that's a story of of
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supply chain but you're right I mean I
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think firms cultures that managed to
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actually build robust supply chain meant
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that they actually you know I mean let
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me just tell a very very simple I mean
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you know very simple story which is you
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know you have to go you can go back to
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World War II and and you realize that
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the countries that had better industrial
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base with better supply chain those are
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the ones that managed to ultimately win
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the war. It was not just about having
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being able to have the best army, but
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the best army that can actually
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replenish very very quickly its supply
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and and so I think we we are many years
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away from that and so we forgot many of
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these lessons and and and I think we we
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are start trying to relearn some of that
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now. COVID was a route awakening for
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many but but not apparently not for
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everybody and and definitely at that's
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at least where we see at the federal
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level some awareness now for that topic
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but again it's it's exactly as you say
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it's usually through negative stories
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not through positive stories. So then
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how should companies think about supply
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chains right now having gone through
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everything that they've gone through in
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the last few years but thinking about
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the next 15 to 20 years about being as
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effective as they possibly can because
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it obviously is something that's going
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to impact their bottom line.
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>> Yeah. So I think I'm I'm it's
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interesting you know the the best
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example for that and and I think the
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firm that you'd expect everybody to try
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to copy is Amazon right and Amazon
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understands supply chain almost like
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better than anyone else Amazon and
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Walmart and but Amazon specifically
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Amazon has a good website but it's not
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such a great website but the main thing
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is that when you order from Amazon
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something today you will get it today
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and if you order it and you're willing
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to pay you might get even within a few
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hours and within a few minutes and
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Amazon is definitely a firm that I mean
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the amount of cash in their supply chain
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is then used to fund the rest of the
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business and every customer Amazon
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Amazon customer is is an Amazon customer
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not because how well the website is run
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that's great that they have everything
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but you have they have everything and
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you'll get everything and so you'd
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expect more firms to understand that you
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can actually be both resilient and agile
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and cheap at the same time if you just
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continuously think about how do you
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improve everything, how do you integrate
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everything, how do you make sure that
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there
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constant loop and you continuously try
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to optimize for both proximity and cost
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and and and it's possible but it
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requires a constant effort to do that
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and we just don't see firms most firms
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have the share of mind of leadership
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into doing that Gad great to talk to you
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again thanks very much for your time and
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your insight today all the best always
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great to be here thank you Gatalon
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professor of operations information and
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decisions here at the Wharton
