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