Summary. Small and midsize companies are essential to American supply chains, but they lag in productivity and technology adoption. If government and industry can help these smaller supply chain firms upgrade their technology, it would make supply chains significantly more resilient by enabling data-sharing and collaboration.
Troy, COO of an overhead crane services company, hung up the phone and shot a worried look at the backlog of orders on his desk. An important customer had just confirmed requirements for two large industrial overhead cranes. In normal times he would be delighted, but with a 12-month backlog totaling nearly $100 million, the company was facing a dilemma. Given the disruptions and delays in his own supply chain, the strong temptation was to increase orders to be sure at least some of the parts he was waiting for might be delivered on time. But he recalled the Beer Game, a business simulation exercise developed at MIT: students in a beer keg supply chain simulation ordered more and more from their distributors (at higher and higher prices) until the famous bullwhip effect set in, bankrupting the student teams. Troy was determined to resist the urge to over-order from his suppliers, but he knew something must change. Was there a way to create better partnerships and streamline his supply chain, creating win-win outcomes?
Troy’s experience is a familiar one currently facing companies around the world. Global disruptions caused by the pandemic, along with extreme weather events and the Russian invasion of Ukraine, have wreaked havoc on global supply chains over the past two years. While there are some signs of improvement, the reality is that it takes a long time for disrupted supply chains to get back on track. As David Simchi-Levi of MIT has shown in his recent work on semiconductor supply chains, a 10-day disruption in a firm’s production leads to at least 300 days before its inventory is back to normal.
The U.S. has an opportunity to do more than just get its supply chains back on track. It can prevent future disruptions by fundamentally improving how they operate. The key is to focus on small and midsize businesses that are critical to supply chains but which typically lag in costly technology investments — particularly enterprise software and advanced manufacturing innovations. The result is a lack of real-time operating connectivity between supply chain partners and their customers, leading to lower efficiency for the whole system. Research by Daron Acemoglu of MIT and colleagues has shown that in the U.S., small and midsize enterprise productivity is a full two-thirds lower than that of larger firms, in part due to their lack of investment in new technology.
The importance of small and midsize businesses in supply chains goes far beyond a few key products or industries. Supply chain companies — defined as those that sell their output primarily business-to-business (B2B) — represent about 44% of U.S. private employment. According to Karen Mills’ recent research with Mercedes Delgado of Copenhagen Business School, these companies have an outsized impact on U.S. innovation, accounting for most of the country’s STEM jobs and patents. They represent a large share of highly skilled workers, with wages 66% higher on average than those in business-to-consumer (B2C) industries. And these businesses are largely small and midsized companies, not goliaths. Companies with fewer than 500 employees make up 98% of supply chain firms and over 20% of U.S. private employment.