Supply Webs: Beyond the Supply Chain

13 April 2011

Wednesday


There is an excellent story in today’s Financial Times by Peter Marsh, High and Dry, about supply chain lessons learned from the disruption following the Sendai earthquake and tsunami in Japan.

As industries have relentlessly globalized their operations, supply chains have become increasingly global, increasingly important, and increasingly vulnerable. I discussed this at some length in my Political Economy of Globalization, especially in Thesis 30 and 31, where I wrote:

“The static model of globalization derived from a completed extrapolation of production geographically distributed according to comparative advantage and lowest opportunity cost is inherently unsustainable and would collapse spectacularly if it could be brought into being. But precisely because it is so vulnerable, it would never come to pass.”

What I failed to note in this context is that, in order to determine the limits of the possible in terms of supply chain management, these limits will have to be tested. Global economic integration will require, and is in fact now requiring, experimentation in supply chains to determine what sort of supply network is sufficiently robust that it can survive shocks in the form of natural disasters and political instability. In the process of experimentation that will ultimately issue in robust, sustainable supply chains, there will inevitably be instances of minor failure. These minor failures are important because of the lessons they teach.

The hysterical manner in which the popular press today treats any unexpected contingency militates against any kind of rational assessment, and if one believed what the news seems to be saying (usually by way of sophisticated innuendo) one would be fairly certain that bread riots in New York City will be hard on the heels of a temporary shortage in the supply of lithium ion batteries for cell phones. I am making light of this, but all we need do is look at the apocalyptic rhetoric from the last recession, in which each failed bank or bankrupt business was treated like the end of the world. Capitalism needs weak and compromised businesses to fail so that better (i.e., more robust, even if less profitable in the short term) business models can fill the vacuum. Supply chain failures are just as important in a globalized economy: without them, we would engineer a catastrophe; with them, we will engineer a robust, resilient, and survivable supply network.

My appeal to the language of engineering is conscious and intentional. As Foucault called doctors the “strategists of life and death,” so today producers and their supply chains are the engineers of life in industrialized civilization. We must be mindful of the responsibility of engineering the lives of others, and we should take the advice of engineers:

“The old-fashioned ‘factor of safety’, which in reality represented a factor of ignorance of actual operating conditions and true performance capabilities, was used to provide a sensible reserve against such unknowns and was usually based on years of accumulated in-service experience. Today engineers are sentient that reliability is associated with risk taking, cost levels, life patterns and life expectancy.”

T. T. Furman, Approximate Methods in Engineering Design, Academic Press, 1981, chapter 7, p. 133

Global supply chains need a factor of safety just as much as any engineered contrivance. To this end, producers will be forced by both natural and political circumstances to incorporate redundancy and alternatives into their supply chains, ultimately issuing in what may better be called a supply web. While in terms of absolute efficiency and cost savings, a single, linear supply chain is both cheapest and simplest, because it is not robust it will suffer failures, and these failures will in turn come with costs. Therefore, in the interest of long term profitability, it is in the interest of producers to source multiple products from multiple sources. If any one source runs into trouble, the alternatives are already there and simply need to be scaled up in order to maintain production.

A complex supply web of many products and many suppliers is more costly in the short term of manage, but will repay dividends in a robustness that can survive shocks that will collapse single, linear supply chains.

In the above-referenced Financial Times article I was especially intrigued by this quote from Hal Sirkin at BCG consulting group:

“In a few years’ time, assuming current trends continue, it will no longer be necessary in a broad cross section of industries for companies in the US to outsource production [of goods to be sold domestically] to China. They will find their costs are no higher if they do the manufacturing at home.”

This is closely related to what I wrote just a few days ago in The Up Side of Inflation, in which I discussed the global leveling effect of the maturation of industrial development in China. At the same time that localism is emerging as an expression of the broader environmental movement, localism is beginning to make more sense from a strictly financial standpoint. As time passes, more and more industries will be able to return to local supply chains and to operate them profitably. This will take time, as much of the world still has some time to go in terms of industrial development even approximating the level of development of those advanced economies that experienced their industrial revolution in previous centuries.

There is the opportunity here for the convergence of environmental and financial policy. Companies can say that they are adopting local supply chains for environmental reasons, populations can demand these changes, and politicians can legislate them in an attempt to make it look like they are taking an activists stance, but also knowing that what they are doing makes financial sense and therefore will not be resisted too stubbornly. This kind of political dishonesty is sometimes the best of all possible worlds for democratic societies.

The demands of advanced industrialized economies and their consumers will ultimately issue in supply chains and supply webs that comprise both local and global elements. Comparative advantage will continue to play a role; France will continue to produce the best wines, and Scotland the best whiskey, both for reasons of expertise and climatic conditions. Apart from these specialty luxury goods for which some consumers will always pay a premium, almost everything else is negotiable.

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