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Trade and Supply Chain Risk

Trade and Supply Chain Risk

One of the key working capital issues that has been highlighted in the last year is the issue of supply chain risk. As supply chains have gotten longer in order to take advantage of manufacturing in low cost countries, the number of entities in the total supply chain involved has also increased.

Increased complexity

For example, in 1990 televisions were manufactured in all of the major OECD countries. Since then the same televisions are almost all produced in China and not by the brand owners, but by contract manufacturing organisations who very often manage all or part of the supply chain independently of the brand parent.

Life of a DVD Player - Working Capital ChannelSource: Wall Street Journal

So it can be much more difficult for procurement to ascertain exactly who all the suppliers are, down to the small components and services required to deliver the final product to the customer. This has exposed several major companies in the electronics and apparel industries to the risk of engaging with companies with poor safety practices, the use of child labour and the danger of invisible weaknesses in the supply chain.

Risky flow of goods

We have also seen how quickly supply chain risk can impact the flow of goods.

  • In recent years both the Japanese tsunami and the flooding in Thailand caused major disruption to the global automotive industry.
  • Political instability is having major economic impacts in countries like Egypt and Syria, but is also echoing economic impacts on neighbours such as Lebanon and Jordan.
  • Maritime piracy seems to have declined off Somalia, but has now become a major problem off the coasts of some West African countries.

But still the biggest impacts come when natural disasters hit major OECD countries. The biggest recent example would be Super Storm Sandy hitting the North-east United States. While the damage may have been fairly superficial compared to such events in other parts of the world, the economic disruption caused by power outages, fuel shortages and disruption of key shipping lanes had a much higher economic impact than almost any other event in recent times.

Changing pattern of trade

Another key issue in the last 30 years has been the changing pattern of trade.

As mentioned earlier, a huge proportion of the rich world’s manufacturing capacity has moved to low cost countries. In turn these countries have enjoyed an economic boom. As a result, wages have increased dramatically and so have property prices. In China growth started in the 1980’s in the coastal special economic areas. These places have become increasingly expensive for employers to operate. The solution has been to move further into China’s interior as a source of cheap labour and property. But with wage inflation in excess of 10% per year and a massive property bubble in China’s industrial cities manufacturing costs are increasing at a dramatic rate.

It is estimated that the cost of manufacturing in China will equal that of the United States by 2015.

US companies are starting to bring back manufacturing from low cost countries (or on-shoring) to become more flexible to the needs of local demand variability. So the cost arbitrage advantage of many low cost economies is rapidly eroding.

Advance of manufacturing technology

The next issue to rear its head will be the advance of manufacturing technology.

In the late 1970’s robotic technology was going to usher in the next wave of efficiencies in Western economies. In 1979 Fiat brought out their famous advert for their Strada model “Hand built by Robots”.

The 1980’s were supposed to usher in this new wave of robots that would make everything. But outside of a few select industries, such as automotive, this progression stalled as the avalanche of cheap labour available in the Far East completely changed the direction of progress in global manufacturing.

3D Printing - Working Capital Channel

But this model is starting to run out of road. That would suggest that maybe robots may be about to make a comeback and revolutionise component manufacturing. And now there is the advent of 3D printing where what are now component kits could be made in a single piece with the click from a computer. 3D printing is expected to have an increasing impact in the next five years.

So…

This all suggests that the need to ship manufactured goods in increasingly large container ships is not going to grow at the pace that major shipping companies have predicted. Giant ships capable of carrying 19,000 containers will be available by 2017 in a market where demanding for container shipping may decline. If this becomes true then manufacturing will become more local to the consumer again. This will have huge implications for inventory management. No more weeks of stock sitting on the ocean. It should be possible to shorten lead times and reduce batch sizes so that companies can respond more flexibly to local customer demand.

 

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