Global Supply Chains, Too Big to Change?
Despite being necessary, regionalizing trade will prove to be a challenge.
Image: MIT Sloan Management Review
As of this writing, a 1,300-foot vessel has come unstuck after being lodged in the Suez Canal. The ~220,000-ton Ever Given ran aground on March 23 due to high winds and poor visibility. Dislodging the behemoth – which is as long as the Empire State building is tall – took round-the-clock efforts for a week.
The blockage created a naval traffic jam with dozens of ships waiting on either side of the canal to transport goods between Asia and Europe. The Suez Canal accounts for about 12% of global trade, and these delays affected the global economy with increases in the price of oil and shipping.
Though the world’s maritime thoroughfares are clear once again, last week’s Suez Canal blockage has shed light on the vulnerability of global supply chains already under stress due to the coronavirus pandemic. The Ever Green’s bad luck, moreover, caps off growing economic nationalism and higher tariffs which caused a slowdown in growth for 2019 according to a United Nations Conference on Trade and Development (UNCTAD) report.
In response, executives and governments are increasingly considering how to shorten supply chains. A trend toward “slowbalization” – where goods are being traded domestically and regionally (rather than globally) – is gaining steam. The logic is simple. Companies faced with increasing uncertainty from changing weather patterns, trade disputes, and financial crises are hedging their risks by choosing to regionalize and hence risk proof their supply chains.
But like a larger-than-life metaphor, the Ever Green sitting listlessly in one of the world’s most important maritime passageways is a reminder of the challenges obstructing this shift.
Challenge 1: Type of good
Not all goods are equally reliant on truly global supply chains. Nor are all goods equally affected by different kind of shocks such as pandemics, trade disputes, or environmental disasters. Heat waves, for example, are more likely to affect resource-intensive industries like agriculture while trade disputes will disrupt supplies of cutting-edge communications equipment. This means that shortening a supply chain requires a company to assess specific risks, some of which are far more predictable than others.
Image: McKinsey
But sourcing nationally or regionally for some industries might prove more difficult. High-tech components in everyday telecommunication products such as iPhones, for example, are made in many different countries. Parts like semiconductors which are used in everything from refrigerators to CPUs are mostly built in the Asia-Pacific region. Countries like China, Taiwan, Germany, and South Korea have spent years developing their industry expertise in these areas, and it will be incredibly difficult and costly for companies like Apple or Dell to source vital components regionally from, say Mexico.
In other words, there are geographical limits to how much a supply chain can be shortened – at least in the short term – and particularly when it comes to technology products which account for a growing part of the global economy.
Challenge 2: Shipping infrastructure
The modern day global supply chain is an international network of goods, infrastructure, and people. By connecting producers and suppliers all over the world, it is based on reducing manufacturing costs by providing access to cheap materials and boosting efficiency by limiting the amount of goods a company has to stockpile.
The shipping industry is the back bone of this system. According to a 2018 review by the UNCTAD, maritime transport accounted for 80% of global trade by volume and 70% by value. The most common trade routes used by ships during the same time, meanwhile, were between Asia and North America followed by Asia and North Europe, Asia and the Middle East, and Asia and the Mediterranean.
Image: World Shipping Council
This existing maritime infrastructure is likely to influence not just how, but whether supply chains are shortened. The result could go either way. On one hand, maritime transport has faced significant industry specific problems in the past decade like rising costs, market saturation, and a lack of innovation. Accelerated by the coronavirus pandemic, execs might gear shipping towards regionalizing supply chains by utilizing medium-sized ships that can serve multiple ports.
But the conservatism, size, and inertia endemic to maritime transport may make operation level changes far more difficult to enact. Additionally, the frequent use of long routes that facilitate trade for high-tech components produced in particular regions (such as Asia) could also push manufactures to make the existing supply chain more risk averse. This might mean a greater focus on end-to-end visibility, whereby manufactures can track and monitor their entire supply chain. The result might be more resilient supply chains which are more capable of handling shocks in different parts of the world, rather than shorter ones.
Future trade-offs
Manufactures face a classic short-term cost vs. long term payoff challenge in their effort to regionalize production. But another trade-off involves profitability and responsiveness. Global supply chains, while beneficial for both consumers and producers when it comes to reducing costs, are complex and unwieldy during times of crises. In extreme circumstances, the resulting inflexibility can do more than just hit consumers’ wallets.
Nowhere has this been more obvious than with personal and protective (PPE) equipment shortages at the start of the pandemic. A massive surge in demand for gloves, masks, and gowns matched by limited supplies coming out of China (one of the world’s largest producers) resulted in higher deaths among healthcare workers as the virus spread.
But, even though the coronavirus has exposed just how fragile global trade can be, the effort to change operations may prove daunting.
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Book recommendation of the week:
Her Thoughts - S.A. Malik (2020)