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July 3, 2019

A New Era of Globalization

In 2005, Thomas Friedman proclaimed that the world was flat. By this, he meant that a confluence of factors such as the collapse of the Berlin Wall, the rise of the internet, and a proliferation of offshoring and outsourcing practices were helping to bring the world closer together. Fourteen years later and a very different climate dominates, in which we talk anew of building walls, breaking away from international treaties and organizations, enacting tariffs, and starting trade wars.

Does this spell the end of globalization?

The rise of nationalism around the world has justly received much press attention in recent years. However, globalization continues to expand, driven by its own, inexorable momentum, in a way that transcends taxes and tariffs. This tide includes several factors that bear directly on supply chain, and that we will take a closer look at below.

Rising consumer expectations — Supply chains used to be highly linear, with consumers stuck at the receiving end of the transaction. However, this has changed, with the connected consumer as the axis around which products, services, and experiences revolve. With an expectation of same- or two-day delivery of products when and where they want them, the modern consumers demand — and expect — nimbleness from the companies that serve them, and they are quite ready to take their business elsewhere. This requires companies to position inventories closer to the point of consumption. Firms are also looking to differentiate themselves by offering personalization of their products and services, moving the final stages of production closer to the point of delivery.

Rising wages in China — When it joined the World Trade Organization in 2001, China solidified its position as the go-to destina-tion for manufacturing. Lured by low wages and a massive labor pool, many top global companies have moved some or all of their manufacturing to China. However, the labor cost advantage of China is on the decline. In 2017, the median wages in Shanghai, Beijing, and Shenzhen rose higher than Croatia’s, indicating an inflection point. This could erode China’s advantage in manufacturing. When coupled with the longer lead times to bring the products made in China to the world’s major markets, its value proposition is further diminished.

Supply-side dynamics and capacity constraints — Today, fewer ocean carriers remain in business due to years of industry consolidation. This has allowed those still sailing to increase their focus on profitability and be less concerned about filling up their ships. This will result in an increasingly inefficient allocation of shipping capacity. A recent paper by Sri Laxmana, vice president of global ocean products at C.H. Robinson, says that while available shipping capacity is expected to rise by less than three percent in 2019, global trade is expected to grow six percent, potentially tipping the supply-demand balance in favor of the carriers. Port congestion, driver shortages, and warehouse capacity constraints all introduce additional risks for operating a lengthy supply chain, making it an increasingly expensive proposition.

Rise in automation — Automation flat-tens the world, though not quite in the way Friedman imagined. Machines don’t take breaks. They don’t demand wages or benefits. Hence, they level the playing field in a way that takes wage disparities out of the equation, or at the very least, make them less of a factor. When combined with rising wages in China, automation provides a strong enough incentive toward an embrace of near-shoring. A 2018 McKinsey report said that upon factoring in the cost of shipping, taxes, and duties, sourcing a pair of jeans from Mexico is 12 percent cheap-er than from China, $10.57 versus $12.04. When further considering the time it takes for finished goods to reach the U.S. market (30 days from China versus two days from Mexico) and the greater opportunities for reducing markdowns and improving responsiveness, the answer as to whether or not to near-shore becomes obvious.

The increase in cyber-physical convergence — As the mechanical, moving parts in machines are replaced by software, as seen in the automobile industry, there is an opportunity to simplify physical supply chains. Additive manufacturing through 3D printing has demonstrated that production can be collocated with consumption by downloading designs on demand. This also makes batch sizes of one practical and cost-effective, accelerating the trend toward hyper-personalization. This will also lessen the needless expense of routing semi-finished and finished goods around the world, and instead will increase the movement of raw materials directly to production centers. A negative consequence of the cyber-physical convergence is the heightened cybersecurity threat. Connected devices are vulnerable to malicious actors. There are also increasing national security concerns regarding the incorporation of foreign companies’ technology in domestic products. This is prompting some governments to seek alternate sources of technology from more trusted sources, making rise of of cyberthreat an even more powerful driver of near-shoring.

Environmental awareness and the move toward ethical sourcing — From producer to consumer and everyone in between, there is an ever-increasing awareness of the carbon footprint cost of the products we consume. Research from The Economist Intelligence Unit reveals while that a clear tension remains between the sustainability and profitability priorities, leading organizations, recognize the need to get ahead of regulators and make sustainability a central operating tenet. Offshoring is also exposing companies to risks related to ethical sourcing. Any missteps in this area can result in significant and irreparable reputational brand damage. When such risks are viewed in light of rising labor costs and increased automation, near-shoring becomes a very attractive proposition, offering better visibility and control over a product’s journey from sourcing to consumption.When one balances the above against U.S.-China trade tensions, Brexit, NAFTA 2.0 and the rise of nativist and nationalistic political parties around the world, it becomes tempting to conclude that say that we are reaching the end of globalization. However, here are several demand-side forces that will not allow this to happen. Social media is con-necting individuals across the world. Content produced by individuals can find an instant, and massive, global audience. The result is a cross-pollination of cultures and trends that is prompting companies to launch products in one market, learn from the experience, and expand to other markets. However, these same considerations are also leading compa-nies to invest in a local presence, not just for distribution and marketing, but for manufac-turing as well. The result is an accelerating “glocalization,” combining the best of global scale and local focus.So, how should organizations be prepared for an increasingly “glocal” world? Here are some recommendations:

Understand and account for shifting demand patterns — With so much change happening at the same time, it serves businesses well to be prepared for a wide range of possibilities. Trusting forecasting approaches that rely solely on historical sales as an indicator of future trends is a recipe for failure. Instead, organizations need to factor external, macroenvironmental factors into their demand models and be prepared for several scenarios. For example, one leading automobile company is factoring in GDP, fuel prices, employment levels, and other measures to forecast demand, and, in the process, has improved forecast accuracy by double-digits. Demographic shifts and consumer sentiment can also be strong indicators of any change in the propensity to buy. Such demand-side-sensing capabilities will need to be matched with supply-side agility.

Total landed cost and cost-to-serve measures are must haves — In the earlier example of a pair of jeans, if a decision were made purely on the labor costs alone, China would win over Mexico. However, in the context of total landed cost, Mexico emerges as the top choice. The supply network would look radically different depending on the sourcing locations. Similarly, total cost-to-serve — i.e., the total cost of getting a product into the customer’s hands, from manufacturing and sourcing to transportation, warehousing and last-mile delivery — must be considered in the context of serving the end-customer.

Supply chain design should be a recurring discipline — In years past, organizations performed supply-chain design studies to ensure correct structure and flow paths on an annual basis, if that. Today, however, supply chain design must become an ongoing discipline. As supply chains continue to combine the global and local, designs can get stale rather quickly. To stay agile, leading organizations are using optimization and simulation technologies to make day-to-day planning and execution decisions. With accelerating “glocalization,” the agility and robustness of supply chains will be subject to an unending stress test. The best-prepared organizations can harness their lithe supply chains to stand out from — and best — the competition.
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