STRATEGIES TOWARDS SUPPLY CHAIN TO MITIGATE SIMILAR IMPACT TOWARDS WORLD ECONOMY
“STRATEGIES TOWARDS
SUPPLY CHAIN TO MITIGATE SIMILAR IMPACT TOWARDS WORLD ECONOMY”
Prepared by:
Dr. Ashan Silva
(Chartered
Marketer [CIM-UK])
AFNI (UK), CMILT (UK), ACIM (UK),
DBA, MBA, CIM (UK) Ex. MBA, Ex. MSc (Strategic Marketing)
Whole world comfortably followed their globalization concept until we reached this catastrophe, we are experiencing now which has been stared from year 2020. Manmade and ecological reasons contributed equally to this and first we should identify those in detail to avoid any similar in future.
According to the journal explanation economy
is one out of main three dimensions of globalization namely political and
cultural globalization. Economic globalization is expanding because of
integration of production, finance, markets, labor with various countries and
through various agreements like free trade agreements.
In a way researchers explain the same as
interaction and integration of people, business and governments across the
world.
Globalization is basically movements of
services and products among the countries and is a complicated process which is
affecting to economy, culture, environment, social, and political background of
the countries.
This became one of the main tools to break
trade barriers between countries and help each other to reach their economic
growth.
Globalization is depending on different
factors such as
Political / geographical / sociological /
cultural / technological / financial / economic and production.
Therefore, to mitigate the impact of this
globalization to our business we should have a proper management plan in place.
That will help us to reach our desired goals.
As a result of globalization, similar
products might invade the planned market within very short period with a very
competitive price which is having a similar or more quality than your product.
Globalization reached as a wave to the world
and first wave started in 19th century and retained till beginning
of first world war and the second commenced after World War two and continuing
till today (figure – 01).
Figure - 01
Source:
- https://ourworldindata.org/trade-and-globalization
Reduction of transitional cost effected a lot
for this trade expansion and development of technology became one of the major
factors for this expansion. Due to drastically development of marine, aviation
and land transportation sectors, transportation cost reduced significantly and
said reasons enhanced trade volumes within cross countries at the level of intra
industrial trade (exchange of similar good and services).
Same time this became one of the
main reasons for this catastrophe. World supply chain totally governed and
benched marked by economic efficiency.
Manufacturers commenced their
hunting for cheap labor markets and diversified their production line to those
countries to control their production cost. As a result, for one product, they
have used several markets to produce their components. Markets like China,
Vietnam, India, etc. are the best examples.
Sametime closest raw material
sources also became one of the prime factors and when the resources are close
to each other, then they have chosen that market for their production. Final
they brought all those components to one place to complete their final product
(assemble). iPhone is one of the biggest examples we can take for this.
Across the world we are experiencing
an economic inflation due to shortage of supplies into the market. This is
mainly due to reasons like pandemic condition which we have faced recently,
geopolitical conditions created by superpowers in the world. E.g., Russian
action against Ukraine, Action by China for the world trade, etc.
When China taking their own
decisions to control their pandemic condition, most of the countries
automatically effected due to this production diversification actions taken by
many countries to control their production cost to compete in this competitive
market.
Most of the production line became
stand still until they receive the other component to complete their task
(China became the battery producer for most of the well-known brands in the
automobile sector). In that way the whole production became stand still for a
while and that gap is still there in the market. As a result, continuous supply is disrupted
and now supply is not there to the market as per demand. Hence prices of most
of the goods are skyrocketing continuously hand in hand with inflation.
With this experience now we should
learn a lesson and need to have firm strategies within the organizations to
avoid any similar bottlenecks in future. Companies should have their own
production lines to cover each leg of the supply chain. Should not depend upon
some other resources or services to compete their task.
Companies should not have a single
vendor strategy. They should have at least two suppliers for the same product.
It is much better if they can diversify it for two different markets.
According to researchers’ studies,
they have identified reshoring as one of the main to control this disruption.
Re
shoring
The process to bring back the
production lines back to companies’ origin is called as re shoring. The world
has learned a lesson in a hard way by off shoring their production lines
expecting a better return for their investments. Specially during the period of
pandemic disruption.
Due to the latest inflation
pressure, organizations and governments are hunting for the corrective and
preventive actions for the same to come out of this and to place an action plan
to mitigate the impact if any similar in future. Within that process they have
identified this off shoring mechanism due to globalization as one of the key factors
for this supply chain disruption. As a result, now they are considering about
re shoring them back towards their soil or nearby to cover following main
reasons,
·
Economic security
Creation of supply shock as a result
of COVID (High freight cost).
As
an example, below gauges (figure – 02) showing supply shortages for U.S.
services and industry,
Figure – 02
Source:
- Bloomberg Economics.
Logjams & pandemic created a huge imbalance in supply and demand (Figure 03) in the world market. As one of the main transportation modes by sea, containerized cargo played a significant role within this pandemic period. World market has faced a significant container shortage and led to a drastic container price inflation. The same has been badly affected towards the inflation of the economy and GDP in most of the countries in the world.
Figure
– 03
Source:
- United Nations Conference on Trade and Development (UNCTAD)
·
Climatic Changes
Decarbonizing programs, Extreme
weather (Droughts/ hurricanes / tornadoes / flooding / Heavy rain or snow
falls/ etc.) will create a significant impact upon companies bottom line. All
those implications will play a role in price and inflation.
As Alicia Wallace explained through
her article under heading of “Extreme weather could push food prices even
higher” in CNN Business which she has published on 14th September
2022. She took various examples like below to explain the same.
“As the United States continues to battle high inflation,
the effects of prolonged droughts and extreme weather events could help keep
the heat on prices for a long time to come.
The Consumer Price Index, which
measures price changes for a basket of goods and services, showed
inflation hit 8.3% in August from
the year before. But food prices rose at an even faster pace, increasing by
11.4% during that period, according to the
Bureau of Labor Statistics”.
“Extreme weather also can negatively affect companies’
bottom lines”, according to research from Paul Griffin, professor of management
at UC Davis.
Heat effect found that every
degree over 77 degrees Fahrenheit (25 degrees Celsius) translates into an
annualized loss of sales of 0.63% and a profit margin decrease of 0.16%. Stock
prices dropped by an average of 22 basis points in response to a
heat spell, Griffin found.
Corn crops that died due to extreme heat and drought during a
heatwave in Austin, Texas, on Monday, July 11, 2022.
Source: - Alicia Wallace CNN Business / Jordan
Vonderhaar/Bloomberg/Getty Images
·
Shifting of competitive landscape
Change of operating cost from
country to country with time.
E.g., Years ago, Chinese labour cost
is much lower than Mexico labour cost, but at present it’s almost same due to
various reasons. So, to US market Mexico is the closest (Figure – 04).
Figure - 04
Source: Record calculations, US Bureau of Labor Statistics, Bank
of Mexico, China National Bureau of Statistics, Conference Board TED, IMF World
Economic Outlook. BLS estimations until 2012 for Mexico and 2008 for China.
Thereafter, series are expanded using manufacturing unit labour cost per
employee index for Mexico, and manufacturing wages divided by total economy
hours worked (assuming similar work hour trends between sectors) for China,
converted at average exchange rates for the year.
Transport cost for the final product and timelines to reach the
same to the final consumer market will improve or can be control through such near
shoring action. (Near shoring is the mechanism shifting the production lines &
assembling lines to neighboring countries) This will support to control the bottle
necks (e.g., supply demand gap) countries are facing within their consumer
market and finally to control their inflation due to freight rates (figure –
05), transportation timelines, congestions, climatic disruptions, geopolitical
actions, pandemic actions, etc. which the world has experienced recent past.
Figure
– 05
Source:
- FBX
·
National Security
The dependence upon certain supplies
through various countries.
E.g., China and Taiwan dispute,
Semiconductor shortage for
electrical vehicles and smart phones in the world. Taiwan is holding a major
share within semiconductor exporters in the world.
The interest of China towards Taiwan
created a bottleneck to this semiconductor supply. To overcome this shortage US
and other countries, those who are using such semiconductors for their
production had to invest large sums of money to regrow the semiconductor
industry within their countries from the scratch.
E.g., Russian GAS supply to Europe.
Russia is the largest energy
supplier to Europe. Due to ongoing geopolitical conflict between Europe and
Russia (Russian action against Ukraine), at present Europe is enduring a
partial natural gas cut-off.
According to IMF there is a risk of
shortage of as much as 40% of gas consumption and GDP shrinking by up to 6%.
(Source: - imf.org).
Dependence on Russia for gas, and other energy sources, varies
widely by country (Figure – 06)
(Figure –07)
Figure – 06
Source: - IMF staff Calculation /
imf.org
Figure - 07
Source: - IMF staff Calculation /
imf.org
With all above now effected
countries should diversify their efforts to secure their supplies through the other
global LNG suppliers to mitigate the energy shortage and encourage their
community for maximum energy savings until they come out of it.
As a result, now manufactures should
think about reshoring their production and encourage their investors to invest
in their soil rather allowing them to carry out their production in the other
territories.
This way manufactures will have much
more control in their production and will be able to mitigate any similar production
disruption in future.
Some countries already identified
this by looking at their uncontrollable inflation hike. Mr. Joe Biden president
of USA have taken some action in their legislation addressing this issue.
In addition, nearshoring and friend
shoring became another alternative to address this issue. When we consider
nearshoring, as same as the other controlling factors, if their own soil is not
suitable, they can consider about the neighbouring countries for their supply
chain requirements, if so, they can control any such disruption much more
effectively and efficiently than they faced in last pandemic condition.
Friend shoring is about using their
friendly neighbours to fulfil the supply chain requirements rather any hostile
unpredictable entities.
So, we can use above few strategies
hand in hand with other identified actions through various sectors to
strengthen each individual economy. Organizations, manufactures and governments
should strongly think and use their strategists to place their short/mid- and
long-term strategies towards their supply chain addressing all those bottlenecks
which they have faced.
Because no one will be able to predict
any such similar disruptions will not surface again in the world market.
So, it’s our duty to learn from the past
and revamp or reinforce our strategies to face any such similar in future with
minimum impact.
Bibliography
Web Sites: –
·
https://fbx.freightos.com/freight-index/FBX
References: –
·
Extreme weather could push
food prices even higher
https://edition.cnn.com/2022/09/14/economy/heat-inflation-economy-drought/index.html
·
Reshoring in perspective:
Rethinking global supply chains and the macroeconomic implications
·
A brief history of
globalization
https://www.weforum.org/agenda/2019/01/how-globalization-4-0-fits-into-the-history-of-globalization/
·
COVID-19: Managing supply
chain risk and disruption
·
Taiwan, Chips, and
Geopolitics
https://thediplomat.com/2020/12/taiwan-chips-and-geopolitics-part-1/
·
National security and
economic prosperity are two sides of the same coin
·
How a Russian Natural Gas
Cutoff Could Weigh on Europe’s Economies
THANK
YOU
14th
January 2023
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