Financial Supply Chain

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Building the Supply Chain of the Future Getting there means ditching today’s monolithic model in favour of splintered supply chains that dismantle complexity, and using manufacturing networks to hedge uncertainty.

Building the Supply Chain of the Future

by Yogesh Malik, Alex Niemeyer, and Brian Ruwadi

Getting there means ditching today’s monolithic model in favor of splintered supply chains that dismantle complexity, and using manufacturing networks to hedge uncertainty.

Many global supply chains are not equipped to cope with the world we are entering. Most were engineered, some brilliantly, to manage stable, high-volume production by capitalizing on labor-arbitrage opportunities available in China and other low-cost countries. But in a future when the relative attractiveness of manufacturing locations changes quickly—along with the ability to produce large volumes economically— such standard approaches can leave companies dangerously exposed.

That future, spurred by a rising tide of global uncertainty and business complexity, is coming sooner than many companies expect. Some of the challenges (turbulent trade and capital flows, for example) represent perennial supply chain worries turbocharged by the recent downturn. Yet other shifts, such as those associated with the developing world’s rising wealth and the emergence of credible suppliers from these markets, will have supply chain implications for decades to come. The bottom line for would-be architects of manufacturing and supply chain strategies is a greater risk of making key decisions that become uneconomic as a result of forces beyond your control.

Against this backdrop, a few pioneering supply chain organizations are preparing themselves in two ways. First, they are “splintering” their traditional supply chains into smaller, nimbler ones better prepared to manage higher levels of complexity. Second, they are treating their supply chains as hedges against uncertainty by reconfiguring their manufacturing footprints to weather a range of potential outcomes. A look at how the leaders are preparing today offers insights for other companies hoping to get more from their supply chains in the years to come.

Twin challenges

The stakes couldn’t be higher. “In our industry,” says Jim Owens, the former chairman and CEO of construction-equipment maker Caterpillar, “the competitor that’s best at managing the supply chain is probably going to be the most successful competitor over time. It’s a condition of success.”[1] Yet the legacy supply chains of many global companies are ill-prepared for the new environment’s growing uncertainty and complexity.

A more uncertain world
Fully 68 percent of global executives responding to a recent McKinsey survey said that supply chain risk will increase in the coming five years.[2] And no wonder: the financial crisis of 2008 dramatically amplified perennial sources of supply chain uncertainty—notably the trajectory of trade and capital flows, as well as currency values—even as the crisis sparked broader worries about the stability of the financial system and the depth and duration of the resulting recession. While many of these sources of uncertainty persist, it’s important to recognize that new, long-term shifts in the global economy will continue to pressure supply chains long after more robust growth returns.

The increasing importance of emerging markets tops the list of these uncertainties. Economic growth there will boost global energy consumption in the coming decade by about one-third. Meanwhile, the voracious appetite of China and other developing countries for such resources as iron ore and agricultural commodities is boosting global prices and making it trickier to configure supply chain assets. Worries about the environment are growing, too, along with uncertainty over the scope and direction of environmental regulation.

These long-term trends have knock-on effects that reinforce still other sources of uncertainty. Growth in developing countries contributes to volatility in global currency markets and to protectionist sentiment in the developed world, for example. What’s more, different growth rates across various emerging markets mean that rising labor costs can quickly change the relative attractiveness of manufacturing locations. This past summer in China, for example, labor disputes—and a spate of worker suicides—contributed to overnight wage increases of 20 percent or more in some Chinese cities. Bangladesh, Cambodia, and Vietnam experienced similar wage-related strikes and walkouts.[3] Finally, as companies in developing markets increasingly become credible suppliers, deciding which low-cost market to source from becomes more difficult.

Another uncertainty
Protectionism could change the economics of a supply chain at the stroke of a pen. Our research suggests, for example, that the total landed cost of making assembled mechanical products such as washing machines in a given low-cost country could plausibly swing up to 20 percent given different tariff scenarios.

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