The World's Exponential Increase in Dependence on Global Supply Chains; Let's Strategize!

[This blog post is based on a presentation I gave in a business-academic panel “jam session” at the American Marketing Association Summer Educators’ Conference, August 6, 2016. The slides with charts and data can be downloaded here].

The strategic importance placed on leveraging global supply chains has seen an exponential increase in the last decade. The world is now connected in a cogwheel fashion, where all 195 countries leverage inbound and outbound elements of global supply chains, and what happens in one part of the world – seemingly far away from where you are – oftentimes has an effect on what you do, perhaps even as a bullwhip effect; that is, small changes in some parts of the world has large cause-effect relationships with other parts.

Tremendous inbound and outbound growth in supply chain traffic has been seen in Asia, with lots more inbound in the last decade than ever before. But, the idea of “supply chain management” is still driven by the U.S. and to some degree Europe. These global supply chains are important given that customers expect the world to become more globalized than the companies expect to have to deliver in the next 20 years. This mismatch needs to be solved.

The reason we expect more globalization as customers is because the world is so solidly connected via information – information about everything all the time! For example, let’s look at what this connectedness means for some core globalization trends. If we take a look at data from 1960 on exports across borders, production within each country added up for all countries, world population, and trade agreements in force, we see a pattern and certain trends develop.

Trade Depends on Global Supply Chains 

If we compare population and world exports, an inference can be that we still see differences and market segments across the world in what customers want or need. We call this spiky and not flat as Tom Friedman wanted in 2004.

The implementation of trade agreements potentially could get us to a flatter world. For comparison, the U.S. implemented its first trade agreement in 1985 with Israel. Since that time, the U.S. has signed another 13 agreements; meanwhile the world has signed 256 new trade agreements, with 132 of them being implemented in the last decade when we have seen an escalation in cross-border trade.

To facilitate the escalation in cross-border trade, there has also been an escalation in resource use. To prevent an overuse of resources, the United Nation’s developed 17 Sustainable Development Goals that were ratified in September 2015.

But the biggest implication of the data from 1960 to 2016 is that global supply chains are becoming exponentially more important for global strategy. The difference between what we produce in-country and what we ship across borders is drastically more pronounced in the last decade.

Customers Depend on Global Supply Chains

For example, in my case, being from Sweden, not only do I know what products are produced everywhere in the world, I also want them and I want then now! This takes strategic planning for companies beyond what they did 10 years ago, and many companies have not kept up. Take into account that more than 90 percent of global shipment still goes by boat, and we can understand that strategic planning has to involve global supply chain management.

These strategic supply chain opportunities can be leveraged well though when taking into account what customers want and what they expect. If we look at customer versus company data for 2015 to 2025, we see that a trend. Customers expect the world to become more homogenous and globalized but they actually do not expect that companies can leverage this globalization as well as company managers themselves believe they can. So, it’s not that companies can’t, it’s that they strategically may not be planning to be as global as they need to be.

Companies Depend on Global Supply Chains

In effect, this means that companies that strategically and tactically leverage their supply chains globally can meet or even exceed customers’ expectations, and operate well within the infrastructure provided by countries. The starting point for such global supply chain implementation are three questions: (1) How global is the industry, (2) How global should the firm’s strategy be, and (3) How global should the firm’s supply chains be? Importantly, companies need to take into that globalizing too much or too little has implications of (1) potentially wasting of resources or (2) potentially wasting of market opportunities.

And, it’s not as easy as saying, for example, that FedEx is a supply chain company. Supply chains may be more or less embedded in corporate strategy, depending on what the company’s core competencies are and what it is trying to achieve. In reality, everyone takes FedEx’s supply chain infrastructure for granted, and would not use them if they didn’t have a robust network. FedEx drives market share based on its global market coverage and service offerings, not their supply chains.

Global Supply Chain Management 

These global supply chains can be divided into four core functions: purchasing, logistics, operations, and marketing channels. To give a couple of examples of the strategic issues facing companies in global supply chain functions, take an inventory example; and inventory is part of logistics within the chain. Presumably the Scandinavian countries are very homogenous, and we would expect their supply chains to behave accordingly. But Swedes are more likely to maintain a higher raw material inventory, while Finns have a lot in work-in-process, and the Danes have lots to sell. If we bring this comparison to an industry level, we also see remarkable differences.

Internally in the company we also see disconnects. For example, purchasing professionals who actually do the sourcing and supply management in the company expect global integration to about 20 percent of the time by 2023; their bosses in the C-suite of the company, on the other hand, expect global integration to more than 60 percent of the time by 2023. In fact, they are even disconnected now, 14 vs 30 percent, which means they have very little vertical understanding of supply chain issues in the company.

Overall, we as customers are connected via lots of information flowing to and from us; we expect the globe to be equally connected in its supply chains; the data is there to make it happen, the strategic leverage and implementation mechanisms have to now follow. More people and companies need to know global supply chain management!