 | | Glen Hodgson
Senior Vice-President and Chief Economist
The Conference Board of Canada |
Almost all organizations rely on supply chains for their operations. For decades, firms in many sectors, but especially in manufacturing, have focused on going global and making their supply chains as efficient as possible to keep input and operating costs to a bare minimum and remain competitive. But recent events have demonstrated that resiliency and reliability are quickly becoming more important factors in effective supply chain management.
What is a supply chain? It is a strategic process in which inputs for an end-product come from a variety of sources. A related and larger concept is value chains, which encompasses all activities that create or add to value for an organization - like research and development or marketing, in addition to key business inputs.
For at least the past two decades, many firms have worked to make their regional and global supply chains as efficient as possible. They have searched continually for the lowest possible cost of inputs, and the most efficient business model while respecting standards of quality. Firms have therefore relied more heavily in imported inputs, and they have adopted practices like global and regional sourcing and just-in-time inventory management, all in an effort to reduce operating costs.
But the world of supply chain management is changing and assessing the risks to supply chain management is becoming trickier. The price of oil and many other commodities has risen significantly along with the global economic recovery, propelled upward by strong sustained growth in emerging markets. Oil prices have recently jumped well beyond $100 a barrel due to the remarkable political events in North Africa and the Middle East.
Higher oil prices have raised necessary questions about whether firms should shorten their supply chains (i.e. bring supply closer to their core markets) in response to higher oil prices, in order to reduce shipping and other energy-related costs within their supply chain. The relationship between the value of inputs and the related shipping costs is being examined more closely, the longer the price of oil stays beyond $100 a barrel.
In addition, recent tragic events in Japan have brought the fragility of some global supply chains even more sharply into focus. The auto industry in particular --Japanese manufacturers, but also others - seems to have relied on specific parts and inputs that were made in only one or a few locations in Japan. Due to the earthquake and tsunami, those inputs have suddenly become unavailable and firms are scrambling for replacement parts and inputs. Assembly lines in Japan, but also in North America, have been forced to shut down at least temporarily, and some end products will not be available for sale to consumers.
The combination of these forces should lead to a fundamental re-think of the global supply chain model. The drive for efficiency will constantly have to balanced against a desire to ensure greater resiliency to unexpected shocks, and increased reliability - that parts will be there when they are needed.
A reassessment of the risks to specific links in the supply chain will likely make supply chains shorter in future - less global, more regional and local - thanks to higher oil prices and resulting higher shipping costs, especially for inputs that have low value relative to their weight. Supply chains will likely be made more resilient, such as by shifting from just-in-time supply of inputs, to greater use of just-in-case inventory management. And supply chains should be made more reliable by identifying more than one source of supply for key inputs, from locations that are geographically separated. Business continuity plans will also need to be reviewed and sharpened, since we now understand that what can go wrong sometimes does go wrong.
Global supply chains will continue to be a source of value creation for business, but their continued success will require a careful and constant balancing of economic efficiency with resilience and reliability.