6/26

Monday the CIPS Supply Chain Risk Index -- reviewing calendar year 2016 -- concluded, "A combination of economic nationalism, rebounding commodity prices and the growth of a burgeoning Chinese middle class is making long international supply chains a more risky prospect..."

John Glen, a contributor to the CIPS report, said,

Re-shoring supply chains will be an increasingly attractive prospect in the months to come. But, these are uncertain times for supply chain managers and there is no quick fix for the months ahead.It is more important than ever for supply chain managers to listen to their suppliers, develop closer relationships with them and to monitor any changes, so they can react quickly and ensure their supply chains remain resilient.

Many supply and demand networks are complex adaptive systems. High velocity demand tends to drive rapid adaptation and related emergence of complexity.

In many markets demand is increasingly time-sensitive.  A more agile supply network may quickly displace others... at least for a time.  Doing so again and again over time can totally transform the competitive landscape.  Apple Music?  Amazon? Uber? What's next?

Over the last thirty-plus years many supply chains have dispersed over long distances. This has allowed complicated products -- computers, phones, and more -- to benefit from widely distributed comparative advantages: assembling the best-of-the-best or least-costly-pieces depending on strategy.

Less complicated products -- clothing, for example -- have also sought piece-making advantages. But what worked when corporate buyers could plan and procure for "next season" is fast becoming a disadvantage. In the last quarter of 2016 Zara moved a winter coat concept to delivery in just 25 days. Eleven of those days were spent manufacturing 18,000 coats.

One way that fast-fashion and other high-velocity competitors are looking to enhance their agility is by relocating more of their supply chain components closer to more of their customers.  It is worth noting that whether this results in reshoring or offshoring depends on where consumer demand is growing.

The Reshoring Initiative emphasizes data positive for US sourcing: "The combined reshoring and related FDI trends continued strong in 2015, adding 68,000 jobs and bringing the total number of manufacturing jobs brought from offshore to over 249,000 since the manufacturing employment low of 2010."

A.T. Kearney is not convinced and sees offshoring as by far the more significant economic force.

But whatever the market-trends of the last decade, President Trump has communicated he will give top priority to reshoring, promising to reverse a generation-long trend.

In late January, Peter Navarro, director of the new White House National Trade Council, told The Financial Times, “It does the American economy no long-term good to only keep the big box factories where we are now assembling ‘American’ products that are composed primarily of foreign components,” he told the Financial Times. “We need to manufacture those components in a robust domestic supply chain that will spur job and wage growth.”

Responding to Navarro, the conservative columnist George Will explains (complains):

Americans streaming movies from Netflix (based in Los Gatos, Calif.) erase American jobs in movie theaters and DVD rental stores. Americans buying books from Seattle-based Amazon have caused many American bookstores to do what Borders’ (400 stores, 11,000 employees) did: disappear. Americans using San Francisco-based Uber are destroying many taxi drivers’ jobs. Evidently our protectors in the administration must believe this: The destruction of American jobs because Americans buy goods or services of some American companies rather than those of other American companies is benign. But the destruction of American jobs because Americans buy goods or services of foreign companies is intolerable.

Navarro has argued that externalities -- such as tax policy, currency values, regulatory constraints, and misbehavior by trading partners -- have distorted the comparative advantage of close-to-consumer supply chains.  Will seems to argue that aspects of consumer demand -- price-sensitivity, innovation, quality -- are perpetual sources of disruption, even the core of an innately chaotic system.

I perceive it depends on the specific product and the nature of demand for that specific product. Where and when demand is more volatile, less price-sensitive and  higher velocity, the costs of staying physically close to consumers will often generate comparative advantages.  Reverse characteristics will drive production to the lowest common denominator... wherever it can be found and delivered-from with reasonable assurance.  Demand decides.  But demand is highly variable.