Back in September 1998 I remember attending a BT thought leadership seminar at the CBI’s offices where the speakers included Alan McKinnon, professor of logistics at Heriott Watt University and David Hindson, then a transport consultant with Appleton Thorn. The two topics that preoccupied much of the day were traffic congestion and shifts in the production costs versus transport costs equation that had seen consumer goods suppliers centralise their manufacturing operations to a handful of key sites across Europe.
Looking back at my notes I see hastily copied graphs showing the crossover between falling production costs and rising distribution expenses. Almost a decade ago, Hindson pointed out that the total logistics element in the selling price of consumer goods could amount to 30 per cent so if production costs fell but logistics expenditure doubled, not only would there be no net savings in centralising manufacturing to remote low-cost areas but we would have ever worsening traffic congestion as well. Gridlock, he surmised, was most likely in the Benelux region as goods poured back into the centre.
Production vs transport
Those remote areas lacking some strategic manufacturing facility would see unemployment rise, he argued. As a result, government intervention would be necessary to drive up distribution costs so in order to balance that production versus transport equation manufacturers would be forced to decentralise their production, so creating both jobs and goods in the regions where they were to be sold.
Almost 10 years later, we may not yet be at the stage of government intervention but rising fuel costs and the supply chain complexities of producing in remote areas are already starting to encourage producers to look closer to home. The rush to China we saw a couple of years ago is now being complemented by a return to producing in parts of Europe – notably the East – where wages are low but freight transport is rather easier to manage. With the marketing emphasis today on responsiveness to consumer demand, matching goods to the vagaries of fashion can be a little difficult if you have to factor up to eight weeks at sea into the equation.
At the same time, labour costs in some of the more remote preferred production areas are rising steadily. Reports of Western companies sourcing products in extremely rural parts of China, well away from the main industrial zones around Shanghai and Guangzhou, are now common. Others have moved to Vietnam or Cambodia. Balancing the production and transport equation means that manufacturers and retailers want to have quality goods for sale in Guangdong but they don’t want the cost of shipping them there from Vietnam, the Ukraine or Morocco.
Some 10 years ago, when fuel was comparatively cheap and nobody had started worrying about the possibility of global warming, trucking containers of dog food halfway across Europe seemed to make economic sense. Today, shipping shoes or underwear to Rotterdam from Sichuan, when they can be made as cheaply in Minsk – without the need to burn as much fuel– starts to look rather less logical.
Whatever one’s view on the scientific veracity of current theories of global warming, many consumers and businesses have been persuaded carbon emissions are to blame. We are already seeing UK supermarkets starting to put ‘travelled by air freight’ labels on some of their more exotic fruit and vegetables. With growing numbers of consumers busily offsetting their carbon emissions by planting a tree every time they fly, it will not be long before eating Zambian mangetout or Peruvian asparagus requires a similar sort of penance. Once we accept that buying indulgences to assuage the guilt of our dietary preferences is good for the environment, the doomsayers will no doubt persuade us that we must do the same for every computer, cardigan or coffee table that travels around the world to reach us.
DR. Penelope Ody is a Regular Columnist with Supply Chain Standard And is a Retail Market Specialist