Monday 6th Jul 2020 - Logistics & Supply Chain

Global poser

Is the headlong rush to globalisation coming to an end? New research suggests that concern over carbon footprints could be having an impact on global strategies.

Could 2011 be the year when globalisation starts to go into reverse? It would have been outrageous to think of posing such a question even a couple of years ago. But the way the world is moving, there are some reasons for thinking that the headlong rush towards globalisation which we’ve seen during the past two or three decades might not last for ever.

If that is the case, it will have some epoch-making implications for supply chains. Not to put too fine a point on it, it could reverse the trend for building ever lengthier and more complex supply chains. But will it?

I’ve been reading an interesting paper by Dr Carlos Mena, senior research fellow at the Centre for Logistics and Supply Chain Management at Cranfield University School of Management. Mena points out that global trading has been a way of life for hundreds if not thousands of years, but it is only recently that the environmental and social implications of global sourcing decisions have been taken more seriously.

One of the arguments that is gaining more traction is the impact of the global footprint associated with moving goods over long distances. Supermarkets across Europe, for example, have been on the receiving end of protests from increasingly vocal campaigners about the carbon cost of moving basic foodstuffs thousands of miles.

Those winter green beans from Kenya may taste delicious but more consumers are choosing a home-grown cabbage delivered in an organic vegetable box with less carbon costs. Mena observes: “There is now a growing realisation that in the not too distant future, organisations and even individuals will probably have to pay for the carbon impact of their activities.”

Then there is the risk inherent in global supply chains. Not only is there more risk of deliveries being delayed in a longer supply chain, it is usually necessary to hold more stock (at the supply point and in the supply chain) to ensure that customers get the goods they want at the time they want them.

And there is the less obvious danger that lengthy supply chains, which may start in a remote province of China or small south-east Asian country, pose risks to corporate reputation. Last year, Apple was embarrassed when it was reported that children had been found working in factories assembling some of its products. (Apple took prompt action to deal with the problem, but the reputational horse had already bolted.)

Last year, Apple was embarrassed when it was reported that children had been found working in factories assembling some of its products. So what’s to be done? It’s clear that the growth in global supply chains is not going to lurch violently into reverse. But as more managers come to appreciate the broader costs of them, we could start to see a slow-down in their proliferation. That could accelerate if oil prices climb higher more permanently than has been the case in the past (and is a real concern in the future).

In his paper, Sustainable Global Sourcing, based on in-depth research in 15 companies from seven industries, Mena discovered that the top reason for global sourcing was to cut production costs. No surprises there.

But what was revealing in the research was that many of the companies defined cost narrowly. They only included purchase price, transport and customs duties in their calculations. Mena notes: “The use of the total cost of ownership (TCO) concept whereby all supply chain costs, risk costs and transaction costs are included was conspicuous by its absence.”

Of course, once those factors are included the cost calculation becomes more complex and, in some cases, hypothetical. Certain risk costs – of goods not arriving, for example – may not happen and so such calculations are based on contingencies which decision-makers may not consider worth taking into account.

But Mena found that using formal risk management procedures in global sourcing decisions wasn’t the norm. Too often, decision-makers were not considering the risk factors that could interrupt supply. At the very least, this suggests that logistics professionals should be asking themselves whether they have properly considered all the relevant factors before they take global sourcing decisions.

It is a truism to state that every sourcing decision is unique and that each has its own special combination of factors that need to be considered. But Mena’s research points to two worrying features of the way decisions are being taken. First, too many decisions are being taken in an insufficiently rigorous way. And, secondly, not all the relevant factors may have been included in the decision process.

At the very least, logistics pros should be taking a long hard look at the process for sourcing decisions. And there may, in some cases, even be a case for reviewing previous decisions which led to global sourcing arrangements.

It’s my guess that, in most cases, the decision will still look robust. But it’s certainly possible that a fresh look could throw some of them in a worrying new light.

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