Liberalisation of trade has enabled companies to reap the benefits of extended supply chains, but with protectionism on the rise could the golden age be coming to an end, asks Malory Davies.
Economist Professor Patrick Minford sent shockwaves through the motor industry six years ago when told the House of Commons Foreign Affairs Committee that leaving the European Union could mean that the industry would have to be run down.
“It is perfectly true that if you remove protection of the sort that has been given particularly to the car industry and other manufacturing industries inside the protective wall, you will have a change in the situation facing that industry, and you are going to have to run it down,” he said.
“It will be in your interests to do it, just as in the same way we ran down the coal and steel industries.”
The UK motor industry currently turns over some £82 billion and employs 856,000 people according to the SMMT. And no industry highlights the complexity of modern extended supply chains better.
Not only is 80 per cent of the UK’s car production exported, the European Automobile Manufacturers Association (ACEA) says that 14.1m auto parts and components, worth €11.4bn, were imported from the EU27 by the UK in 2017 – 78.8 per cent of the value of the UK’s total part and accessory imports.
At the same time, the United Kingdom exported 21.7m auto parts and components to the EU27, with a total value of €4bn (or 68.3 per cent of the UK’s global part and accessory exports value).
These figures highlight the global nature of automotive supply chains and the potential damage from a bad Brexit.
But, at the same time, the growth of trade protectionism is having an impact, and motor manufacturers will be watching the US negotiations with China particularly carefully.
The US imported $1.3 billion worth of cars from China in 2018 – not a huge figure. But it also imported $20.1 billion worth of automotive parts, according to figures from the US Department of Commerce International Trade Administration. At the same time it exported $6.2 billion worth of cars to China, along with $3.6bn of automotive parts.
According to the US International Trade Commission, the US could increase tariffs on the import of Chinese car parts by ten to 25 per cent.
Of course, the Trump administration is not just in conflict with China and its approach is exemplified by its ambitions for the USMCA (United States – Mexico – Canada Agreement) which were set out by vice president Mike Pence in an opinion piece for “The Detroit News” (24th April). Under the old NAFTA agreement, he said, “companies can buy a significant share of auto parts from China or Europe, assemble them into a vehicle in Mexico, and sell them into the United States duty free”.
The USMCA will require at least 75 per cent of a car to be built with parts genuinely made in North America for it to be sold duty free in the US. It will also require at least 40 per cent of a duty-free car to be made by workers earning at least an average of $16 an hour, said Pence.
It’s worth pointing out that Trump’s protectionist strategy has strong support from America’s United Auto Worker’s union which argues that American workers have been harmed by decades of offshoring. Commenting on the Pence’s NAFTA comments, UAW president Gary Jones said: “We need a strong, enforceable and impactful agreement that saves and creates good paying jobs right here at home.”
Of course, it is not just the motor industry that has embraced global sourcing and supply, and factors such as Brexit and trade protectionism will have an impact on all extended supply chains.
For example, the decision to leave the European Union is likely to cause orders from EU-based countries to decline dramatically, points out Jon Moody, chief Executive of software provider SSG Insight.
A research paper, Harnessing Brexit, Technology and Insight, produced by SSG with Sheffield Hallam University, found that 44 per cent of UK manufacturing companies identify Asia as their focus for the future, as well as the Americas, Africa and the Middle East.
Justin Sadler-Smith, head of UK & Ireland at SAP Ariba, says: “Today, protectionism is being expressed in such varied ways. The dynamics of a trade war in the traditional sense is demonstrated between the US and China but there are new forms of socio-political forces causing disturbance; such as Brexit, perhaps the biggest form of protectionism in British history,” says Sadler-Smith.
“Naturally, increased uncertainty in any situation means challenges ensue, growth can be hindered and business communities can become more cautious in their decision-making. When a change in tariffs, sanctions or similar is expected, businesses are often concerned about the security of the supply of goods and services. While this can mean higher costs, it is generally required to keep supply flowing, such as increased warehousing space for stock-piling of critical components, alternative sourcing channels which may come at higher costs, or production shutdown causing larger ripples in an extended supply chain,” says Sadler-Smith.
“Change however, even in the form of protectionism, can also create conditions for innovation and other benefits, such as minimising risks or exploiting opportunities such as finding alternative sources of supply. Even if unit costs are higher, the search for new supplier partners may uncover new ways of working, innovations, and efficiency gains that may reduce the overall total cost of ownership or create a competitive advantage in the overall value chain. Brexit for example, has been regarded by some as stimulating efforts to further distribute manufacturing techniques, including additive manufacturing technologies,” says Sadler-Smith.
Richard Wilding, chairman of the CILT and professor of supply chain strategy at Cranfield School of Management, highlights the reasons why companies have put global sourcing at the heart of their strategies: “It has proved essential to increasing gross and net margin. In the competitive environment characterised by over-capacity, corporate consolidation and depressed spending, global sourcing has been a key ingredient for corporate survival – taking advantage of low cost labour, cheap international logistics and less regulated operating environments,” says Wilding.
Nevertheless, he questions the extent to which the trend can continue: “Global sourcing implies long distance supply chains with extended lead times that have major implications for security of supply and for demand responsiveness and freshness of the offer.
“The nature of the risks that are faced and how these do not fall equally across a corporation’s portfolio of sources, products and customers and the strategic and operational capabilities that can be used to counter the risks are increasingly recognised. Companies however are recognising that risks now include risks to reputation from modern day slavery, child labour and sustainability issues, for example. The risks are no longer associated with just profits but also with implications for people and the planet,” says Wilding.
“Nike, for example, has announced moving from a current supply chain model of one million workers at 566 factories, 75 distribution centres and 30,000 retailers in 190 countries to one with 30 per cent fewer steps and 50 per cent less labour by using Industry 4.0 technology to near shore its supply chain. Benefits also stated by Nike are reduced shipping expenses, import duties and over production risks. Importantly this approach has significant implications for the risk profile of its supply chain enabling tighter control by localising manufacturing. However a key question to ask is what the 500,000 workers who are no longer part of this supply chain will do? Could this create challenge of civil unrest in some communities and geo-political challenges thus increasing the risk of global sourcing for others?” says Wilding.
Roy Anderson, chief procurement and digital transformation officer at Tradeshift, the procurement platform, argues that there is an understanding that every company has a responsibility to be much more diligent in their comprehension of external factors that impact the supply chain.
“That can range from things like sustainability and environmental impact, through to geopolitical elements that could ripple right through the supply chain if left unchecked. It’s not just about ‘Can I get a good product, lower my risk and get it through the supply chain?’ but shifting towards ‘Is it the right product? Does it have the right ecological impact?’
“Businesses are a lot more attuned to the reputational risks associated that can come about from a failure to derive transparency across the supply chain. Regulations like the Modern Slavery Act have also brought these issues ever higher up the corporate agenda.
“The vast majority of companies want to be good actors, but most are still in the very early stages in working towards implementing a connected supply chain. Many fall short when it comes to having access to the data necessary to have a complete view and understanding of their supply chain’s patterns and processes,” says Anderson.
SAP Ariba’s Justin Sadler-Smith believes that it is no longer sufficient to look at immediate suppliers. “The need to conduct checks five, six and seven tiers into a supply chain, beyond just availability, price and lead time, is more critical than ever. Only this way can issues in the supply chain like environmental factors, pay and working conditions, child labour, anti-corruption, anti-bribery, information security and financial solvency be tackled.
“As sustainability moves up the corporate agenda, the opportunity ensues for organisations to go beyond brand protection and into brand enhancement – many organisations are building strong brands and connections with their customers through promoting sustainable practices. Simple steps such as providing budget holders with pre-qualified social enterprise suppliers and providing a greater award criteria to suppliers with specific sustainability credentials, all help to make that shift,” says Sadler-Smith.
“We’ll also see a greater focus on supplier management as a way to become more involved and strategic. A much closer and collaborative relationship with suppliers can drive shared value in how sustainability initiatives are deployed and driven beyond just the first tier,” says Sadler-Smith.
Technology has been a key enabler of the extended supply chain and emerging technologies such as artificial intelligence, the internet of things, and blockchain are set to have a dramatic impact.
Alex Saric, smart procurement expert at Ivalua, points out that these technologies have the potential to improve traceability of supply, identify potential failure points and much more.
“However, organisations must ensure they can walk before they run and be careful that any technology is sufficiently mature. Blockchain offers potential but is not yet ready as major limitations must still be addressed,” he says. “AI is furthest advanced, but before jumping headfirst into AI adoption, there must first be a solid data foundation in place so that AI-driven applications can access resources and formulate better insights in real or near real time, giving businesses complete visibility of the extended supply chain.
With this in place, AI can help organisations to stay on top of supply chain disruption, flag ethical or sustainability concerns and identify instances of fraud. The adoption of AI will also lead to the automation of menial processes like invoice processing and the approval of purchases, giving employees more time to focus on strategic tasks risk management and supplier-led innovation,” says Saric.
Tradeshift’s Roy Anderson points that what’s holding a lot of organisations from embracing these technologies is a lack of digital connectivity, both between companies and between departments. “When you look at supply chains, there’s still an awful lot of paper around. That’s no good to technologies like AI, which rely on digitised assets to produce data they can capture, store and interpret. So yes, the potential is enormous, but there’s still a lot of work to be done to get organisations operating digitally by default.
“Get that digital connection in place, and you can start to do some really interesting things. For example, in the old world, if one of your manufacturers had an inspection process it would be a piece of paper or a document that stayed within that manufacturer. In today’s world, if you put an IoT device or a widget on that inspection criteria that information can be sent immediately through blockchain to the entire string. Now everyone gets to see what’s happening, and technologies like robotic process automation can be deployed to keep an eye on the things, call out inspection requirements and flag issues before they become bigger problems.
“Digitising the supply chain allows for all of these technologies to act much faster, easier and increase accuracy levels which spur growth.
“The combination of accuracy and digital drives speed, therefore allowing change to happen at a more rapid rate. The marketplace can free up resources and in most cases that means people and investment are able to go after the new activity and build off of the underlying layer of AI. This revolution is a huge step forward for the supply chain world,” says Anderson.
Justin Sadler-Smith points out that AI is still emerging but early use cases are demonstrating how it can enable organisations to shift their workforces away from lower value routine activities, to higher value activities instead.
“We first need to upskill our workforce and manage the transition in how roles can be transformed to extract the most value out of these opportunities. In a recent survey, it was revealed that many talented millennials and Gen Z’ers are selecting employers that are enabling that shift to higher value work and those that create the capacity to work on purposeful initiatives in the area of sustainability.
“IoT brings great insight into the consumption of goods and services to help extended supply chains organise fulfilment in a more efficient manner, and re-invent business models to inform how customers can be better served.
“This will be one of the disruptors from which the more agile supply chain partners will innovate and create new forms of shared value with their partners,” says Sadler-Smith.
“While Blockchain is often criticised for the value it may or may not bring, it does indeed provide the standards by which supply chains can communicate and share information,” he says.
Six critical capabilities
The measures to mitigate risk in global supply chains require six capabilities, says Professor Richard Wilding. It is these capabilities that are the critical success factors
- Total Acquisition Cost Management
The ability to analyse and predict the total cost-to-serve from the source of supply to its final point of sale. The capability in this analysis is not to simply build up the logistics costs by differentiating the physical characteristics of the freight and the duty and customs regimes that are applicable. It is important to analyse and build into the costing the inherent markdown and lost sales risk of the product by developing and applying a “market verses cost verses risk” profile. The inventory holding cost through the chain must also be factored in. Experience has shown that this analysis identifies products that should never be traded on a long lead-time, or that should be the subject of a postponement strategy. It is also likely to show that there are some products where actions to reduce lead-time and increase flexibility will justify a higher initial purchasing cost.
- One touch information flow
To avoid double entry, duplication, mistakes and inconsistency as the same transaction moves through the many points of contact in the chain. Accuracy of information is a precondition of pro-active management and the ability to exercise risk mitigation measures. This capability is systems enabled; it is critical to have the widest view of the total chain on one information platform with the ability to recognise inconsistencies.
- Total product identification and compliance
To ensure fast accurate product and handling unit identification that feeds the “one touch information” requirement immediately. The use of bar codes, RFID (Radio Frequency Identification) and even blockchain to the correct standards are the enabling technologies; but this needs to be quality assured and enforced on the ground across many sites with failures being fixed where they occur.
- Real time routing through dynamic transparency
The capability to see through the chain, know what is coming, and test for events that have not happened as planned; to interpret the implications of failures in a pro-active way and make decisions to minimise their impact. This is the ‘traffic control’ of global supply chain management; it must be managed transparently and with the proactive co-operation of all the parties in the chain. Monitoring of social media, weather and geological survey feeds may also be useful in maintaining transparency.
- Vendor development
The capability to understand and improve the long-term performance of vendors in terms of cycle times, timeliness, sustainability, quality and accuracy is central to risk reduction. Based on historical performance of the end-to-end chain it is possible to identify improvements programmes to develop supplier reliability.
The ultimate goal is to issue orders and schedules on shorter lead times, reflecting real demand or more accurate forecasts.
Understanding the underlying performance of the vendor and their category of products in the marketplace is the starting point for this; it is dependent on information across the chain.
- Information platform to provide consistent and timely information
The capability to put in place, operate and maintain a full supply chain visibility solution. All of the above capabilities are anchored by operational skills to secure and maintain the information backbone with the diverse data structures that are needed by each supply chain function.
Both members and corporate members of the Chartered Institute of Logistics and Transport are increasingly recognising that their decisions have impact not just on profits but the environment and society as a whole.
As the Institute continues to professionalise the profession in its 100th anniversary year, the challenges of global sourcing in 2019 are very different to 1919.
Extended supply chains rely on good transport links, notably liner shipping and air cargo, to move goods reliably over the thousands of miles from the point of production in Asia to consumers in Europe and the US.
But over the past few years, China has been championing an overland route into Europe under its One Belt, One Road initiative, which it argues will lead to a new era of globalisation.
It’s known as the new silk road, and China is expected to lend up to $8 trillion for infrastructure development in 68 countries along the route opening up a host of new trading possibilities.
“If you look at the roadmap, it is an enormous consumer base. All of Europe and Asia are going to be connected,” says Roy Anderson of Tradeshift.
A report from ING, New Silk Road – the Golden Middle Way, said the New Silk railway “will make the transport of goods twice as fast as sea freight and four to six times cheaper than air freight. This will give shippers the ability to optimise supply chains by choosing a combination of modalities.”
Anderson points out: “China is an enormous producer of products for the world, as a direct results of their labour base and government strategies. They are a significant force on the supply chain. By making their transport activity through the North passages and shipping lanes, through the Belt and Road initiative, they look to speed transport capabilities and are able to tie their production lines directly to their consumers more effectively. This will reset the bar for efficiency standards. It will also reduce costs and impact decision making as to what products and services businesses want to buy from China and their partners.
“These policies tie economies together and have to be reviewed by every organisation and government to say how do we work together, rather than at odds. Leaving the Americas in a segmented state, the United States, Central and South America are ultimately going to need to have the same strengths of community in their economic activity to be more successful and to be able to compete on a global scale. This is another level of competition and the world has to look at it with an understanding of what competitions, cost reduction, and consumer aggregation will do – changing decisions and buying habits. It’s going to be impactful,” says Anderson.
This article first appeared in Logistics Manager, June 2019.