The rise of the emerging economies, fluctuating prices in commodities, the lingering effects of the global financial crisis and an unprecedented series of natural disasters are forcing major transformations in the global supply chain. Last year’s tsunami in Japan and floods in Thailand, which produces a fourth of the world’s computer disk drives, managed to shut down or delay production lines around the world, illustrating both how interconnected the world’s manufacturing has become and how vulnerable manufacturing has become to unforeseen events in places that on the surface might seem distant and unrelated. After the Japanese tsunami, Apple faced a sudden shortage of lithium ion batteries for its iPod because the factory it had subcontracted to in Japan couldn’t receive the chemicals it needed to create an essential polymer. The factory in Japan was not damaged, but the port that was needed to transport the battery was. Camera stores in New York and Switzerland were unable to meet the market demand for Nikon’s new D7000 camera, because although Nikon is a Japanese company, critical parts for the camera were being made in factories and Thailand that were damaged by the floods, which the World Bank described as the fourth most costly natural disaster in history. Even without a major natural disaster, the growing threat of protectionism and increasingly volatile fluctuations in the prices of commodities ranging from oil to minerals, copper and even steel, mean that global supply chain managers need to be constantly alert and prepared for the unexpected.
For most companies, the advantages in global outsourcing remain compelling, and focusing on the supply side of the business model tends to be a more effective way of increasing profits than concentrating on expanding sales and market share alone. Our research indicates that lowering supply chain costs by 10% produces a 60% increase in profits, while increasing market share by 10% is only likely to produce a 40% increase (see table 1)
Because of duality of globalization and protectionism, the rise of emerging economies and recent financial crises, we contend that the business model for approaching the global market place is now fundamentally different than it was in the past. We see five major transformations taking place:
- The current model is moving from market-driven to customer and supply chain-driven
- A growing number of businesses are moving from internal innovation to “open” innovation
- The most recent trend is from “made in China” to “designed in China” and “made in China for China.”
- Smart companies are moving from arm’s length financing to joint financing.
- Leading corporations are broadening risk assessment to a global level with a particular focus on complex risks in which one event may trigger another that ultimately breaks the chain.