Volatility in a Flash

International trade has been transformed by a factor about which most consumers know nothing — an intricate supply chain that connects store shelves to manufacturing facilities at the far corners of the earth. This dense and invisible thread, which binds countless suppliers of raw materials and components in a seamless global web, is the most important manifestation of modern globalisation. The success and failure of 21st century companies is increasingly determined by the efficiency of their supply chain management. For example, while the runaway success of iPhones and iPads is credited to the brilliance of Steve Jobs, it is Apple’s superb supply chain that has enabled its products to reach consumers globally.

Unsurprisingly then, multinational companies are concerned about maintaining and improving their supply chain management. Volatility these days is a matter of urgent, daily attention. From the fast-changing tastes of consumers to natural disasters and commodity prices to currency fluctuations, every aspect of the production network needs to be taken into account to face the intensifying challenge of competition. Alarm bells started ringing in many global company headquarters when protests erupted in Egypt, when the internet disappeared, and workers began demonstrating in Alexandria and Port Said. While the worst fears about the flow of global trade through the Suez Canal have not materialised, the wave of political unrest sweeping the Middle East comes as a sobering reminder of the new volatility supply chain managers must factor into their planning.

Volatility is, of course, nothing new. Only the speed with which it affects the world and causes serious ripple effects has increased exponentially. Egypt’s rise as a major cotton producer that fed the mills of 19th century Lancashire was itself a product of supply chain volatility. The American Civil War led to the blockade of southern ports, which threatened the slave-grown cotton supplies to British textile mills. Manufacturers responded by seeking supplies from Egypt, in turn initiating the process of shifting the focus of Egyptian agriculture from grain to cotton. The process at that time took several years. If the current turmoil in the Middle East was to affect delivery of garments and other consumer goods to supermarket chains, the switching of suppliers would take weeks. More seriously, the soaring price of oil resulting from the Bahrain and Libyan uprising could rapidly affect all aspects of the world economy.

With business environment subject to rapid and unpredictable change, risk forecasting and preparation have become a critical part of companies’ operations. Certain occurrences such as the eruption of a volcano in Iceland that shut down the airspace over Europe and rendered vegetable and flower growers in Africa jobless cannot be foreseen. But the experience must have given managers surveying the empty shelves new impetus to consider alternatives. The rising price of oil is likely to add to the growing concern about timely delivery of supplies across oceans.

There were cases when container ship operators reduced cruising speeds to save fuel, leading to delays in the supply of components, and ultimately delivery of products.

After years of lack of concern about shipping goods anywhere in the world at a cheap cost, geography has again become an important consideration. Companies have been setting up final assembly near the main market and looking for suppliers closer home irrespective of cost considerations. Ensuring timely supply may in the long run trump minor immediate cost gains. A recent McKinsey report suggested that to deal with volatility, companies could be “splintering” traditional supply chains into smaller and nimbler ones. The report gives an example of a company, which maintains its China production base for stable product lines, but has moved some production back to the US to sell finicky customers made-to-order products. The low inventory cost of such a move compensates for higher labour cost in the US. McKinsey says rearranging supply chain can also be a hedge against price and currency volatility. With pressure mounting on China to revalue its currency in 2010, Nike for the first time produced more shoes in Vietnam than in China. Other companies, too, have begun hedging against higher renminbi and rise in labour costs in China by quietly building supply bases in Mexico and Brazil.

The volatility of the world is speeding up the transformation of the supply chain and reshaping globalisation.