Increasing supply chain complexity

In the video, Nick Wright explains how demand for increasingly complex products is driving supply chains and complicating logistics distribution networks.

The globalisation of supply chains and the rise of alternate outsourcing options other than China has increased the complexity of a product’s supply chain.

As the below diagram, illustrating how Volkswagen’s supply chain in the 1990s compares with now, shows manufacturing has divested considerably around the world.

Any complex product, such as cars, aircraft and smaller consumer technologies have very varied supply chains. Developing countries in Southeast Asia and South America have been successful in persuading global brands to locate their factories, selling them the benefits of the trading blocs they are members.

When a developing country such as Brazil or Argentina managed to host Volkswagen factories, the economic and business advantages gained by the local economy are vast. South America is a region with free higher education and subsequently a highly educated workforce. Many developing countries do not have enough higher skills jobs for the many graduates they are producing.

Global brands such as Volkswagen are keen to exploit this and contribute to local economies. In the 1980s, global manufacturing was far more centralised. As outsourcing has taken hold over the past 30 years, supply chains have become more dispersed as global brands have either invested directly into developed countries or established strategic partnerships, which are common in China.

This has led to less direct control of the supply chain from the centre and more interactions regionally. In Volkswagen’s supply chain they currently trade between Mexico, Brazil and Argentina. This reflects the way trade blocs are interacting locally. Remember, Leamer and Storper (2001) suggested that the distance variable has a key impact on the amount of trade between nations.

The pressures of the financial crisis in the developed West have added further complexity to supply chains. Many western-based global brands noticed greater risks in extended supply chains and political turmoil in the developed countries they were helping to grow. Africa and the Middle East were particularly insecure, but with great potential.

The main reason for extended supply chains and globalisations was the prize of low labour rates. Distance and poor local logistics infrastructure were additional risks. Dealing with a developing nation as part of a trade bloc is a safer alternative and if they were nearer, this was a bonus.

Currently, many global brands from clothing to high technology capital goods and electronics have truly global supply chains. Each component is viewed as a supply chain.

As the video explains, a mobile phone consists of a battery, a screen, a body, a processor and the printed circuit board bringing them all together. None of these components is manufactured in one place. Global logistics is how they are bought together as a finished product.

References

_{Leamer E. and Storper M. (2001) ‘The Economic Geography of the Internet Age’, Journal of International Business Studies 32(4), 641-665}