Emergence of global supply chains

HENK ZIJM: Hello, my name is Henk Zijm. I am a professor in production and supply chain management at the University of Twente. In two short presentations, we are going to explore the meaning and significance of logistics and supply chain management in the global economy we are witnessing today. We will investigate why worldwide logistic flows– as we see them today– have become so dominant. What the merits are and what the drawbacks. And what is the role of information technology in governing, planning, and executing these good flows? And how to mitigate the undeniable logistics and environmental problems we are confronted with.

That we are living in a global economy is best illustrated by taking a look in your personal environment. Just watch the products we are surrounded with– the household appliances in our kitchen; the electronics equipment that we use, such as laptops and audio/video tools; the furniture in our houses; the clothes we are wearing; the food we eat; the coffee we drink; the medicines that we sometimes need to recover from illness; and even the flowers we buy. It is not uncommon that some 70% to 80% of all the things we daily use are not fabricated or grown in our home regional country, but elsewhere. Not seldom even at other continents. Why did that happen?

Well, there’s a reason for all this– Made in China, Japan, USA.

To answer that question, we go back to the year 1776, when English economist, Adam Smith, published his An Inquiry into the Nature and Causes of the Wealth of Nations, in which he outlined the principle of labour division. That publication marked the start of the dominant philosophy of efficiency through specialisation. The manufacturing philosophy that was amplified when the steam engine– invented by Thomas Newcomen and improved by James Watt– was applied in industrial production. It culminated in the First Industrial Revolution– in mass production and mechanisation– which has shaped production ever since. Mass production requires physical concentration. And so the mass of factories were born that dominated the industrial landscape in the 19th and last parts of the 20th century.

Scale was the leading paradigm, and not to be compromised by diversity. Famous, became the reply of Henry Ford to the question, in what colour the T Ford was going to be produced– “Any colour, as long as it’s black.” That situation continued even during the first decades after the Second World War. There was a shortage of the most basic goods. Everything that could be made, could be sold. However, starting with his 60s, as prosperity grew, product variety increased. In response, industries diversified– following again, the principle of labour division– and introduced more first-time machines that could produce a variety of products– but at a cost of large setup, of large changeover times. The result was still production in large batches.

Economy of scale remained the leading philosophy. And the transfer of production to low-wage countries in the Far East and southern America was a further attempt to sustain mass production at affordable costs. Efficiency also marked modern logistics. The introduction of the container meant a big step forward in handling the ever-growing logistics flows. But due to this functional specialisation and shift of routine production to low-wage countries, supply chains tend to grow longer and longer.

And further, two oil crises of 1973 and 1979– That, for the first time, revealed also the weaknesses of the prevalent production philosophy. Raw material prices and interest rates raised sharply. And industrial companies started to realise that these long supply chains represented large amounts of stock and showed unfavourable cyclical behaviour, as demonstrated by Jay Forrester in his, Industrial Dynamics– already in early 1961. Long supply chains make it hard to quickly adapt to changing market demand. Companies became inert, and not prepared for the flexibility that a changing society requires. In addition, publications such as, Limits to Growth, from the Club of Rome, in 1972, stress the depletion of natural resources and the pollution of our natural environment at an exponentially increasing rate.

And for the first time, industry and the public started to realise that current supply chains were to become economically prohibitive and socially unacceptable.

And so, large-scale batch production– once applauded as the most efficient production philosophy– now became the cause of all evil. Fortunately, new technologies, in particular automation, proved to be at least a partial remedy. Computerised machining, robotised assembly, and flexible manufacturing systems helped to balance efficiency and flexibility, not only in production, but also in material handling and distribution.

Information systems such as MRP and ERP helped to synchronize and integrate supply chains. New production philosophies, such as just-in-time and lean manufacturing, focused on removing unnecessary stocks. As these were seen as a sign of a waste or slack that marked non-synchronized production. And gradually, we moved from an economy of scale to an economy of scope. But still, long and expensive supply chains– due to functional specialisation and dispersed production– continue to be the overarching story. At the same time, these supply chains contribute significantly to the gross national products of those countries for which logistics is a strong economic sector. Take my own country, the Netherlands, which has built itself a name as Gateway to Europe.

Trade and logistics, as a tradition, started already as early as the 17th century, when the Dutch erected the United East Indian Company, which by the way, turned out to be the first multinational ever. Large infrastructural measures were taken, resulting in excellent facilities at main ports, such as, the port of Rotterdam and the Amsterdam Metropolitan Area, including Schiphol Amsterdam Airport. Together, with a well-developed infrastructure, supporting logistic flows to the Hinterland.

But all this growth comes with a price. And more and more it’s realised that current supply chains are fundamentally unsustainable. Emissions of carbon and nitrogen oxide, as well as particulate matter, cause unacceptable environmental damage. Stench, noise, and increasing congestion further demonstrate the high price that has to be paid. In addition, the pressure of the infrastructure needed on land use gives rise to additional social and environmental problems– certainly, in densely populated countries. Problems of congestion and environmental pollution also put a high pressure on cities worldwide. As urbanisation continues, it becomes an unprecedented challenge to keep cities livable. And that includes a sustainable logistics planning and execution. And despite many attempts to turn the tide, the situation is worsening.

Partly also, perhaps, due to the strong growth of electronic commerce with its short delivery time promise and ease of return of unwanted products. In the next part, let’s see how we can respond to these challenges posed to us.