Transforming the logistics and supply chain agenda

On February 18th 2011, Belgium – not used to being world champions at much – took the title from the Iraqis to break the modern world record for the longest period without a government; 220 days after last years June election. It is a sobering thought that, as the regimes of North Africa have their 1848, falling like dominos, and western media opines about the voice of the people and the triumph of democracy that the developed world would be best advised to pause for thought.

Looking for the X factor

Since 1989 and the collapse of the Berlin Wall the percentage of voters at Elections across Eastern Europe has declined dramatically and, as the current Irish Election illustrates, confidence in politicians in the Developed world is at an all time low. For example, the 2010 Edelman Trust Barometer gauged public confidence in business as low as 30 per cent in the EU and a further 74 per cent are convinced that as the crisis settles that the status quo will resume – so much for politics and democracy.

Then, there is the economy. In recent years we have seen confidence in unfettered and unregulated markets shattered and questions asked about the shareholder value riding roughshod over local values. Let’s not forget that it was Alan Greenspan, who explained the 2008 financial meltdown to a Congressional Committee as due to a collapse of self-regulating markets – a fact that he had not anticipated. Then, there’s Warren Buffett, one of the worlds most respected investors, who labelled those opaque financial instruments of structured finance responsible for the 2008 crash as weapons of mass destruction.

The poet T S Eliot wrote of the parochialism of time; a stance seeing all relevance in the here and now, dismissing the past as plain gone and the future as equally irrelevant to I, me, mine. Consider shareholder value. The average ownership of a share in the New York Stock Exchange is seven months. This is a recipe for short termism in business – quarterly results and volatile shareprices – and, in politics, presidential or parliamentary terms that reduce the incentive to invest in the long term.

Against this backdrop, it is perhaps not surprising that Michael Porter, the author of several classics on Competitive Advantage; the Value Chain and Cluster theory and co-author David Kramer, urge business leaders to adopt “The Big Idea: Creating Shared Value” (Harvard Business Review, January 2011) and break with the maximisation of shareholder value as magnetic north. In a nutshell, Porter argues that business has to factor in social impact and environmental sustainability as well as economic profit.

This thinking questions the growing gap between rich and poor – an average CEO in the USA earns 185 times more than the average US worker whilst the Mondragon Cooperative in Spain pegs CEO salaries to 5 or 9 times the lowest paid. Discuss. Further, Porter and Kramer highlight several business examples, like Nestle, where local considerations are factored in. This perspective is common to the Cooperative Movement but anathema to many MNC (Mult-National Corporations) who can be foot-loose with their FDI in what has been called the race to the bottom price for raw materials, semi-finished and finished goods.

This is where globalisation is not so much about market access for the many but for those 200 or so MNCs that dominate market share in all categories: the top 10 companies in Pharma have a 69% global market share; Autos, 77%; Retail, 25%; Seeds, 50%; Pesticide, 80%; Food & Beverage, 25% and, 3 mobile handset manufacturers hold 65%.  This closes rather than opens up markets building ever better, cheaper and faster supply chains from frontier markets to add value in consumer markets of the developed world. This de-localization is having real and potential social and economic impacts on communities and painting globalisation in a bad light.

As recent events illustrate, social networking can wire up protest very quickly and this will fast translate ill conceived growth plans into business risk. MNCs beware; this is the other side of market share where shareholder activism reacts to citizen (read consumer or worker) unrest. This is how politics pushes its way into prices, fuels inflation and social networking does the rest. Shareprice volatility is as much a fact of life these days as the weather or tectonic plates.

This is NOT an anti-capitalist or anti-market stance. It follows the line of CK Prahalahad’s advocacy of the Fortune at the Bottom of the Pyramid and Paul Polak’s observation that design can shift to serve the Majority world and make sense to developed world business. After all, we are seeing the first strains of shareholder activism as footloose funds challenge those MNCs with a weak presence in BRIC and so-called next 11 economies. This is business potential significantly dependent on market access and materials handling. Witness the Vietnamese and Malaysian textile industries going head-to-head for the Japanese market. Ex works, Vietnam wins hands down; factor in the better infrastructure and port turnaround and Malaysia seals the deal.

Here we argue that a transformational and innovation agenda embracing the specific needs of these frontier markets is hugely relevant and demands a fresh chapter in mainstream logistics and supply chain thinking and practice. It is not enough to graft boiler plate developed world solutions onto unique local problems, challenges and bottlenecks. Here are some of the points, in our opinion, that need further investigation if logistics and supply chain thinking and practice is to respond to this fresh context.

1. Markets. Market fundamentalism has distorted a number of perspectives; non more so than what a market is all about. First, it is difficult to claim that markets are free when they are increasingly concentrated in the hands of fewer and fewer MNCs. As with globalisation, there has been a tendency to see markets all converging to a single homogenous model. Reality is that diversity is more the norm and, in emerging, developing, frontier, devastated or dislocated markets all sorts of market dynamics are at work – the vast majority characterised by informal actors, processes and protocols. Livelihood matters more than lifestyle in these markets and real rather than consumer needs drive the agenda.

A transformational perspective questions the validity of both the Washington consensus with its emphasis on free and unregulated markets delivered by SAPs (Structural Adjustment Programmes) in places like Russia AND, the Beijing consensus with an emphasis on maximising access to minerals raw materials to fuel domestic Chinese growth. These projects offer cash injections to African economies but show little evidence of a local dimension. In fact, many local markets are being flooded with artefacts imported from China and threatening local traders. There is a need to explore more equitable relationships on the global stage. If not, globalisation could become a battleground of those who profit from versus those who lose out to global markets.

 

More needs to be done to understand and interpret these markets – it is not a zero sum game but in all likelihood multiple traditional and modern markets will co-exist.

2. Progress. Wen Jiabao, Chinese Premier, has lowered the country’s economic growth targets and declared that the world’s second biggest economy can no longer “blindly” pursue unsustainable expansion (Various Reports, February 2011). In an “online” chat – triggered by thousands of people attempting to take to the streets in protest against soaring inflation – he stressed “we want to put an emphasis on the quality and the benefits of economic growth; the fruits of development to benefit the people”. Elsewhere, the drive for sustainable growth has questioned a number of assumptions.
This is where Policy makes a difference for good or bad. Take bio fuels. Several developed world governments set targets that require a certain proportion of national energy needs to be met from renewable fuels – mostly bio-fuels. In practice, this means diverting crops such as maize or sugar into fuel from food; thereby exacerbating food shortages.

3. Governance. Growth and progress are impossible without a level playing field and far too many countries are wasting their momentum in petty or systemic corruption. This has been observed elsewhere and the role of governance and policy in the context of logistics and supply chain thinking is long overdue. For example, a typical emerging or developing world market is characterised by a Government with multiple departments handling logistics matters and, large projects being a function of patronage and influence rather than transparent bids won on technical merit and, local commitments on sourcing and skills development.

4. Infrastructure and connectivity. Despite the claim that we live in an increasingly “flat and connected world” (Friedman) the reality is that, increasingly, powerful nodal points of urban sprawl link up as rural areas decline. More needs to be done on hard (ports, roads, rail and air) and soft (telecoms and broadband) infrastructure projects in these markets. Even more needs to be done on intermediate infrastructure – the warehousing; cold and chill chains; truck fleets and the SME and micro firms that make this work. This is an asymmetrical world that is badly understood.

5. Understanding the informal market. The lines between formal and informal markets are blurred. Like it or not, many traders, even those who can be absorbed into the formal economy easily, have roots in and a capital base developed through unregulated trade. Mind you, so too did Joseph Kennedy back in the 1920s and, a number of Russian establishment figures today. And then, there are thousands of micro businesses worldwide that are deterred from moving to the formal market through an opaque or corrupt legal service that is not fit for purpose. We need to understand business at the margin far more than we do. Especially in an era of outsourcing.

6. Inclusive value chains or networks. It is estimated that the coffee growers earn no more than 7 per cent of the final price in the markets of the Developed World – and this has declined from over 25 per cent in the 1970s. Malcolm Harper has observed various supply chains in India and concluded that many need to be more responsive to local conditions. Set these facts against the remorseless concentration of trade into the hands of a few MNCs and the chances for wealth to spread in the local areas is slim. Extend this issue to environmental concerns and sustainability and the need to re-think supply chains becomes all the more acute.

7. Logistics and Supply Chain Flows. All supply chains, simply put, are about flows: physical; information; funds; people and waste. A transformational agenda does not reject the techniques championed and developed in lean and agile supply chains but argues for greater attention to the asymmetrical realities of locally based traditional low tech actors combining with modern high tech and highly leveraged international businesses. We need to understand far more how products, supply chains and the equipment used can be adaptable, affordable and more accessible to local needs. This can be manual handling systems such as Coca Cola in Africa; bamboo bicycles with long wheel bases used to ferry materials; shelf ready packaging adapted to maximise post-harvest performance.

8. Design. A transformational perspective looks to adaptability, affordability and accessibility in products and services. Take the Godrej Fridge with 20 rather than the average 200 parts; the bamboo built bike with the extended wheelbase to carry products in Zambia; the Haier washing machine adapted for Chinese farmers to clean produce for market; mobile phones that are used to aggregate orders and link remote rural communities or fisherman at sea with local markets. And, the use of design to add value to traditional crafts. There is real scope to explore a transformational agenda by harnessing design that respects the values and works with the needs of frontier markets rather than the shareholder value of the developed world’s MNCs.

9. Skills. All emerging and developing markets have an issue with how best to equip their own people to deliver the projects in infrastructure and industrial sectors. India needs an estimated 450 million more skilled people by 2020 and, yet there are only 3.2 million course places available per year as things stand. More innovation is needed to develop short, high impact courses rather than developed world courses that take months and are not fit for purpose in frontier markets.

10.  Localisation. Local context counts when we are looking to transform livelihoods and to deliver a sustainable “triple bottom line” of economic, social and environmental outcomes for all types of firm. In other words a balanced scorecard that does not use globalisation as a means to benefit the developed world at the expense of the majority.

Transformational Logistics is asking significant questions of mainstream logistics and supply chain thinking. It is not a silver bullet and, is no more than an umbrella term for this research agenda and, for techniques being developed in these frontier markets. Back in 2000, Parisian Economics students at the Sorbonne questioned the autistic view of market fundamentalism and the straight jacket that it had put on the economics curriculum.

Logistics is a much broader discipline but it would benefit from a concerted effort to open up the debate, the research and what goes on in the field in frontier and hybrid markets. This extends to Humanitarian Logistics and the need to extend thinking and improve performance after the Emergency. What happens when the humanitarian emergency teams leave and local solutions have to take root and deliver?

After all, without the transformational potential and multiplier impact of logistics and supply chains in the Majority world potential will stall and, real issues will remain unresolved. For example, India is not alone in seeing 30 to 40 per cent of the harvest rotting on the way to market; neither is Russia the sole economy rich in minerals but failing to close the gap between rich and poor. And China’s growth trajectory has seen energy demand surge 220 per cent compared to a world total of 20 per cent and since 2006, China has accounted for 75 per cent of the global increase in coal consumption and 60 per cent of the increase in oil use.

Meanwhile, better, cheaper and faster supply chains continue to benefit consumers in the developed world and fail to add value at source where economic, social and environmental sustainability has an impact on livelihood and, when all is considered, collective global security – especially as Arab unrest pushes politics back into the oil price. These notes could be a research manifesto of benefit to governments, aid agencies, business and academia alike. This is the stuff of Transformational Logistics.

Share this:
Share this page via Email Share this page via Stumble Upon Share this page via Digg this Share this page via Facebook Share this page via Twitter
This entry was posted in T L thinking and tagged . Bookmark the permalink.

6 Responses to Transforming the logistics and supply chain agenda

  1. Pingback: Transforming the logistics and supply chain agenda …

  2. sravea says:

    Very interesting and informative post!…..

    very well focussed on the 10 areas of investigations.they play a major part and bring change.

    i really enjoyed myself reading the post Rob!!…

  3. Karen Hughes says:

    Very comprehensive look at the complex world of business and trade! The massive disparity in wealth throughout the world is indeed the root cause of terrorism and wars. The battle over collective bargaining in the US is merely a means for the fat to get fatter! Vocational education focused on local needs, which has everything to do with local economies is the long term, single most important factor in developing/ improving any economy.

  4. John Ward says:

    I read this after pulling together an essay on logistics and felt frustrated. We are preparing logisticians for a lean or an agile set of products for the developed world. We are not developing the skills set for these markets. This is hits the right chord. It should be part of any developed world logistics effort. If not, why not?

  5. Marianne Saska says:

    Very interesting points! I really enjoyed reading this.

  6. omkar Kaligatla says:

    I would like to include the price of crude oil to be one of the important to be discussed as it would be effect the logistic operations and 3PLs which support the business in this economic state. President of USA Barack Obama outlined his plan to reduce the oil imported into the United States by one-third in the next decade, and wanted to be replace it by Bio fuels and Natural Gas, this proposal was warmly greeted by a supply chain sustainability expert..

Leave a Reply

Your email address will not be published. Required fields are marked *

0ptye

Please type the text above: