Time to rethink the global supply chain

By kevin | Decision Making

Aug 03

The follow-on effects of the shock of high oil prices is moving to a new phase. Rage and denial are giving way to acceptance and reappraisal, at least in some circles.

One of the crazed cousins of cheap oil is what’s known as the “global supply chain,” high-minded words for what now seem like profligate practices where chickens are grown in the US, killed and shipped to China for processing, and then shipped back to the US for eating. Note here that words like “shippped” and “supply chain” are code words for burning fast quantities of fossil fuels to have Xian do something that Juan or John could just as easily do . . . if not as cheaply. Says the New York Times 

Cheap oil, the lubricant of quick, inexpensive transportation links across the world, may not return anytime soon, upsetting the logic of diffuse global supply chains that treat geography as a footnote in the pursuit of lower wages. Rising concern about global warming, the reaction against lost jobs in rich countries, worries about food safety and security, and the collapse of world trade talks in Geneva last week also signal that political and environmental concerns may make the calculus of globalization far more complex.

“If we think about the Wal-Mart model, it is incredibly fuel-intensive at every stage, and at every one of those stages we are now seeing an inflation of the costs for boats, trucks, cars,” said Naomi Klein, the author of “The Shock Doctrine: The Rise of Disaster Capitalism.”

“That is necessarily leading to a rethinking of this emissions-intensive model, whether the increased interest in growing foods locally, producing locally or shopping locally, and I think that’s great.”

Many economists argue that globalization will not shift into reverse even if oil prices continue their rising trend. But many see evidence that companies looking to keep prices low will have to move some production closer to consumers. Globe-spanning supply chains — Brazilian iron ore turned into Chinese steel used to make washing machines shipped to Long Beach, Calif., and then trucked to appliance stores in Chicago — make less sense today than they did a few years ago.

“Globalization” is nothing more than arbitrage with jobs and natural resources using low-cost transportation as currency. In information-based jobs, the low-cost currency is bandwidth and the universal adoption of English as the language of business (at least for now). In the global supply chain, it has been cheap oil.

I’m no futurist but I don’t see a worldwide collapse in oil prices coming, so I think it’s fair to assume that we’ll see new business models emerge that factor in a different energy footprint: Actually old business models.

At a larger level, it’s a good example of the importance/advantage of rethinking or reframing problems as a way of opening up new alternatives. In this case, the answer isn’t more drilling, it’s new thinking.

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