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The merits of globalisation are being drawn into question as supply chains struggle to cope with multiple shocks to the global trading system. Navigating these uncertainties is a major challenge for companies, especially as globalisation undergoes a fundamental reevaluation.
While such a review is justified, and disruptive forces will continue to roil supply chains for the foreseeable future, global growth remains an attractive proposition for companies. Hence, the challenge is how to develop new approaches to globalisation that mitigate the risks associated with doing business internationally. As they strive to meet this challenge, companies might look to the lessons learned in one of the powerhouses of world commerce: China.
Three steps to fragmentation
The events that led to globalisation’s fall from grace and fragmented the global trading community are complex and wide-ranging.
Yale University Professor of Economics and former World Bank Group Chief Economist Pinelopi Koujianou Goldberg offers a useful summary of the story. She maps the transition in three phases.
The first phase began in 2016 with the ascent of inward-looking politics in the United Kingdom and the United States, two bastions of globalisation. These developments were primarily reactions to inequality, argues Goldberg. The COVID-19 pandemic delivered phase two, which further undermined confidence in global commerce. Phase three arrived with Russia’s brutal invasion of Ukraine. Says Goldberg, the conflict eroded trust among countries and disturbed the peace, stability and predictability that are critical for the smooth functioning of global supply chains.
While international trade may have lost some of its lustre, global growth remains an important priority for many companies.
The same can be said for the other shocks that hit business communities worldwide over recent years and threw supply chains into disarray.
Companies were unprepared for the precipitous swings in supply and demand that unleashed the “bullwhip” effect (where overordering to compensate for supply uncertainties ripples through supply chains and becomes amplified along the way). Time-honored practices such as attuning supply chains to finely balanced, just-in-time manufacturing processes were severely tested as companies struggled to adapt to unrelenting market volatility. International supplier networks that took years to establish could no longer be relied upon.
Finding a middle ground
Many of these pressures are still being experienced today, and the war in Ukraine continues to cast a shadow over the world economy. However, companies need to adapt to “new normal” operations and reshaped perceptions of globalisation. And while international trade may have lost some of its lustre, global growth remains an important priority for many companies.
A key challenge is how to develop heightened responsiveness to constantly changing market conditions without blunting companies’ ability to compete internationally.
While appreciating the unique opportunities that come with global expansion and not abandoning it, enterprises can become more judicious about their strategy.
Achieving such a balancing act is akin to pursuing the so-called “China + 1” strategy, developed by companies in response to rising costs in China and trade tensions with that country. Followers of China + 1 are circumspect about sourcing there, while maintaining a presence in China. Thus, companies choose to avoid putting all their sourcing eggs in the China basket without withdrawing from one of the world’s largest economies, and one where they have already made significant investments. The strategy also acknowledges that China offers expertise and workforce skills that are not easy to replicate elsewhere.
Companies can take a similar approach to globalisation. While appreciating the unique opportunities that come with global expansion and not abandoning it, enterprises can become more judicious about their strategy. This requires enterprises to be agile enough to quickly change tack as trade winds shift and new opportunities come to light or existing ones suddenly become untenable.
Tech-based enablers of agility
Developing this level of agility is not a trivial task. For instance, decisions to near-shore or “friend-shore” (favouring doing business in countries deemed friendly) involve substantial analysis and planning yet must be taken expeditiously. The good news is that tools to help companies arrive at and implement such decisions are improving all the time.
In a survey of supply chain leaders, 34% said that adapting to new technology is the most important strategic change supply chain organisations will face five years from now.
Much of the technology derives from the advance of digitalisation in supply chains. For example, artificial intelligence, machine learning and a flood of new operational data are fueling advances in predictive analytics (exploring future outcomes) and prescriptive analytics (recommending specific actions). These methods are evolving rapidly, as are the networks of sophisticated sensing systems that supply much of the data.
Digital twin technology is another fast-moving innovation that helps companies to model change. Companies create digital replicas of supply chains they can use to test-drive strategies and different operational configurations before committing to making real-world changes.
In a survey of 211 supply chain leaders released by research firm Gartner in June of this year, 34% of respondents said that adapting to new technology is the most important strategic change supply chain organisations will face five years from now.
Advances in scenario planning—creating scenarios of likely outcomes—enable companies to anticipate change and develop playbooks that improve their responses to market shifts.
Supply chain design is another area where better tools support enhanced operational nimbleness. Visualisation technology and computer science make it possible to visually analyse the impact on cost and efficiency of changes in supply chain designs. Importantly, these systems provide platforms for collaboration between disciplines, including supply chain, marketing and finance. A proposal, say, to near-shore a manufacturing operation that requires the supply chain to be redesigned can be explored and evaluated in a multi-disciplinary manner, speeding up the decision-making process. Benefits like these are described in a new white paper from the MIT Center for Transportation & Logistics.
Read more: Living in Unprecedented Times: Focusing on solutions through partnership & technology by Valentina Ion, Director, Strategy Public Finance Industry, Microsoft Corporation
Facing the future with flexibility
In addition to helping companies flex with an ever-changing global business environment, these advances will improve their ability to manage future uncertainties.
A recent OECD analysis projects global growth to remain subdued in the second half of 2022, before slowing further in 2023 to an annual growth of just 2.2%. In 2023, global GDP is expected to be USD 2.2 trillion lower than estimates made in December 2021 before Russia’s illegal incursion into Ukraine.
Against this background, companies face unfamiliar global challenges including the fallout from climate change and increasingly stringent sustainability targets. International co-operation and highly adaptable supply chains are an essential part of companies’ responses to these challenges.