Supply chains will change.

Commentators typically use the term ‘globalisation’ when describing international trade; however, the actual situation is a gradual reduction in global trade and growth in intra-region trade. Therefore, as in the past and over time, supply chains will change.

Decisions concerning change to supply chains are influenced by at least four factors: geography; regional development; existing and potential trade agreements and economic trends. The previous blog discussed the effect on supply chains caused by the probable exit of Britain from the European Union (‘Brexit’) – an example of change happening now.

An often quoted aspect of Geopolitics is that while politics will change, geography does not. So, a country’s geography – its mountains, deserts, seas and rivers, plus fresh water availability, are a major influence in the development of a country’s supply chains for domestic and international markets. For example, when reviewing the supply chain logic of China’s Belt and Road Initiative (BRI), start by plotting the country’s geography and access routes to major markets.

What is a region?

Intra-region trade in the EU now exceeds sixty percent and within North America it exceeds fifty percent. But what is a region?

At the macro level, the world can be viewed as three major geographic regions: the Americas, EMEA (Europe, the Middle East and Africa) and Asia Pacific. Each of these are then sub-divided into more homogeneous regions; for example, the Asia Pacific region consists of five geographic regions:

• South Asia
• South East Asia
• East Asia
• Central Asia and
• Oceania

The term ‘Asia’ incorporates South East Asia and East Asia. But the Asia Pacific region is not static; future developments in South Asia could see an expansion to form a separate Indian Ocean region, incorporating all the countries that are touched by the Indian Ocean.

In the structure of international trade, a region can be defined within a trade agreement and therefore be whatever its proponents want. Trade facilitation agreements (incorrectly called free trade agreements or FTAs) are now the typical descriptors of a trade region.

As an example of size, the recently negotiated (but yet to be fully ratified) Trans-Pacific Partnership (TPP) Agreement is big. It includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

A region can also be a collection of adjacent countries in a continent, such as the European Union and the United States-Mexico-Canada Agreement. Sub-regions can exist between adjacent parts of different countries (such as the Greater Mekong sub-region, consisting of two Chinese provinces and parts of Cambodia, Laos, Myanmar Thailand and Vietnam. And regions can be within countries – the USA has eight economic regions.

The term ‘near-shoring’ was originally used in the context of American companies possibly returning production from Asia to or near the US. However, established facilities in Asia are more likely to remain for servicing the growing Asia region. The ‘Near-shoring’ term is better used to define an organisation’s business operations, grouped to service demand within a defined region and likely to incorporate cross border logistics and possibly, short lead time, responsive manufacturing.

Influences on region supply chains

Regions of whatever description, have two main influences on the design of their future supply chain: urbanisation and digital technology.

Urbanisation refers to the percentage of a country’s or region’s population living in urban areas. It also includes additional elements that contribute to the design of supply chains and inventory policy:

• the density of urban population – Sydney (Australia) would be only about 30 percent of its current size if it had the same urban density as Hong Kong
• potential development of satellite cities and towns,
• demographic spread of age groups – younger generations move to the cities for education and employment opportunities
• disparity of incomes between urban, satellite and rural areas

Urban centres contain more than 50 percent of the world’s population and are the drivers of productivity and economic growth, providing about 85 percent of global GDP. But, at the country level, urban population as a percentage of a country’s total population can have a wide range. In the Asia Pacific region it ranges from more than 90 percent in Australia, to over 40 percent in China and about 30 percent in India.

Satellite cities and towns within a two hour travel time (faster trains enable longer distance), have the potential to capitalise on opportunities from urban growth and provide public and private goods and services to their hinterland and for niche markets. However, this development model will require considerable investment in infrastructure, sustainability measures and communications.

The development of new technologies provide possible changes to how and where goods are made and distributed, increasing the capabilities of satellite towns. Increasingly, the potential of data connectivity and mobility will provide people with choices about where to live and how this influences their work and leisure.

The design of region supply chains will also take account of responsiveness provided through shorter distances and lead times and the benefits of fewer time zones and better understood cultures and business practices.

However, regional supply chains will continue to provide challenges:

• Transport volumes could increase, due to more ‘intermediate goods’ e.g. specialist components and sub-assemblies; produced and delivered to the next node in a chain for further value to be added
• Reliability (in full and on time) will often be more important than speed
• Agility is required in the operations of SME producers (providing intermediate goods), 3PLs and transport providers
• Improved visibility through supply chains, although systems and processes may not always be aligned to achieve visibility
• Increasing risks in supply chains. Requires building resilience into operations to recover from severe disruptions, whether the cause is human or natural
• Current and new trade agreements require a knowledge base within the supply chain group of organisations

The trend towards regional supply chains is a trend, not an overnight change and global supply chains will continue to function. Supply chain professionals therefore have time to review and model future supply chains and how they may affect their organisation.