Time to Rethink Your Global Logistics

Some thoughts about changes Post Pandemic adjustments in supply chains.

It’s Time to Rethink Your Global Logistics

by Willy C. Shih and Adrien Foucault  in the HBR

Over the last three decades, companies have established wide-ranging global supply chains that have taken advantage of steadily improving scale economies in global logistics. Efficient and reliable ocean and air cargo have linked low-cost manufacturing hubs across Asia with major markets in the United States and Europe. Much of this global sourcing was driven by the cost savings reaped through labor arbitrage, cost savings that were so dramatic that it more than covered the expense associated with moving products across vast distances to markets, or the extra cost of carrying inventory in long pipelines.

Yet the disruptions in logistics networks caused by the Covid-19 pandemic have added to the woes of supply chain managers who have tended to focus narrowly on their production partners and less on their geography and the links that connect them. With some of the shifts already underway to diversify production and make supply chains more resilient, it is a good time for managers to take a more holistic view of logistics as a dynamic and evolving link in their supply chains.

Concentrated East-West Trade Lanes

The massive increase in global merchandise trade of the last two decades and the shifts in production from the West (United States and Europe) to the East (Asia, particularly China) were fueled by labor arbitrage and cost advantages, but they were powered by low-cost container shipping and air cargo. On the ocean trade side, subsidies for shipbuilding and tax incentives for shipowners combined with giant new Euromax container ships (starting with the Emma Maersk in 2006) brought a step change in lower costs.

To utilize this capacity efficiently, container lines built east-west networks with efficient transshipment hubs, creating high-volume trade lanes on the trans-Pacific and East Asia-Suez-Europe routes. Fueled by a race to deploy larger and larger ships, chronic excess capacity also led to irrationally low prices for transporting goods halfway around the world. ... '