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The Global Supply Chain Equation

September 1, 2020 | Commentary

  • Supply chains are the steps in the production process that occur as manufacturing becomes more specialized.  For centuries it has had global elements, but the last 30 years has seen a rapid acceleration in the process as trade barriers were generally reduced and transportation improved.
  • The evolving global supply chain is largely driven by manufacturers seeking competitive advantage from lower costs.  As long as trade was relatively free this process accelerated, first primarily to China and then to other low-cost countries around the world.  However, trade wars and the COVID-19 pandemic have added an understanding of uncertainty in the mix.
  • Risk of supply chain disruption can be mitigated by taking control of more of the steps, owning directly more links in the chain and locating them where they are less exposed to political or natural uncertainties like pandemics.  All of this comes at a cost.
  • The quest for the absolute lowest cost should never be the only focus of manufacturing decision making.  Being able to sleep well at night, knowing that supply chains are secure, is worth somewhat higher prices.  When these price increases show up in CPI and PPI, they may appear inflationary.  But such cost increases are mostly one-time events, and unless the manufacturers have been awarded monopoly or cartel power, there should be no sustained pressure on inflation.

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