Along Comes a Trade War

For 30 plus years, the strategic trajectory of globalization was the development of low-cost sources of supply. This strategy fed the developed world’s demand for low priced consumer goods, but at a cost. Traditional industrial factory jobs shifted offshore.

In some sense, supply chain as a profession was born and matured in this era of globalization. Manufacturers created long and complex global supply chains and used economies of scale and process standardization to drive greater and greater efficiencies and cost control advantages.

About 5 years ago, this trajectory began to shift. Advances in manufacturing and logistics technologies as well as the rise of ecommerce supported what many supply chain strategists saw as a paradigm shift in supply chain network design. Cost was only one piece in a puzzle that had to balance the desire for shorter lead times, better access to markets, better service to customers, and societal and corporate sustainability objectives.

Taxing the Global Supply Chain

This trend most likely would have accelerated, with both positives and negatives for workers and industries. Now, however, we find ourselves in a trade war with China and the rise of government policies that treats trade, even among allies, as a zero-sum game—he who has a bigger trade surplus is the top dog.

All I will say on the politics of tariff imposition is that it strikes me as a classic example of a solution in search of a problem, and one that will only exacerbate the problem the solution is trying to solve. This might be an overly simplistic description, but Trump’s tariffs are really just taxes on the global supply chain, taxes that are intended to force the realignment of supply networks. This was happening anyway, so why do we need this tax?

Much ado About Nothing?

A more important question at this point is whether or not healthcare supply chain professionals should be overly concerned about this trade war. The markets are interpreting current government actions as a lot of bluster intended to stake out negotiating positions. Conventional wisdom is that cooler heads will prevail before any significant damage occurs. Supply chain professionals, therefore, seem to be taking a wait and see approach.

This isn’t unreasonable. Many provider supply chain organizations have multi-year contracts and wouldn’t feel the effects of price increases for at least a couple of years. Suppliers are probably more exposed, but do they have to make any decisions right now? Not really. Sitting back and expecting it to blow over is kind of logical.

The biggest issue with following this path is the uncertainty and unpredictability of all wars. What might seem like a simple, non-threatening move on the chess board may be interpreted differently by the other side and trigger a response that seems incommensurate with that move (i.e. the law of unintended consequences.)

It might be time then for supply chain professionals to develop more robust risk mitigation strategies and model different what-if scenarios around trade. Take the time to understand the level of exposure and risk at various sourcing locations and then try to answer the question, “what do I do if this trade war goes terribly wrong?” For instance, what if China decides to freeze all outbound shipments of goods to US ports? Unlikely yes. But worth having an answer for when we are talking about critical life-saving medical supplies.

Gumming up the Gears of Global Trade

I honestly doubt it will get as bad as all that. A more likely scenario is we will see a slow and steady increase in the price of goods and corresponding increase in friction in the gears of global trade. Goods may move more slowly across borders, increasing lead times and creating headaches for supply chain professionals.

A couple of years ago, I was at an event where Dave Clark, SVP of worldwide operations at Amazon discussed the flow of goods and the role supply chain efficiency plays in economic development. One comment has stuck with me. If inventory turns increased by just one turn globally, 1 trillion dollars would be released to the economy.

That’s the power of the global supply chain, and it is a measure of how flawed this war is.

As always, we welcome your comments and suggestions.