Why supply chains are about to be flipped

The supply chain will be undergoing significant tweaks as emerging markets fuel economic consumption around the world.
Written by Larry Dignan, Contributor

The growth of emerging markets and the demand they can bring will turn the supply chain upside down in the years go come.

The supply chain model to date goes like this:

  • Asia makes stuff and provides cheap labor;
  • Developed nations buy it all.

That supply chain pecking order, which took decades to cement, is going to change in a big way, according to Victor Fung, group chairman of Li & Fung. Never heard of Li & Fung? Li & Fung started out in fashion as the conductor of a global supply chain. Today, it manages supply chain for high volume time sensitive consumer goods.

The Li & Fung model has been highlighted in numerous innovation books. Chances are that shirt on your back somehow ran through Li & Fung’s supply chain network.

Fung, speaking at IBM’s Think conference in New York, said economies and their associated supply chains will have to adjust to one key reality: Demand won’t be onshore in the U.S. and other developed economies.

“For the first time, demand is coming from countries that were traditional producers,” explained Fung. “That means it’s a much more nuanced world. It’s a total shift in how the supply chain operates. You’ll be sourcing everywhere and selling everywhere.”

Fung’s home turf in China will also be rebalancing as it moves toward more domestic consumption instead of exports. Toss in the Chinese government’s plan to raise wages and create more of a middle class and there are a lot of supply chain ramifications to ponder.

Among the moving parts via Fung:

  • China won’t be the cheapest place to manufacture goods in the world.
  • A supply chain restructuring will distribute work more evenly around the world.
  • The supply chain is at an inflection point where costs take a back seat to speed and a fast order cycle.
  • “The supply chain will move closer to you and pull jobs back into the country (referring to the U.S.” he said.

Higher supply chain costs will be tolerated as long as velocity remains fast. The main supply chain competency will be spinning up factories and manufacturing quickly.

Boeing CEO Jim McNerney largely agreed. The global supply chain will become more than finding low-cost labor pools. “Companies will source and sell in the same places,” he said.

“The world is going through a period of major change,” said Fung. “You really have to keep an open mind about what’s going to be changing next.”

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