CHAPTER 1

Background

Supply chains have existed ever since humans began trading with other tribes. Archaeologists have found evidence of artifacts far from where they are known to have originated. In historic times, the civilizations around the Mediterranean were active traders and even ventured outside the Mediterranean to the west coast of Africa to look for items they wanted. The Byzantines, in the seventh century AD, developed interchangeable parts manufacturing and a supply chain involving the church and the army to support their wars against the Persian Empire.¹ Marco Polo established a global supply chain with Asian countries. From the 15th century onward, the nations of Europe established trade routes and global supply chains from America, India, the East Indies, and Africa. Some of these supply chains brought products that had been previously scarce or unknown in Europe, such as spices, rubber, tobacco, and cotton. Around 1850, an important industry in Baltimore, Maryland, was the manufacture of haircloth for covering furniture. The hair component in the cloth was horsehair from Siberia.² Global supply chains stretched around the world. Some supply chains brought shame, such as those transporting slaves to the Americas and Arabia. More recently, there has been a growth in global supply chains in illegal drugs, human trafficking, and banned substances such as ivory.

A big difference between merchants of old and today was the risks they took. Traders of yore had no GPS or satellite tracking systems, no e-mail, no telex, and no telephone or telegraph of any kind. The expression “when my ship comes in” stems from investors in ventures to the far-flung ends of the supply chains—stretching as far as India or the East Indies—waiting to see if their investments would pay off. They literally had to wait until the ship arrived many months or even years after embarking with no word from it in the interim.

Much of this current growth in global trade may be attributed to technological advances. Improvements in transportation, especially the introduction of containerization by Malcolm McLean in 1955,³ reduced the “transportation cost” barrier to trade and speeded the movement of goods. Communication improved dramatically starting with the first wireless transmissions by Guglielmo Marconi in 1895. Deregulation made it easier to trade, and the development of institutions to facilitate transactions and the increasing sophistication of the banking system all contributed to the expansion of global trade. Governments began to recognize the importance of trade, and trade barriers were lowered, especially after World War II. The theoretical nature of the economics of this reduction in transaction costs is described in Oliver Williamson’s Nobel Prize–winning work.⁴

Supply Chain Issues: Old and New

Some of today’s burning issues are similar or identical to those of 100 or more years ago. In 1771, Richard Arkwright built a mill in Cromford, England, which gave the English a competitive advantage in the manufacture of textiles. The English were serious about protecting their intellectual property; the penalty for attempting to leave the country with a copy of the plans was hanging! Samuel Slater built an Arkwright mill in the United States in 1791 by memorizing the plans and sailing to America, thereby starting the Industrial Revolution in North America.⁵ Throughout the first part of the 19th century, England depended on the American South to supply its mills with cotton. The issue of cotton became important during the American Civil War when there was a lot of debate in England over which side to support.⁶ Because of the Union blockade of Confederate ports, the price of cotton in London reached heights it would not reach again until 2010.⁷ Management of supply chains was important for both sides in the U.S. Civil War. Coffee for the troops, for example, was an important import for the Union army; the army would buy only whole coffee beans to prevent the vendors from “stretching” the coffee by adding sawdust or other contaminants. This was a clear case of lack of trust in the supply chain, and they devised a method to insure the security of the product (in other words, to insure that they got what they ordered).

The Theoretical Grounds for Globalization

The theoretical grounds for global supply chains were laid by Adam Smith in 1776 with the publication of his An Inquiry into the Nature and Causes of the Wealth of Nations. Prior to Smith, the mercantilist school of thought argued that a nation’s wealth was the amount of gold it had accumulated. Smith argued that wealth was the goods and services available for consumption. His argument for free trade and specialization (in his story of division of labor among the pin makers)⁸ eventually provided support for the repeal of the “corn laws” in England (basically, reducing the tariffs on agricultural goods). His theory of absolute advantage and David Ricardo’s theory of comparative advantage argued that nations should specialize in what they do best relative to other nations.⁹ This is essentially what globalization is all about.

The Scope of Globalization

Globalization today, of course, is on a much larger scale than it was over 100 years ago, and there are many more players—both firms and countries. In fact, the word “globalization” was scarcely used before the 1990s. The Economist reported that “the word seldom appeared” in its pages “before 1986, and began to be common only in the 1990s.”¹⁰ A classic example of the modern development of the global economy was the bidding for Arcelor, the steel firm based in Luxembourg. The two bidders were from Brazil and India. Twenty or even 10 years ago, both of these countries were considered to be underdeveloped, and neither would have had players in the bidding. Closer to home in the United States, the three largest U.S. brewers of beer are now owned by non-U.S. firms. Miller Brewing Company was purchased by a South African firm in 2002, Coors Brewing Company by Canadians in 2005, and Anheuser-Busch by Belgians in 2008.

Sometimes the links in the global supply chain are not as stable as one would like. In fact, most of the time the average person is unaware of the links and how events around the globe can have a serious impact on business around the world. Bolivia, for example, has the world’s largest reserves of lithium, a critical material in batteries for powering everything from our mobile phones to the new electric automobiles. Bolivia has been going through a lot of political turmoil. The Democratic Republic of the Congo, where revolution and fighting seem to be constant, is the world’s leading supplier of cobalt, a vital component in jet aircraft engines.¹¹ It is also a leading supplier of tantalum, which is used in smartphones.¹² There are many other examples—from rare earth in China to platinum in Zimbabwe (not to mention Middle East petroleum)—of how vital links in the global supply chain can become embroiled in political maneuverings. Even the U.S. Congress has gotten involved. The 2010 Dodd-Frank financial-regulation law identified four minerals mined in the Congo that are used to generate funds for violent conflict there. Companies are required to report to the Securities and Exchange Commission (SEC) “whether any of [the four minerals] in their supply chains originated in the Congo or nine neighboring countries.”¹³

In the 1950s, trade with other countries was so insignificant in the United States—about 5% of the gross national product (GNP)—that the government did not even measure GDP (gross domestic product) separately from GNP.¹⁴ The difference was trade, which was negligible. Today, trade is about 24% of our GDP. Global trade has become a significant part of America’s economic life.

Vertical Integration

As U.S. industrialization moved ahead rapidly in the last part of the 19th century, the competition among the industrialists was fierce. Personalities with large egos, such as Vanderbilt, Gould, Rockefeller, and Carnegie, dominated the economic scene. Partially because of these rivalries, the issue of securing dependable sources of supply became important. The answer to securing these sources was what is known today as vertical integration. Vertical integration was the incorporation of much or all of the supply chain into one company. The master of this approach was Henry Ford. Not only did he refine the modern discrete production line, but he vertically integrated his supply chain from the sources of iron ore to his steel mills, to his fabrication and assembly operations in his River Rouge plant, to the dealerships that sold his cars.

Vertical integration ebbs and flows like a fad. Firms will move away from vertical integration with the rationalization that they should concentrate on their “core competencies.” Then, as they run into problems, they move in the other direction. Boeing’s strategy for the development and production of its 787 Dreamliner jet aircraft has been to outsource much of the design and production of components, with the final assembly taking place in Seattle, Washington. The major structural parts of the aircraft are produced in nine different countries. Because of recurring quality problems in the fuselage assembly, Boeing decided to purchase a factory from a major supplier, Vought Aircraft Industries,¹⁵ to get more control over the quality—in other words, a partial vertical reintegration. The Chinese are investing in raw materials such as coal in Australia¹⁶ and oil in Africa to insure a steady flow of these commodities. Apple is “insourcing” some of its design functions from Asia to protect its intellectual property.¹⁷ The steel maker ArcelorMittal has purchased iron ore mines to insure a steady flow of raw materials.

Summary

Supply chains have existed since humans began specializing and trading. Their rapid development in recent years has caused virtually everyone on the globe to be touched by them in some manner. At one point in his life, the author lived in a small town of 4,000 people in Pennsylvania. There were three supermarkets in the town. One was American, one was Belgian, and one was Dutch. Most of the residents were unaware of the international connections of two of the supermarkets, but they were in contact with their global supply chains virtually every day.

The supply-chain manager should keep a sense of perspective and remember the following:

• Global supply chains are not new; they are just more extensive and pervasive.
• There is a solid theoretical basis for global trade, supply chains, and outsourcing stretching back over 200 years.
• Identifying products or firms as being from one country or another may be a fruitless exercise. Even our “locally grown” food may have been raised using equipment made of parts produced in Thailand or India and using fuel refined from Saudi oil.
• There is no absolute rule about producing in-house or using an extensive chain of suppliers. Each situation is unique and must be assessed on its own merits.