In the November/December issue of Foreign Affairs (in print but not on the 'net - http://foreignaffairs.org - as of this writing) Marc Levinson (economist and author of The Box, How the Shipping Container Made the World Smaller and the World Economy Bigger), pens "Freight Pain" the subtitle of which is:
Even as Americans lament there being too much globalization, they are in fact on the verge of facing too little. Slower, costlier, and less certain transporation will not put and end to international trade, but the golden age of globalization is over.
Mr. Levinson is the economic authority on how containerization enabled business globalization and (much of) the corresponding outsourcing phenomena that has occured in the last fifty years or so. So, it's appropriate to have someone of his stature make the case that we have reached the veritable tipping point in the long tail of the global supply chain.
Levinson correctly points out that there is more to this than the implications of fuel cost:
Two factors are driving the retreat of globalization: rising transportation costs and diminished reliability, both of which are causing long-distance supply chains to lose appeal. Companies that provide American and European customers with goods made in Asia are rethinking their business models and seeking ways to shorten the distance between the factory floor and the store shelf.
Recent events involving dangerous toy manufacture and tainted foodstuffs certainly come to mind when thinking in terms of reliability - and those give pause both to the public and to supply chain participants - but there are many more infrastructure issues that are converging to impact long distance supply chain reliability - which further exacerbates the fact that container shipping costs have increased by at least 15% this year.
Regulatory issues are a factor. Environmental fees and costs associated with port improvements add to the cost of importing goods. Though not yet realized, there are potential increases in costs - that companies participating in supply chain must evaluate - that maritime organizations or governments may levy for emmissions or that may construct carbon trading schemes that will increase shipping costs.
Infrastructure delays and costs impact imports. From larger cargo ships to increasing security measures, delays and costs continue to add to both the cost and schedule time for container goods.
Domestically, fuel costs and infrastructure issues continue to raise the cost of getting inventory to a point where it can be distributed to consumption. Rail transportation - which takes the containers from the ports to the interior of the country - even though much more cost effective than long haul trucking - has increased by twenty-five percent in the last year. Rail and truck traffic congestion have reduced the speed of delivery by almost ten percent.
And Levinson opines:
Congested shipping lanes and highways make transit times uncertain, and this uncertainty hurts profits. Over the past two decades, much of the economic benefit of tighter supply chains has come in the form of lower inventories. In economic terms, inventories represent waste. Whether these inventories are sitting on warehouse shelves or on the deck of a ship, their owner has paid for them but has not yet sold them - and therefore incurs cost while waiting. If the time required to bring foreign-made goods to sale in the United States grows longer and if retailers and manufacturers are less certain about whether imports will arrive on schedule, the logical - if economically inefficient - response will be to keep larger inventories.
And having reached this tipping point - increase in cost, decrease in reliability, and infrastructure changes that motivate increasing levels of inventory - Levinson sets the stage for the next market dynamic that will change the shape of distribution:
Slower, costlier, and less certain transportation will not put an end to the growth of the international trade. But on the margin, where business decisions are made, the strategies of manufacturers and retailers will change. As transportation eats up a greater share of the total cost of an imported product, supply chains will shorten and production will move closer to home. Your local discount store may actually stock American products once again. In retrospect, globalization will likely appear not as an inexorable trend but as a temporary state in economic development. When prices for imported sneakers and ceiling fans start to rise in response to higher transportation costs, consumers may with that the golden age of globalization had lasted a bit longer.
Now this is the whole story as Levinsons tells it. But in 2006, in an interview with ChainLink Research - under conditions that Levinson now says are no longer characteristic of the global distribution environment - when asked about what kind of innovations are needed for domestic distribution efficiency improvement he says:
- The cost of short distance transportation is still expensive. A container from Asia to Indiana is fairly cheap. But moving goods in local markets is relatively expensive. What is needed here is for technology development to have an impact.
- The domestic transportation structure is quite stressed, and there is a need to rethink how this will be done. My sense is that shippers have not weighed in on this discussion of what ideas will ensure on time delivery, and other quality and cost issues around this. Are we talking about toll roads, so that their shipments will arrive in time? Are we talking about rail to fund improvements? However, the shippers need to get involved, since they are the ones who are in need of this outcome.
Even with the understanding that transportation of the container from Asia to Indiana is now problematic - local domestic transportation and infrastructure are even more stressed than they were just a couple of years ago.
We think that a missing part of this equation is an assumption that the distribution points in Levinson's consideration seem to be fixed. Our view is that it is apparent that the single point of distribution or the hub and spoke model of distribution is just as impacted by these developments as the transportation strategy is. We think that these increased costs - both the global costs - as well as local transportation - will give way to distribution models that demand point of presence everywhere domestically.
This has far-reaching impact as well. It is all part of the most powerful dynamics to impact supply chain since the 1960s.
