In the post-Covid era, the rethinking of risk offers profound competitive advantage, argues Retail Prophet founder Doug Stephens.
If a single image has come to define the failure of global supply chains amid the Covid-19 crisis it’s that of the Ever Given – one of the world’s largest container ships – seized in a diagonal death grip inside the Suez Canal, heavy with more than twenty thousand units of cargo aboard. Cargo destined for the shelves of Western retailers. For six long days the ship sat like an upended tortoise, before eventually being freed.
But, as we would come to understand, the plight of the Ever Given was just the tip of the proverbial iceberg. Indeed, the entire global shipping industry had seemingly run aground – if only metaphorically – as dock workers at many of the world’s largest ports reeled with the effects of the virus. Soon, merchants everywhere began to experience what many thought could only happen in third-world economies and banana republics – panic buying, empty shelves and bottomless backlogs to fill them. A shock to the system of western merchants and consumers who had largely operated with an assumption of unconstrained access to whatever they’ve wanted, whenever they’ve wanted it. How, we wondered, could our supposedly modern supply chains be so fragile?
On closer inspection however, it becomes clear that today’s modern global supply chains are a product of centuries of growth, largely uninterrupted by any meaningful progress. In fact, Covid-19 was not the first such derailment of the global supply chain. Less than 200 years earlier, a similar breakdown played out. One that brought an entire global industry to its knees.
America Ran on Dunkin’ Cotton
At the turn of the 19th century, a freshly constituted United States began forging its economy – an economy constructed principally of cotton, which, by 1825, had found significant demand in England and Europe. While cotton could indeed be sourced elsewhere, the US had several distinct market advantages. Boundless, fertile land, an objectively superior strain of cotton, and most significantly, slave laborers to bring the product from the fields of America to the ports of England. If anything, it was the use of slave labor that made it simply impossible to compete with the United States with on the global cotton market.
By the mid-1800’s two thirds of all cotton imported by Great Britain and Europe was being single sourced from America. India, Brazil and Egypt collectively struggled to make up the remaining third. According to some historical reports, close to 80% of England’s cotton imports came from America. Fully half of the factories in Britain at the time were for cotton production. Goods made from cotton comprised nearly 40 percent of all British exports. And about 1 in 5 British workers relied on the cotton trade to put food on the table.
Slave laborers load cotton onto waiting ships. (Image credit: civilwartalk.com)
Then on April 12, 1861, something happened that would throw America and global cotton supply into a state of chaos. Confederate troops fired on South Carolina’s Fort Sumter, plunging America into civil war. By July of that same year, a mere three months after the start of the conflict, supply of American cotton to England was reduced to nearly nothing, where it would stagnate for the better part of three years. The effects on England’s economy were devastating, with factory closures and rampant unemployment, coupled with meteoric levels of inflation on all cotton and cotton goods.
By the time the Civil War ended, and U.S. cotton exports resumed, England and other countries had learned their lesson, spreading their cotton imports across alternate sources of supply. Thus preventing the US from ever again recapturing such outsized share of the global cotton market.
At this point you might reasonably imagine that having experienced what many saw as the first true global raw materials shortage, the retail industry would have completely rethought the premise of supply chains and the inherent risk of putting all one’s eggs in a single, distant basket for the sake of low price. You’d surely assume that governments would never again allow their economies and labor forces to become so inextricably dependent on a single industry, commodity or source of supply.
But you’d be wrong.
Flash forward 76 years to America’s Port Newark. It was here in 1937 that trucking entrepreneur Malcom McClean had an idea. As he sat for hours while his cargo of cotton (yes, cotton) was unloaded and reloaded onto a waiting ship, McClean imagined how much more efficient it would it be if only his entire truck could be lifted onto the ship. A huge saving of time and labor, he thought.
McLean Trucking Company (Image credit: Gary Morton Collection)
In 1956, after almost two decades of planning, McClean’s musings became reality got when he loaded 58 metal containers in Port Newark onto the S.S. Ideal X – a recommissioned tanker ship that McClean had specially outfitted to carry uniform cargo containers on a maiden voyage to Houston, Texas. It proved a short journey with long lasting consequences.
McClean had managed to reduce the cost of loading and unloading cargo from $5.83 per ton to just 16 cents. And with that, intermodal transportation was born – an innovation that would revolutionize transportation and usher in a new era of supply chains.
The S.S. Ideal X on its maiden voyage from Newark to Houston with uniform containers on board. (Image credit: SAS)
Modern cargo ships like the Ever Ace, a leviathan of a vessel with a capacity of almost 24,000 containers have made it possible to venture farther and with more payload than America’s cotton barons ever could have dreamed.
This single innovation –the container ship, swung open the doors of the global economy to countries like China. Like the US of 200 years earlier China was a nation rich with land, resources and – it must be noted – a willingness to engage in varying levels of slave labor. The combination of ultra-cheap transport coupled with the fractional labor costs of Asian and South Asian countries drove a wave of hyper-globalization of supply chains. But in the process also opened global consumer markets to risks that would make the cotton collapse of 1861 look like a picnic.
Today, the vast majority of what is consumed in the world is made in the East. Roughly eighty percent of Walmart’s non-food inventory is made in China. Seventy-five to eighty percent of Amazon’s new marketplace sellers, in its top 4 markets are also based in China. Just as England found itself dangerously addicted to American cotton, today’s western economies have become alarmingly addicted to Asian manufacturing. Just as the U.S. of the 1800’s served as the world’s cotton factory to disastrous ends , Asia of the 1990’s and 2000’s became it’s everything factory, creating risks we are only now beginning to understand.
The High Risk of Low Cost
Although separated by almost 200 years of history, the cotton famine of the 1860’s and the supply chain crises of today share the same pernicious root cause. A myopic and often perilous focus on lowest landed unit cost. Procuring vast quantities of cheap goods has driven and continues to drive the agendas of most of today’s most prominent brands. Because most see price as the cornerstone of competitiveness. However, as my friend and supply chain expert John Thorbeck often says, we operate in an era where business leaders must once and for all appreciate that the singular pursuit of low cost comes with an extraordinary number of risks. Risks, he says, that make businesses far less competitive. The first being the risk to financial capital.
Most companies today, according to Thorbeck, are accounting only for the front-end advantage that low cost might afford them. What they’re failing to properly consider are the deleterious back-end costs that accompany it. For example, the massive orders and long lead times implicit in most globalized supply chains make responding to fluctuations in demand nearly impossible. Indeed, in a world where consumer preference can shift on a single influential TikTok video, fashion-based products may be out of fashion even before they reach the rack. The result is slow turns, deep markdowns, write-offs, and heaps of dead stock in warehouses, much of which eventually becomes landfill. Increasingly unpredictable weather events may delay, prolong, or even negate seasonal changes entirely, once again throwing demand into chaos. And given record levels of consolidation in manufacturing across many categories of goods, a hiccup (or sneeze) at a single factory on the other side of the planet can spur weeks of supply shortages.
The myopic focus on low price has lead to an epidemic of markdowns and dead stock. (Image Credit: Hip To Save)
It is also logical to assume that risks to global supply chains will become more frequent and profound as we become increasingly interconnected as a global community. Whether driven by economic turmoil, civil unrest, climate-driven events, or yes, the next pandemic, change today moves at light speed compared to only a few decades ago. In short, we’ve crossed over into an era where disruption is so frequent and fast-moving, that we must completely rethink and rebuild our supply chains. But how?
In talking with experts like John Thorbeck and others, it seems clear there are several essential areas.
Rebuilt for Shared Risk
Most supply chains are merely a loosely connected set of individual companies, each with their own goals, data, and resources, as well as an accepted share of the financial risk inherent in any supply chain. Often, within such groups, one party or parties will try to gain some material advantage over the others. Perhaps by seeking lower prices, more favorable terms, or any number of other concessions. To some this might seem simply like shrewd business. However, when this happens, it’s essentially one party attempting to shift its risk to another party or parties. If, for example, a retailer can secure a 10 percent lower price, it clearly lowers their risk to capital. The problem in doing so, however, is that it sets off a daisy-chain of risk shifting. Because, in theory at least, parties forced to take on more risk will likewise similarly seek to off-load that risk to others in the chain. Soon, trust suffers, performance wanes, corners are cut and links in the chain weaken, subjecting everyone to greater risk; risk that often only becomes fully exposed at the first sign of a crisis.
So, instead of simply shifting risk, brands should aggressively work to transform their supply chains into digital ecosystems where members share risk and work collectively to reduce it for all. An ecosystem of data, resources, along with a common set of tools for demand planning, business continuity plans, key material or product stockpiles, transportation contingencies and even inter-industry materials demands to avoid shortages due to spikes in demand across categories. The goals of the group may also include plans to regionalize a percentage of supply to provide a fallback position should a crisis arise. The point is that each member of the ecosystem protects not only their own interests but those of the group and in so doing, reduces risk and improves business outcomes for all, making every member stronger.
Rebuild for Transparency
Most retail buyers today know their primary vendors. They know who they are, where they are located, and may even have some understanding of their practices and reputation. However, when it comes to knowing secondary vendors (their vendor’s vendors), things get murky fast with most companies reporting little to no visibility into this layer of their supply chains. This is the very definition of risk. And too frequently today it’s one that is showing up to undermine the reputations of retailers and brands. In 2020, for example, the Australian Strategic Policy Institute for example, “identified 27 factories in nine Chinese provinces that are using Uyghur labour transferred from Xinjiang since 2017”. In all, 87 well known international brands were identified in the report as (wittingly or unwittingly) using these factories for production. Indeed, numerous studies have shown that beyond tier one vendors, most supply chains are essentially black boxes offering very little visibility, traceability, or transparency.
Whether sideswiped by environmental crimes or allegations of human right’s abuses, brands are quickly realizing that a new and radical level of supply chain transparency is essential – not only to avoid reputational damage to their brands but also to attract consumers. Seventy-five percent of whom in a recent University of Pennsylvania study indicated that a brand’s sustainability is an “important factor” when choosing products. It follows then that those brands that can supply consumers with verifiable data to back up their social and environmental claims will outperform. Technologies like RFID tagging and blockchain are already helping proactive brands begin better trace their products through the supply chain from point of origin to point of sale.
Consumer sentiment on corporate social and environmental accountability is converting directly into investor demands. In 2022, Reuters reported that “Investors managing over $130 trillion in assets have written to more than 10,000 companies calling on them to supply environmental data to non-profit disclosure platform CDP.” The CDP manages an open scorecard, listing participating companies, countries and regions and their disclosures on performance across issues like climate change, water security and deforestation. With increased pressured by the investment community for such disclosures, it’s only a matter of time before outlying companies become conspicuous by their absence and cut off from global capital markets.
In turn, such investor demands are forcing governments to accept the writing on the wall. If they hope to attract investment in their national economies, they and their corporate citizens will have to achieve above average performance on environmental, social and governance issues. It’s reasonable therefore to assume a more aggressive pursuit by government of corporate accountability in these areas. Failing to do so will send capital, growth, and prosperity shopping elsewhere.
Rebuild for Intelligence
For most companies today, supply chain planning remains largely a finger-to-the-wind exercise. Most use some combination of volume, velocity, and visibility to project supply and demand. Many still rely on fairly rudimentary data sets – stock on-hand, sales velocity, order lead-time, and in-transit order quantity. Sprinkle in some accounting for seasonality and you’ve got inventory management 101. A system that was feasible when the planet was less interconnected, and change moved more slowly.
But in an increasingly intertwined and fast-moving global landscape, these considerations only scratch the surface of what brands need to factor into their planning. Weather patterns, industry sales projections, consumer trends and macro-economic indicators are now also vital. Stepping out even further, what about geopolitical issues, transportation costs and environmental performance optimization? All these new and dynamic data points are increasingly vital. The problem is no human being can possibly consider all these things at once.
Therefore, the incorporation of artificial intelligence and machine learning into an organization’s planning systems is becoming a table stakes investment. One that is helping pioneering companies outperform competitors in both revenue growth and margin expansion. While most brands today are still playing checkers, forward-thinking brands are already beginning to play 3-D chess, modelling supply and demand data across dozens of new data inputs.
Rebuild for Good
And finally, beyond all the business cases supporting a rethink of supply chain goals and behaviors, there’s the human case. As primatologist Jane Goodall once said, “The most intellectual creature to ever walk Earth is destroying its only home’. A jarring truth and one that that retail has a conspicuous hand in facilitating.
A recent report indicates that “Container imports from America’s 15 largest retail giants in 2019 caused the same climate pollution as three coal-fired power plants or the energy needed to power 1.5 million American homes. These retail giants have produced 7.3 times more carcinogenic sulfur oxide emissions than all road vehicles in the United States combined, or 2 billion trucks and cars.” And that’s just the 15 largest U.S. retailers. The apparel industry is responsible for 10 percent of global emissions. And the next time you’re admiring the beauty of an ocean, know that beneath its surface lies 16 million tons of plastic. In fact, 90% of the plastic that has ever been created still exists, in some form today.
Retail’s lasting legacy (Image credit: As You Sow)
Our obsession with low price also exacts a human cost. Whether it’s the garment workers in Pakistan who are paid $112 US per month, the forced labor camps of China or the victims of factory fires and collapses in places like Bangladesh – our fellow human beings are paying an inhuman toll for our low-cost consumer products. But such abuses are hardly limited to foreign workers. As our lust for cheap products becomes increasingly insatiable, we in the west have become willfully blind to abuses closer to home. Whether it’s working conditions in the Amazon warehouses of America or documented instances of forced labor in Leicester England’s garment factories, we, as a society, have become increasingly accepting of human suffering in the interest of consumerism. Even when that suffering takes place close to home.
Regrettably, too many companies today take all this to mean that their goal should be to do less harm. This, says Cradle to Cradle author William McDonough, is the wrong way to think about it. Consider, he once said to me, your reaction if your local water treatment facility announced an effort to gradually, over time, reduce deadly levels of lead in your drinking water. You’d be outraged and demand that all lead be removed and removed immediately.
Becoming a Force for Good
Likewise, the goal of brands should not be to simply lessen the damage caused by their supply chains. Rather the aim ought to be to do zero harm and indeed even transform their business activity into a force for good. For many companies this might sound like a pipedream, yet inspiration for such transformation can be found around us today.
For example, denim production tends to be a messy business, and one that uses conspicuous amounts of energy and water, resulting in an effluent sludge containing dyes and a range of other toxins – much of which escapes through the process into local sources of drinking water. It’s been an inconvenient truth in the denim industry for decades and one that Sanjeev Bahl was determined to tackle head on.
Toxic wastewater from a denim factory in Xintang China. (Image credit: The Guardian)
Bahl is the founder of Saitex, a unique denim manufacturing company in Vietnam. He and his team devised an entirely new system of manufacturing; one that recycles 98% of all water used in the process (2% evaporates). Where heat and steam are recycled. Where 100% of the jeans are air-dried and biomass is used to generate heat. A facility where solar energy is used to generate electricity. Where ozone technology and lasers are used to replace old harmful methods for distressing fabrics. And to top it all off, Saitex reclaims the waste sludge from the process, turning it into bricks, which are then used to build affordable housing for Saitex workers – all of whom, as it turns out, receive wages well above industry and regional standards.
Saitex factories reclaim denim waste material in solid form to produce bricks used to build affordable housing for company workers. (Image credit: Bloomberg)
This is what being a force for good looks like. But beyond the obvious societal and environmental payoffs, Bahl has done something else. He’s all but completely de-risked Saitex as a supply chain partner, thereby harnessing a remarkable competitive advantage over his competitors, while also becoming a force for societal good.
So, it’s time. Time to fix a system that has, for at least 200 years, run amok. Time to not only repair but also reverse the damage done by a global retail industry addicted to low cost. But technology alone isn’t the solution. Digitalizing a decaying system, based on archaic goals rarely solves anything. Instead, we need to completely redefine our concept of “cost” for the tumultuous age we find ourselves in. An era where the true cost of every product now includes an array risks. Risk to capital, to brand reputation, risk to the planet and to humanity at large.
Blindly working to reduce unit cost is the competitive advantage of the past. Eliminating risk is the future.