Outsourcing/value chain deconstruction

The vast container ships that sail into the ports of most developed countries are often thought to be full of cheap electronics, toys and other finished goods, bound for shop shelves. The truth is more complicated, however. Many of the containers bring components, chemicals and other semi-finished parts for industrial processes.

Those components are moving along production lines that stretch around the world. The question is how fundamentally the vast changes in the world economy following the 2008 financial crisis – and a series of shocks to supply chains following recent natural disasters – will reshape the system.

Many companies have started to carry less stock, concerned that they might again be left with significant unsold inventory in a downturn. That has further increased the pressure on shippers to deliver goods to a tight schedule.

“We’re in a just-in-time world,” says Scott Davis, chief executive of UPS, the parcel and logistics company, a major beneficiary of the outsourcing trend.

Many manufacturers, facing rising wages in China and struggling to make quick changes to their product lines, have moved some operations to Mexico, Turkey and other countries nearer the world’s biggest consumer economies.

High oil prices are also a factor. Less time-critical goods that once went by air often move by ship or truck instead. And overall growth in freight movements is no longer outpacing economic growth to the same degree as it did for much of the past decade.

Many of the essentials of the international supply chain remain much as they were during the outsourcing boom of the 2000s, but are focused on serving consumers in a wider range of markets. Logistics operators are scrambling to acquire or set up better delivery operations in emerging markets.

“With projections that they will add 1m people a week for the next 30 years, we’re going to see cross-border trade stay very strong for years to come,” Davis says.

Robert Wright