Events, Shocks, Trends and the Supply Chain

Patrick Daly:

Hello, this is Patrick Daly and welcome to Interlinks. Interlinks is a program about connections, international business, supply chains, and globalization, and the effects these have had on our life, our work, and our travel over recent times.

In today’s program, I’m joined again by my colleagues from the Supply Chain Special Interest Group of the Society for the Advancement of Consulting to review some of the events that have impacted supply chains during 2022 and how these events sit within the context of the overarching long-term trends that are driving supply chain strategy such as demographics, technology, and the energy transition, among others. So, joining me today we have Diane Garcia, president of Lorraine Consulting based in Phoenix, Arizona. Welcome, Diane.

Diane Garcia:

Good morning. Hi, Patrick.

Patrick Daly:

Very welcome, Diane. And Lisa Anderson, president of LMA Consulting joining us from Los Angeles metro area in California. Welcome, Lisa.

Lisa Anderson:

Hello. Glad to be here.

Patrick Daly:

So Lisa, I might turn to you first to talk about how pandemic and war sit within the context of demographic change and technology advance, and how all of this is kind of affecting the prospects of businesses and supply chains in the US now, I guess, specifically, but maybe internationally as well.

This question came to me, I was listening to a podcast. I’m a bit of a history nerd, so I listen to these historical podcasts, and these guys were talking about the Battle of Trafalgar in 1805, a naval battle, was fought between the British on one side under Admiral Nelson, and the French and their reluctant Spanish allies on the other side under Admiral Villeneuve.

But it turns out that the technology of the British ships, of their guns, and very importantly, of their organizational processes onboard the ships, were far superior to their adversaries. And the Spanish were severely demographically challenged at the time in terms of manpower because they were bringing diseases back into Spain from the colonies in the New World, so they had a pandemic, or an epidemic if you like. And right at the time of the battle, there was an epidemic raging in Southern Spain of yellow fever, so they couldn’t get the men to man the ships, in essence.

So today now we have all of these ingredients again, we have war, we have pandemic, we have technological process change, and we have a shortage of people. So Lisa, with that kind of preamble, in the US today, how are all of these factors interacting and shaping what businesses are doing and are going to be doing over the next 12 to 18 months?

Lisa Anderson:

Well, that is quite the question that you bring up there. I would say that certainly the war that’s going on with Russia and Ukraine, and the impacts of the pandemic, the concerns about China and Taiwan, all of this turmoil is definitely going to impact supply chains. For sure in the United States they’re going to need to be bringing … most executives are looking at reshoring, nearshoring, which is also being called friendly shoring these days, because we really need-

Patrick Daly:

Give me that again. You said reshoring, nearshoring, and friendly shoring.

Lisa Anderson:

Correct. So friendly shoring is in essence nearshoring, but being careful about who it is that you’re bringing it … even if you’re bringing it closer to where your customers are, you need to be making sure that it’s a friendly country to-

Patrick Daly:

Yeah. So if you’re American, you wouldn’t be going to Venezuela or Nicaragua, for example.

Lisa Anderson:

Yes, you would hope not. I mean, right now, I know that the US is looking at Venezuela when it comes to oil, but we really, really should not be. So I know that … What I think is going to happen though is that we’re going to be definitely bringing back, reshoring is on the rise, and it’s definitely going to be on the rise for items related to national security, for healthcare products, for food, and really just for our executives overall.

Patrick Daly:

Sorry, computer chip production, I guess there are movements in that space as well, right?

Lisa Anderson:

Yeah, yep, definitely. There’s several computer chip factories that are coming back to the US. There’s expansion in Arizona, expansion in Texas, and really though, we’re going to need more than what’s already happening. The US is going to have to be really aggressive with everything that’s going on in the world right now because there’s China and Russia combined have a lot of natural resources, and there’s just a lot of risk. So we really need to be aggressive. And the pandemic has showed us that we really don’t have the backups in place that we thought we did, if you will, or at least not over … overall, it was much more concerning in terms of our ability to … And this has been true across the world, but basically we really need to take more control is really the theme.

Patrick Daly:

Yeah. So it seemed like in the years before the pandemic, although the kind of, decoupling from China probably even started in Obama’s time, so I mean, it was there already. There were issues there. But we kind of lived, from a supply chain perspective, we lived in a world where things were connected internationally and things were working well and we all kind of felt that we could get what we needed because it was in everybody’s interest to keep the whole thing running. And then all of a sudden it started to change, and we saw people ripping things up, whether it was due to political change, say in the US when Trump come in, or in the UK with Brexit. And then we saw Xi in China, and all of these geopolitical changes started having an effect on supply chains, and we kind of started to realize they weren’t working and then we were hit with the pandemic and we saw they really weren’t working. Would you concur with that kind of view?

Lisa Anderson:

Yeah, I think that we … Yes. Obviously the tariffs that started to come about during Trump’s time made people start to think about what they were doing. Really, if you looked at the total cost, adding up all of the intellectual property that was being stolen, the inventory costs, and the fact that labor costs were rising in Asia and in China specifically, if you added it all up, basically folks were, on non-commodity products, already made sense to bring production back. The issue really was that there was so much capital investment and you aren’t going to get your capital investment back, if you will.

I mean, if you have a large enough customer base, you’re going to serve China for China, which is what they were saying, how they were terming things last week at a healthcare conference. They were talking about China for China, India for India, which basically means each country, you can certainly leave production in Asian countries to serve that region of the world, but you basically would need to … If you don’t have production, let’s say, in the US market, Latin America, Mexico or somewhere, that’s closer to the customers that are in North America and South America, you’re going to have to start it up. That’s why there’s so much conversation about reshoring and nearshoring.

So basically each country or region is going to need to take more control and serve itself if they wish to have success, because there’s so much also going on, you brought up the pandemic, and the pandemic has created supply chain disruption everywhere, and pretty much we’ve learned that we’re a system of systems, which in essence means that every element of the supply chain is impacted by all of the other elements of the supply chain, so there’s no way to control all of those elements. And that, again, another reason why folks are thinking they need to take better control over what’s going on in their supply chain and are moving it and taking control one way or another, partnering with somebody or something.

Patrick Daly:

So from a US perspective then, reshoring or friendly shoring, what countries do you think in your neighborhood are likely to benefit from that in the coming years?

Lisa Anderson:

Well, definitely Mexico. I mean, we put together an agreement with Mexico and Canada when Trump was in office that improved upon the trade relations that we already had, and that’s, for sure … Actually, we’ve always traded with Mexico because of course, generally speaking, their labor is less expensive, so we can do well.

What I really see is we’re going to need to be trading a lot more with Canada as well. So Mexico and Canada for sure, although Mexico’s already started, and it’s been ramping up for quite some time, but we need to really emphasize it. And then also Latin America. So, it depends on the industry and the product. Some countries specialize in different types of products. For example, in this healthcare products conference, I actually led a panel about reshoring, or I didn’t lead the panel, I was on a panel about reshoring and nearshoring, if you will, and Costa Rica, the Dominican Republic, and Mexico, in a different order. Mexico is number one, Costa Rica is a close number two, and the Dominican Republic was number three in terms of medical devices, let’s say. But that’s just one product.

Patrick Daly:

Yeah. So there’s going to be a growing interest in all things Latin American then in American business over coming years.

Lisa Anderson:

Right. Yep. There should be. And of course that’s the concern about China as well, although I don’t want to absorb all the time here, but China is absolutely making moves on Latin America as well, and we better get our act together and ensure that we deal with that because there’s a lot of risk when it comes to China, especially these days.

Speaker 4:

93.9 Dublin South FM.

Patrick Daly:

Diane in the US, as in lots of other places, so I’m not picking on the US here, but it’s just that this is where you are. So in the US, inflation has risen sharply and it seems to have kind of embedded itself in the economy, and the Fed in response has increased interest rates aggressively and the dollar has risen. So how is this impacting what businesses are doing now and over the next year or so as regards investment and recruitment in America?

Diane Garcia:

Well, like you said, Patrick, inflation is on the rise and has been on the rise. So the businesses and clients that I work with are feeling the inflation rise, mainly because everything is just more expensive, so managing inventories, holding talent, recruiting talent, the supply chain issues that we’ve been seeing. I know gas and oil prices are starting to decline as compared to the pretty crazy prices that we saw over the last year or so, but just everything is overall more expensive, so these companies and businesses have to think about long-term decisions and how do you really survive and remain profitable? So I know that my clients I work with are just worrying about what’s going to happen long-term, and how do you make sure that you can sustain your supply chain and retain your talent?

Patrick Daly:

Yeah, it’s interesting, when the dollar rises, I guess two things happen. Your exports become more expensive, but I don’t think America worries too much about that because it does so much business internally, but your imports get cheaper, right? So therefore your inputs and if you’re kind of reshoring stuff to these Latin American countries, that’s probably going to favor America, would you think?

Diane Garcia:

Oh, I would agree. And as Lisa mentioned, what I’m seeing is the same behaviors that reshoring, nearshoring, trying to shorten your supply chains and trying to secure your supply because things have been in a lot of turmoil in the last couple years, and we continue to see, or at least we can envision additional turmoil to continue on. So trying to sustain these supply chains and making sure that you have what you need in terms of raw materials, like you said, it’s very keen on the minds of executives today.

Patrick Daly:

Yeah, it’s curious that some of the short-term events are very challenging, having to reconfigure your supply chains and having to go through inflation and so on. But I think if you look at it long-term, America seems to be in quite a strong position because you have your own energy, you have the global currency, you’re importing deflation, and granted you might have some issues with exports, but then you’re also going to be able to use the strong dollar to invest in other places. So, all in all, it’s strange how the short-term seems to be very negative, but the longer term looks like it might be quite favorable. And I know, Lisa, you’ve been saying around the place, I’ve heard you say this, that ironically this is probably the best of times. Is that why you’re saying it, or do you have some other thought as to why you think this might be the best of times?

Lisa Anderson:

Well, I do agree with you. I think that it’s interesting. There’s a lot of risk right now. However, you’re right. When positioned against the rest of the world, the US does have vast capacity when it comes to oil and gas production. It’s easy to get caught up in the fact that the current political environment is not allowing that to happen. However, that can change quickly.

But the reason that I am saying that I think it could be the best time, if you will, for a company that is forward thinking is because I think that it’s similar to the Great Depression in a way because there’s so much turmoil throughout the world, there’s a great resignation going on right now where we have a lot of folks who are retiring, companies are selling off and getting absorbed, so I just think there’s a lot of volatility, I guess you could say.

There’s going to be a reshaping of supply chains, folks returning closer to their customers, if you will. And then from the US point of view, as much as not every group likes manufacturing, manufacturing certainly creates jobs, to your point, so there’s … I think that the main reason though, although all those are good as well, is just that because there’s so much volatility and there’s going to be so much turmoil, I think that the companies that invest and are willing to take that risk and are … They’re going to have to invest, if you will, in order to bring production closer, because even if they outsource, they’re going to have to probably invest with the partner or do something to make all that happen.

If they’re thinking ahead, I think that they’ll have more opportunity now to innovate and to take market share and leapfrog the competition, because I think the competition is pretty concerned, if you will, about everything that’s going on and they’re thinking about cutting costs and they’re thinking, “How will I weather the storm?” Or maybe, “Do I even want to weather the storm?” Because they’re getting closer to retirement age.

And so with … Basically there’ll be an opportunity to succeed. It doesn’t necessarily mean that it’s just the US. I think anyone who’s thinking forward during this time will have an opportunity. But to your point, the US absolutely does have energy, whereas, for example, Europe certainly doesn’t. We have energy policies that are … Well, we have negative policies considering energy currently, but we didn’t. We were actually energy independent a couple of years ago, so we could get back there. And energy is a huge, huge issue in the world today.

Patrick Daly:

Yeah, you can be energy independent at will almost, and that’s what kind of differentiates you from Europe. In Europe, we’re kind of stuck. I think actually there’s going to be huge innovation in renewables and alternative energy in Europe because we don’t have any option because we don’t have the oil and the gas that we need, but we have lots of wind, we have lots of coast, we have lots of sunshine. So I think there’s going to be a big push forward in renewable technologies in Europe, and it could be a differentiator for Europe in the long run. We’ll see. Might we just-

Lisa Anderson:

Yeah, but you know what, Patrick, with that topic, I just wanted to throw out there that Diane and I heard last week that the oil and gas companies, in the US anyway, are investing more in renewables and that industry than any other, so I think that you’re absolutely right. I mean, just because we can be independent, we also, I think, have the opportunity to leap forward in the renewables space as well, in addition to Europe from that point of view. So I think there’s a lot of opportunity there as well.

Patrick Daly:

Yeah. You might just turn our attention, the three of us, for a minute, to the other big economic power on the world stage. So President Xi in China has had himself selected for a third five-year term, which is unusual. So his predecessor, Hu Jintao, had two five-year terms and then voluntarily stepped aside and Xi came in. So Xi has had two, but he’s not stepping aside, he’s got a third, and he’s basically filled the power structures below him with people who are his supporters, so it doesn’t look like he’s going to brook any dissents there. And it seems that the economy there seems to be kind of closing in more on itself, and we have these ongoing kind of travel restrictions that are ostensibly to do with COVID restrictions, but they seem to be kind of getting seduced by this idea, which China has been through various points over its history, to kind of look in on itself and sever connections with the outside world.

So, what would be your own view, Diane, on what China is doing and how that’s going to affect supply chains within China and between China and the developed economies in the west and America and Australia and Europe and so on?

Diane Garcia:

Well, I think we’ve been talking about it here. I think China is going to continue to isolate in ways, and as far as supply chains go, trying to I guess benefit or focus in on what benefits, like Lisa used the term China for China, so what suppliers and what industries will stay within China are I guess continuing on or were continue on. And I think companies are realizing that, what do they do to secure or how do they maybe continue to partner with China, but more so probably, how do they leave a lot of those US supply chains, perhaps are they leaving the region so that they can secure their supply in that area? But I think it’ll continue to become a problem and remain a problem for those who are looking to secure their inventories.

Patrick Daly:

Yeah. And Lisa, I think you had a question for me. Is that right? About what’s going on, on this side of the water?

Lisa Anderson:

Yes, that’s correct. I wanted to find out what you thought about the recent turmoil in the UK and how that might relate to supply chains and our future in Europe.

Patrick Daly:

Yeah. It has been quite, in a way, shocking, the political instability in a country like the United Kingdom that has a reputation or had a reputation over the years for being very kind of pragmatic and practical and serious and so on.

But I guess in a way, if we want to take kind of a positive view on it, it seems that their political system is indeed working, and they seem to have made the decision now, literally we’re recording this and literally as we were recording this it was announced who their new prime minister’s going to be, who’s a man called Rishi Sunak. And he has a background in finance, and he’s quite a pragmatic and serious politician I think in contrast to some of the recent prime ministers that they’ve had in the United Kingdom.

So in a way I’m strangely optimistic that a lot of the issues that they have had in part have been driven by the Brexit process over the last six years, which separated them from the largest trading zone in the planet, if you like, which was the European Union’s population of 500 million.

And when they exited, their economy was about 90% the size of the German economy and now it’s 70% of the German economy, so they have suffered obviously because of the pandemic and war in Europe, as all the rest of us have suffered, but they have this extra thing of Brexit, which has made it more difficult for supply chains to function between Britain and continental Europe, which was their major trading partner.

So I’m beginning to detect a bit of realism coming into the conversation in the United Kingdom as regards their economic prospects and the real effects of Brexit on supply chains and import and export. They’ve realized that many British companies have gone and set up branches in the European Union, which has taken investment out of the United Kingdom. A lot of small businesses in the United Kingdom have had to give up exporting to the European Union because it’s just too much trouble.

So I would anticipate that with the new Prime minister, although he was a supporter of Brexit, I think his version of Brexit will perhaps be different and they’re probably going to look to maybe a renegotiation of the deal that Boris Johnson negotiated with European Union, which was quite a hard Brexit, if you like, where they exited the customs union, they exited the single market, as well as exiting politically the European Union.

I think this new guy may look over the next couple of years maybe to come to an arrangement where they may become closer to the European Union in terms of customs union and maybe even the single market, and that will resolve a lot of supply chain issues, practical supply chain issues, say, and moving parts, particularly the automotive industry in the United Kingdom is very interwoven with the parts supply chain across the whole of Europe. So if they were to come closer and make some new arrangements within the common customs union, that would certainly facilitate trade in that regard.

Also, with food imports, they’re very dependent on food imports. They’re probably the industrialized country in the world that is most dependent on food imports from abroad. And a lot of that kind of fresh produce comes to them from continental Europe, and a lot from Ireland as well in terms of cheeses and dairy and meat and so on.

So yeah, I’m strangely, after the rollercoaster ride, I’m slightly more optimistic with regard to United Kingdom and its relationship with Europe and the positive effect that they may have on supply chains as we go into the next couple of years and beyond. So, how has that looked to you guys from the US looking at it from your vantage point?

Lisa Anderson:

Well, it definitely has looked chaotic, as far as-

Diane Garcia:

It has.

Lisa Anderson:

… what’s been going on lately, although just in talking with you, as well as other clients in the Europe region, it seemed like supply chains were continuing on. However, I think that how you described the future of the UK and Europe working closely together, I think, is what’s going to end up happening, because I think as I was talking about reshoring, nearshoring, and friendly shoring, certainly the UK and Europe are friendly shores as compared with all these risks that are out there between Russia-Ukraine, China, and all these other issues going on. So I personally think your more positive view at the moment is likely to hold.

Patrick Daly:

Yeah, so we kind of got lots of short-term challenges and really kind of impactful unforeseen events, but we’ve got some long-term optimism I think to bring to the conversation. So, guys, as always, we’re beaten by the clock here on Interlinks yet again, so many thanks you both for being here. Thanks again, Diane. Thanks, Lisa.

Diane Garcia:

Yeah, thank you, Patrick. Thanks, Lisa.

Lisa Anderson:

Absolutely. It was a lot of fun.

Patrick Daly:

You’re very welcome. And thanks also to our listeners for tuning in once again. So until next time, keep well and stay safe.