Global Dimensions of Supply Chains PDF

Chapter 2 GL OBAL D I M E N S I O N S O F S U P P LY C H AIN S Learning Objectives After reading this chapter you should be able to do the following: 27 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, som...

Chapter 2 GL OBAL D I M E N S I O N S O F S U P P LY C H AIN S Learning Objectives After reading this chapter you should be able to do the following: 27 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 28 Chapter 2 Supply Chain Profile The Impact of Changing Weather Patterns As supply chains have become more global in scope, executives became increasingly aware of the inherent risks associated with managing global supply chains. Initially, the focus was usually upon the risks associated with the complexity of managing suppliers, customers, and service partners who were separated by distance, culture, customs, language, business practices, etc. The threat or risk is also associated with intense competition from rivals in other countries as they became more efficient and effective in the global marketplace. Managing risk has become a major focus for supply chain executives in the twenty-first century and the scope of the risks has increased, especially in the area of weather-related risks. The latter concerns are usually associated with catastrophic events that can result in supply chain disruptions, stock-outs of needed materials and finished products, and of course the costs associated with emergency responses and preparation for mitigating the impact of the potential catastrophe. There are also more subtle risks associated with changing global weather patterns, especially global warming, which can transform global shipping patterns and influence geopolitics. The improvements being made to the Suez Canal and especially the Panama Canal have been discussed widely in various publications. The impact of being able to accommodate the new larger container ships has resulted in much discussion about maritime trade patterns with respect to port deliveries. Ports on the West Coast of the United States have benefited from the great growth in shipments from Asia even though some of the containers move relatively long distances from the ports to Midwest and East Coast destinations. When the Panama Canal can accommodate these larger size vessels, it will open up the possibility of more direct shipments to East Coast ports and possibly Europe. There is, however, another “mystical” northern maritime route that is likely to open up because of the Arctic ice melt being caused by global warming. This “Northeast Passage,” as opposed to the Northwest Passage across the Canadian Arctic, would provide a maritime route from Europe to Asia through Russia’s remote Arctic region. This maritime route could have a dramatic impact on supply chains by shortening shipping times between Europe and Asia by 35 to 40 percent and also shortening shipping times from Europe to U.S. West Coast ports. This alternate route would likely have a significant negative impact on Suez Canal traffic. The geopolitical ramifications of the Northeast Passage are perhaps even more important than the economic impact. For countries boarding the Arctic, there is much at stake in terms of the economic potential of unexploited natural resources, especially gas and oil. These developments are not going to happen in the near future, but a long-term vision for countries and businesses is critical. The debate over who has sovereignty over the North Pole will really heat up! Source: John J. Coyle, DBA and Kusumal Ruamsook, Ph.D., Center for Supply Chain Research®, Penn State University. 2-1 Introduction Global supply chains are dependent on the efficient and effective flow of commerce between and among the countries and regions of the world. There are numerous factors that can impact and influence the flow of global goods and services, especially economic and political factors. Additional important factors range from weather (see the Chapter Profile) to the threat of terrorism to demographics. The number of such factors that can possibly impact global trade flows are too numerous to discuss each one in detail in this chapter or the text. The authors used their judgment to select those important factors that will most Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Global Dimensions of Supply Chains likely impact and shape global trade flows in the twenty-first century. In other words, what factors are the “drivers” of global commerce and need to be discussed to gain an appreciation and understanding of global supply chain flows. Before discussing the global drivers, the rationale for global and regional trade will be summarized. 2-2 Rationale for Global Trade and Commerce Anyone familiar with economic and political history realizes that international trade is not a phenomenon of the twenty-first or even the twentieth century. Such activity can actually be traced to the Middle Ages when trade merchants from various countries traversed by land and sea to barter or trade for selected commodities not available in their own country. The exploits of European explorers and others have long been noted, especially their quest for new territory to annex, but trade was a very important aspect of their travels, viz., the opportunity to find and trade for valuable commodities. As European countries advanced economically, particularly during the eighteenth century, there was a growing awareness of the potential value of international trade. Adam Smith in his renowned treatise, The Wealth of Nations, provided not only a rationale for a market economy based upon competition, but also advanced a rationale for trade among nations called the Theory of Absolute Advantage. Smith argued that countries would be better off if they would trade commodities where each country had an economic or a cost advantage for one or more of the products that they produced, in other words, sell or trade products where they had a cost advantage and buy or trade for products where they did not have an advantage. Smith concluded that all participants in such transactions would be better off than trying to be self-sufficient. While the analysis was relatively simplistic, it was valuable advice, especially for that time period. The underlying logic of absolute advantage was also used by Adam Smith to advance the rationalization of what he called “division of labor” or “specialization of labor.” The latter concept led to mass production or assembly lines in manufacturing plants. The underlying logic was that the specialization led to increased aggregate output and lower unit cost, and provided an opportunity for regional specialization and inter-region commerce for an overall economic benefit. The theory of comparative advantage was advanced about 40 years later by several economists. They maintained that even if one country had a comparative advantage (lower cost) in the production of two products, they should focus on the production of the one that they had the greatest advantage and trade for the other. The analyses were also somewhat simplistic because not all of the relevant costs were considered. However, the logic was sound as long as total landed costs were considered. The importance of both absolute and comparative advantage is they demonstrate that global trade and related global supply chain flows can be based not only upon scarcity of items among countries but also differences in the cost of production with implicit benefit to all parties involved. As one would expect, later economists explored more fully the rationale of global trade and specialization. For example, the Factor Endowment Theory postulates that when a country has more of one of the four factors of production (land, labor, capital, and entrepreneurship), they may have a comparative advantage in producing one or more products. For example, a country with an abundance of capital and an educated workforce may produce high-tech products and import labor-intensive products and agriculture products. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 29 30 Chapter 2 The current more complex global economy means that there are more variables than the traditional factors of production that can provide advantages to countries and be a basis for global trade flows. Some of these factors help to explain the development of the BRIC (Brazil, Russia, India, and China) and VISTA (Vietnam, Indonesia, South Africa, Turkey, and Argentina) countries. India and China have developed and prospered in recent years because of improved global transportation, faster communication systems, population growth, education, and technology advancement. The discussion of contributing factors for global development that follows is very important for appreciating and understanding current global supply chain flows, and it also provides insights into future challenges and potential development. 2-3 Contributing Factors for Global Commerce and Supply Chain Flows Essential factors for economic growth and increased development of global trade flows include population size and age distribution, urbanization, land and resources, economic integration, knowledge dissemination, labor mobility, financial flows and investment in infrastructure by public and/or private sources, faster communication systems, and improved financial services for the effective flow of goods and services. These factors are the driving forces for globalization around the world and need to be discussed in order to understand the future course of global trade and development. 2-3a Global Demographics Table 2.1 displays the total population for the 10 largest countries for 2000, 2010, and 2019 as well as the projected population for 2050, which can be used to gain some perspective and understanding of current and future economic growth and development. The top 10 countries account for almost 60% of the total world population. Interestingly, two countries account for about 36% of the total, China and India. The United States is a distant third and China and India each have over four times as many people as the United States. Another interesting statistic is that India is projected to have a larger population than China by 2050 and that Russia (#9) is projected to have fewer people in 2050 than they had in 2019. The sheer size of the populations in China and India will provide these two countries with a potential economic advantage in terms of labor for growth as long as the economies can support that population size. The decrease in size for Russia reflects an aging population and has the potential of being an economic disadvantage in terms of labor availability and the social cost to support an aging population. Immigration into Russia could be an economic benefit, not only for labor availability in general but also to provide services for assisting seniors. As suggested earlier, not only is the total population of countries important, but also the age distribution deserves consideration. Figure 2.1 provides some insight into this area with median age data for four years. Each of the four years shows the median age for the world for that year (note that the last two years are projections), and then for more developed countries, less developed countries, and least developed countries. As one would probably expect, the median age is increasing, with one exception, over the course of the four years for all categories. Developed countries have the highest median age in each year, and the least developed counties have the lowest median age. The differences are generally explained by the level of education, quality of health care, and economic well-being. The difference in median age between the most developed and least developed is interesting to Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Global Dimensions of Supply Chains Table 2.1 31 Top Ten Countries with the Highest Population Rank Country 2000 Population (in thousands) 2010 Population (in thousands) 2019 Population (in thousands) 2050 Expected Population (in thousands) 1 China 1,268,302 1,336,681 1,389,619 1,301,627 2 India 1,006,300 1,173,108 1,311,559 1,656,554 3 United States 282,162 309,338 331,884 398,328 4 Indonesia 214,091 243,423 264,936 300,183 5 Pakistan 152,429 195,834 210,798 290,848 6 Brazil 174,315 184,405 210,302 232,304 7 Nigeria 125,581 165,905 208,679 416,996 8 Bangladesh 128,735 146,616 161,063 193,093 9 Russia 147,054 142,527 141,945 129,908 10 Mexico 99,775 114,061 127,318 150,568 3,598,744 4,011,898 4,358,102 5,070,409 59% 58% 58% 53% 6,086,149 6,872,671 7,560,290 9,488,153 TOP TEN Countries Top Ten Percentage of World Population TOTAL World Population Source: U.S. and World Population Clock and International Data Base (IDB), U.S. Census Bureau (https://www.census.gov/popclock/), and U.S. Census Bureau (https://www.census.gov/data-tools/demo/idb/informationGateway.php). Figure 2.1 Median Age of Population 50 45 40 40 36 Median Age 35 32 30 25 20 45 43 29 29 24 22 35 30 27 19 26 21 19 15 10 5 0 World 1950 2010 More Developed Regions 2025 Less Developed Regions 2050 Least Developed Regions Source: United Nations, Department of Economic and Social Affairs, Population Division (2017). World Population Prospects: The 2017 Revision, custom data acquired via website (https://population.un.org/wpp/Publications/). Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 2 32 note. It is 21 years in 2010 and 22 years in 2025 but drops to a projected 19 years by 2050. Overall, however, the challenge is evident that the more developed countries have a lower birth rate and an aging citizenry, which has implications for future economic development and prosperity. The challenge is even greater if you examine the data for individual countries. For example, Japan and three European countries are projected to have populations with median ages over 50 in 2030 (see Table 2.2). As suggested, the aging populations in these countries will result in increased health care costs and a reduction in the size of the working population or labor pool. This could result in a lowering of labor productivity and increased taxes. In comparison, many of the least developed countries currently have and are projected to have median age populations under 20 years old (see Table 2.3). The consequences of this phenomenon could mean high unemployment, scarcity of some resources, and a need for more housing, infrastructure (water, sewers, roads, etc.), education, and other services, thus straining their economic viability even more. However, the size of the potential workforce can attract industries that are labor intensive. Migration to countries with aging populations is another possibility if not constrained. From the perspective of world business and global supply chains, these data have some important implications relative to economic growth, market size and development, capital flows, labor availability, consumer needs, and utilization of natural and strategic resources. There will be challenges and opportunities for not only the private sector but also for the public sector. A related issue is urbanization with the increase in migration in many countries from rural areas to cities or urban areas. As one would expect, this shift will be most profound in the less and least developed countries of the world. The United Nations projects by 2025 Table 2.2 Ten Countries with the Oldest Populations 2019, 2030 2019 Rank Country/Area 2030 Median Age Rank Country/Area Median Age 1 Monaco 53.8 1 Japan 51.5 2 Japan 47.7 2 Italy 50.9 3 Germany 47.4 3 Portugal 50.1 4 Saint Pierre and Miquelon 47.2 4 Spain 50.1 5 Italy 45.8 5 Greece 49.3 6 Andorra 44.9 6 Hong Kong 48.0 7 Greece 44.9 7 Slovenia 48.0 8 Hong Kong 44.8 8 Republic of Korea 47.8 9 Saint Barthelemy 44.7 9 Germany 47.6 10 San Marino 44.7 10 Martinique 47.2 WORLD 30.6 WORLD 33.0 Source: CIA World Factbook 2019 (www.cia.gov/library/publications/resources/the-world-factbook/fields/343rank.html), Statista 2019 (www.statista.com /statistics/673014/top-ten-countries-with-highest-projected-median-age/), and Statista 2019 (www.statista.com/statistics/672669/projected-global-median-age/). Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Global Dimensions of Supply Chains Table 2.3 33 Ten Countries with the Youngest Populations 2019, 2030 2019 Rank Country/Area 2030 Median Age Rank Country/Area Median Age 1 Niger 15.5 1 Niger 15.7 2 Mali 15.8 2 Somalia 17.7 3 Chad 15.8 3 Mali 17.8 4 Uganda 15.9 4 Uganda 17.9 5 Angola 15.9 5 Angola 18.1 6 Malawi 16.6 6 Chad 18.1 7 Zambia 16.8 7 Dem. Republic of the Congo 18.2 8 Burundi 17.1 8 Burundi 18.6 9 Mozambique 17.3 9 United Republic of Tanzania 19.0 10 Gaza Strip 17.4 10 Zambia 19.0 WORLD 30.6 WORLD 33.0 Source: CIA World Factbook 2019 (https://www.cia.gov/library/publications/resources/the-world-factbook/index.html); Statista 2019 (www.statista.com /statistics/673014/top-ten-countries-with-lowest-projected-median-age/); and Statista 2019 (www.statista.com/statistics/672669/projected-global-median-age/). that 50% or more of the total Asian population will be in cities, with China having the largest urban population. A new category of cities has been identified, namely, Megacities (10 million or more inhabitants), which is a manifestation of the migration to urban areas. One of the interesting and important dimensions of the new Megacities is “where” they will develop. The prediction is that Asia will have 18 Megacities, Latin America will have four and North America will have two. Europe will not have any cities of this size. Mumbai and Lagos will challenge Tokyo for being the world’s largest city.1 The rise of the Megacities will present opportunities and many challenges. The private sector can play an important role in the development of these large urban communities. The sheer size and density of the cities will require much effort and innovation to address the infrastructure shortages of transportation, fresh water, sewage disposal, health services, educational facilities, etc. Meeting these needs will require public and private funding. Global trade flows and global supply chains will be impacted and businesses must be prepared to take advantage of and participate in the welfare of the citizenry.2 Migration was mentioned earlier as a means to balance the population distribution, especially with respect to age distribution. However, migration can be disruptive and dysfunctional when it occurs in large numbers under conditions of political upheaval. Such was the case in the middle of this decade with individuals and families fleeing their native lands to go to areas that were viewed as safe havens to escape the threat of terroristic acts, including death. Absorbing that crush of humanity strains the existing economic and social systems and causes unstable conditions. However, humanitarian concerns dictate that every effort possible be made to accommodate this mass migration from Syria and other nearby countries. The European Union countries have felt the major impact of the migration pattern because of their proximity and economic status. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 2 34 Table 2.4 U.S. Population by Age and Gender, 2013 to 2017 Population Estimates (as of July 1) 2013 2014 2015 2016 2017 316,234,505 318,622,525 321,039,839 323,405,935 325,719,178 Male 155,596,820 156,807,419 158,048,153 159,243,817 160,408,119 Female 160,637,685 161,815,106 162,991,686 164,162,118 165,311,059