Anyone who took a basic economics class may still hear the phrase “specialisation and trade are the key to economic growth” echoing in his mind. In class, this is usually demonstrated using the example of wine and bread. Global value chains (GVC) follow the same logic for each of the sub-steps involved in the finished goods, thus allowing companies and economies to focus on what they do best, while buying the necessary intermediate goods and services from others. As a result, GVCs are becoming, on average, more fragmented and more complex to the extent that some researchers have renamed them “networks”.
Indeed, in most economies, significant shares of intermediate imports undergo a value-added process and are then re-exported. According to the OECD, more than half of the OECD’s manufacturing imports today are intermediate goods while more than 70% of the services imports are intermediate services (e.g. business services).
Lower barriers to trade and technological developments were key in making this global picture a reality. Think, for example, of how cheaper telecommunications enabled the outsourcing of customer services from the US to India. Information and communication technology (ICT) has also proved very efficient in collecting and communicating data, thus lowering costs and enabling better management and control of GVCs. Tracking flows within the supply chain with smart software and barcodes has already brought companies like Procter & Gamble double-digit productivity gains, for example. Radio-frequency identification (RFID) is expected to bring this to the next level by complementing the barcode with distant read-and-write capabilities. American Apparel, whose products already carry an RFID tag, deployed a grid of RFID readers in one of its shops. Once the system was switched on, it immediately discovered around 1,500 items that the store’s inventory system had reported as missing. Imagine the implications of such a globally deployed tags plus Internet connection. What you get is real-time global inventory data and a dramatic reduction in inventory shrinkage and redundancies.
Big Data and predictive analytics may take efficiency one step further by enabling companies to optimise logistics, forecast demand more accurately or better time their product launches. This will have implications for almost all sectors, from industrial products to entertainment. GE, for example, by sharing its customers’ blind data, has created a large database on industrial machines. According to the company, its monitoring centre is able to predict some 200+ equipment failures a month, thereby reducing unplanned down time.
With the promise of real-time optimisation and more-accurate long-term predictions, the hope is that value chains will become resilient. Smarter data and computing will also make it easier to stress-test supply chains, enabling the detection of possible vulnerabilities and testing of modifications leading to more reliable trade. An ex-ante analysis of weather patterns and of the supply chain structure of Thailand’s electronics industry could have helped prevent the two-to-threefold increase in the price of hard drives following the 2011 floods there, for example. Of course, having more interconnected and digital supply chains also means increased exposure to cyber risk. Discovered by Kaspersky Lab in 2013, “Icefog” is an example of a cyber attack focusing on supply chains in South Korea and Japan.
More dramatic disruptions may come from other technologies, however. With advanced manufacturing robots, more companies may follow Swatch’s example of using high-tech machinery to create a watch literally made in Switzerland. Cheap and versatile 3D printing could add to this trend by decreasing the advantage of centralised mass production. Put these two together and you might realise that your perfect outsourcing partner is much closer to home than you thought.
This article is published in collaboration with GE LookAhead. Publication does not imply endorsement of views by the World Economic Forum.
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Author: Amir Kohen is an author at GE LookAhead.
Image: A container ship departs Burrard Inlet in Vancouver, British Columbia March 6, 2009. REUTERS/Andy Clark.