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Sunday, 30 September 2012

Will technology reshape global supply chains?

There are many forces at work in the global supply chain which are already beginning to reshape global logistics but one which has yet to have any impact is, arguably, changes in productive technology that could undermine the prime reason behind offshoring production to far flung countries ---lower costs, particularly labour rates.

Hitherto, the main reasons forcing a rethink on global supply chains have been concerns over rising costs, both at the production level and in distribution, poor quality, prolonged time to market, wholesale intellectual property theft and natural calamities. The last of these can be disastrous in a world economy geared to JIT (just-in-time) deliveries. There are also political risks but fortunately these have not had any impact so far. They may also be augmented by environmental concerns which lead to some form of taxes because offshoring has boosted carbon emissions. Despite all these risks, global corporations have not been dissuaded from offshoring to cheap labour countries on a significant scale because the law of comparative costs is still in their favour.

That law, however, could be turned against cheap labour countries by advances in technology which will give high wage economies the edge. Already, in some respects, America is cheaper than China in the production stakes and that gap is narrowing. But that trend could be galvanised through the application of robotics that will replace many low wage menial factory tasks.

An interesting example is Rethink Robotics' Baxter robot that can learn any menial assembly line task. It, and doubtless others like it to come, can increase the productivity of US manufacturers and so help them keep business that would otherwise move overseas. Mounted on a gurney, its two arms, five cameras and sonar sensor that detects motion through 360 deg around it, and enough intelligence to learn tasks within an hour, Baxter can work safely beside humans at remarkably low cost owing in part to its low price tag of US$22,000. Based on three years of an 8-hour shift, that is the equivalent of $4 an hour, almost half the minimum wage in Britain. According to Rodney Brooks, Baxter's brainchild, "We are spending hundreds of billions of dollars doing this kind of work in China and we want companies to spend that here, in a way that lets American workers be more productive." Baxter's upgrades will also be free to enable more complex tasks like two-handed manipulation, and early next year the company will release a set of programming instructions so users can create their own tasks and attachments for the machines.

Plausible though this scenario may be, and while it could have some initial impact, it could cause more problems in the long run of a political nature. Cheap labour economies will develop their own capable robotics when they see that their cheap labour no longer makes the law of comparative costs work in their favour. Production costs are important but these can be changed as market forces dictate. What cannot be changed, however is the exposure to natural and political risks and sharp changes in fuel costs and wage rates. Given that universally applied robotics will not give any one country a competitive edge, the more likely scenario to unfold is a trend towards regional manufacturing, with many companies wanting to produce their products as close as possible to their customers. This will have manifold advantages, like minimising the natural and political risks of stretched global supply chains, enhancing the environment, and lowering distribution costs. Given China's and other Asian countries' social problems of burgeoning populations and their growing aspirations, it is to be hoped that any changes in international trade patterns will be managed skilfully to avoid major social upheaval.
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