Supply chain ‘trumps’ political pressure in making business choices

The global environment that characterizes the business world today has pointed out the importance of developing strategies that go beyond the geographical boundaries of one country. Nowadays, it is not uncommon to see a company that develops a new product in the U.S., manufactures it in Asia and sells it in Europe.

The world is becoming a marketplace, not only for selling, but also for buying. Wage rate differentials, expanding foreign markets, faster information technologies and improved transportation are breaking down barriers of time and space between countries, forcing companies to take a global dimension. Competing, and most importantly, being successful in this “new” world requires a different approach. 

{mosads}As mentioned by General Electric (GE) Chairman and CEO Jeff Immelt at Georgetown University on May 4, when he joined GE in 1982, 80 percent of revenue was in the United States. In 2017, nearly 70 percent of revenue will be global. They have customers in 180 countries and their exports exceed $20 billion.

General Electric’s U.S. workers earn high wages because they make leadership products that are sold around the world. “Globalization has made us become more efficient, more competitive,” Immelt said.

The essential question then becomes, ‘What makes some companies more successful than others?’ The definition of global supply chains is at the core of the answer, i.e., who makes what and where it is made become critical factors in determining how efficiently an iPhone reaches the end user.

Global supply chains are the response to the increasing integration of international markets, as firms try to remain competitive. More importantly, the battlefield is changing from “my company” against “your company” to “my supply chain” against “your supply chain.” As many say, we are competing with everyone from everywhere for everything!  

Therefore, the basic premise that politics and business are not related is fundamentally wrong. It is impossible to isolate the optimization of business performance, such as cost, quality and productivity from the externalities imposed by government policies, such as taxes, regulation and protection. That explains why supply chains are so extended for just about any business you can imagine.  

A company like Apple involves hundreds of suppliers around the world. A typical iPhone travels the world before reaching final customers. The constant struggle of offshoring and reshoring is part of the continuous search for the ideal balance between business and politics. It is myopic to assume that companies make drastic decisions overnight. Changes respond to strategic decisions where multiple trade-offs are evaluated.  

In research, I recently helped conduct with the Global Supply Chain Benchmark Study Consortium, we found companies are currently restructuring their global production footprints. Most firms engage in offshoring; reshoring does occur but seldom for corrective reasons. Firms localize production in developed economies and use developing economies as production hubs. This explains many of the trends we see with Apple’s latest announcement. 

Apple is not inexperienced in creating U.S. jobs. According to the plan, Apple is launching a $1 billion fund to invest in U.S.-based advanced manufacturing companies. This is consistent with the company’s recent strategies.

Apple has already created 2 million jobs in the United States. According to CEO Tim Cook, Apple has employed workers in all 50 states, boasting 80,000 company workers in areas like research and development, customer support, Apple stores and financial services. 

In addition to Apple, the companies affiliated with its supply chain contribute to providing U.S. jobs. As reported by Cook, U.S.-based suppliers, such as Corning, which provides glass for the iPhone and iPad, and 3M, which creates adhesive materials for Apple, add an additional 450,000 jobs. 

It is tempting to argue that Apple is responding to political pressure. I believe the response is more in line with the challenges companies face managing complex supply chains. As our research demonstrates, changes in supply chains are not decided overnight. They are more the response of a solid strategy developed over time. 

This is not a public relations move designed to get the federal government off their backs. The challenge is to decide what and how to outsource in order to maintain control over key elements that provide the core competence.

Many leading companies have realized that it is worthwhile investing to make sure offshoring and reshoring are properly executed and that they positively influence product development costs, inventory levels, after-sales service and the fulfillment of customer demand.

Is the political pressure tweaking the long-term strategy? No doubt, but it is definitely not the main driver. The amount and complexity of the “real” linkages in the existing global supply chains “trump” over public relations pressures.

Ricardo Ernst is a professor of operations and global logistics at Georgetown University’s McDonough School of Business.

The views expressed by contributors are their own and not the views of The Hill.