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Supply Chains 4.0 And The Global South

By News Creatives Authors , in Small Business , at September 20, 2021

CEO of Smartlink Communications. Global analyst, consultant and trainer, passionate about leadership, global communications and competition.

The mark of the current world is perhaps less the emergence of artificial intelligence or genetic engineering, which have been very much around for well over half a century, and more the global supply chain.  

Quite simply, never before at a point in history could the average income earner order an electronic product, which has been produced across many countries and companies, and expect it to be delivered in 24 hours. That miracle of economic drudgery is the global value chain, evolving in parallel with each Industrial Revolution, from steam power fuelling the Atlantic supply chains to digital technology fuelling the Third Wave of Globalization. Now, with the Fourth Industrial Revolution, they are themselves evolving into what has been billed Supply Chains 4.0.  

This entails the partial or full employment of technologies associated with the Fourth Industrial Revolution, namely industrial automation and artificial intelligence, all propelled by 5G telemetry and big data. Headlines have, in the past, gone ahead of results, but they are catching up. PwC estimates that investment in advanced supply chains takes just 1.8 years to recoup, fuelled by what the WEF and McKinsey estimate are 20% increases in productivity or between 3% to 25% reductions in raw material costs. Potential benefits also include, according to McKinsey, 30% lower operating costs, 75% decreased inventories and about 75% fewer lost sales.   

Where The Global South Is Now

The expansion in supply across the world seen during the Third Age of Globalization led some to call the world “flat” with a degree of Voltarian flamboyancy. In search of the lowest costs, many lumped together highly heterogeneous countries into an all-encompassing “emerging markets,” stretching from China to South Africa. Companies would equalize all to optimize production, and the market would prevail.  

Reality duly begged to differ. Shortages, logistical bottlenecks and poor interoperability meant that while many goods were indeed produced over globe-spanning value chains, the actual value-add happened in a few clusters that could deliver the infrastructure, educated workforce and technological edge required of modern production. The aforementioned “emerging markets” of the “Global South” showed the world not to be flat but jagged with a vengeance: The actual Global South enjoyed a commodities boom, while East Asia produced Samsung and Huawei.  

With resilience and technology as the new leitmotif, supply chains are now being upgraded in a manner that risks turning a mountainous gap into a chasm. Quite simply, the new shift toward Supply Chains 4.0 risks turning this into a permanent affair by further concentrating value-added segments of supply chains away from the likes of South America and Africa, which might enjoy a labor cost advantage over the likes of China, Vietnam and South Korea, which enjoy a technological and educational advantage.  

Business Adaptations 

With reality dispelling any mythology of Global South development, if it does not wish to be left behind, it needs a cohesive strategy for adaptation with government as well as business leaders fully cognizant that the future is not necessarily bright. Just as climate change and questionable state development raise risk premiums for foreign direct investments, global value chains polarize away. The feedback loop created can be harmful: Fewer GVC integration means less investment, leading to lower income growth and technology transfers, which leads to lower formalization levels, which leads to poor state development, higher risk premiums, lower investment and so forth.  

To avoid it, business leaders might wish to be cognizant of some aspects of Supply Chains 4.0:  

• Automation 

Labor cost advantages are increasingly illusionary: Nobody can compete with the automated, digitally integrated production lines that are increasingly the norm. China shows the way here, with its Made in China 2025. Instead of trying to maintain eroding profit margins until the lights are turned off, investment now in semi-automated production lines would allow maintaining positions in supply chains. The alternative is uncompetitive productivity and GVCs moving on, leaving companies dependent on a potentially protected domestic market and with little future beyond. Business leaders in the Global South are the ones ultimately making the fateful decision: Use a fleeting cost advantage for a few more years or move decisively toward the future. 

• Infrastructure 

Infrastructure was often dismissed as a relic of 1980s development theory otherwise tinged with crony capitalism, whereby developing countries would borrow substantially from Western countries to pay other Western companies for large-scale infrastructural development while pocketing significant parts of it. No more. Infrastructure ensures the just-in-time supply chains that companies have come to expect. The Global South, which often lacks the effective states that build good infrastructure, pays the price. PwC estimated at one point that Brazil is losing 12% of its GDP due to poor infrastructure. Business leaders in the Global South must push for reforms and infrastructural development now. 

• Workforce Development 

If that state cannot provide it, companies will have to step up to workforce training to a previously under-appreciated level. Quite simply, the Global South is awash with countries where many complete their studies without even basic literacy. A capable workforce that meets the requirements of Supply Chains 4.0 will have to be partially trained from scratch by companies themselves. Businesses in the Global South must develop training programs that allow for the often highly specialized knowledge associated with Supply Chains 4.0 or face stark shortages in the future. 

Conclusions 

Supply Chains 4.0 are a natural development of the Fourth Industrial Revolution, able to deliver higher productivity, better management and cost efficiencies. They also make countries in the Global South significantly less able to compete and business risks being increasingly isolated from GVCs. Responding in time, business leaders may push both their countries as well as their companies to adapt before eroding labor cost advantages give way to a country of businesses that find themselves to be speaking a wholly different tongue to the data-driven automated supply chains spanning the globe. 


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