There was a time when the world was flat. The world had not yet been explored and global trade only accounted for a small portion of supply to most regions. Goods were mainly produced locally, or within a reasonable distance for them to be transported, at least before the 18th century. This was especially true for perishable goods. Supply chains linked consumers and suppliers to what they needed—as long as it was close, or they had the resources to bring it from far away. And it used to be that this link was just physical—moving a product from source to consumption.
Over the last two centuries trade has grown remarkably, completely transforming the global economy. With today’s modern technological advantages like the Internet of Things (IoT), the connection between supplier and consumer is becoming faster through digitization. From UPS to Amazon to ocean shipping containers, consumers are no longer connected just to the link immediately upstream from them, now they can be “digitally connected” directly to their product even as it traverses the world. Through technology, each link can be connected to all the other links, creating a chainmail for your organization rather than a chain.
Globalization, the word used to describe the interdependence of economies and cultures across the world, makes all this easier too. It enables markets and regions to link to others much easier, and with less cost and risk. It drives technology development by creating standards that bring nations and economies together. It helps us negotiate free trade agreements to remove economic barriers that inhibit the movement of goods, information, and people. It fosters global development by fueling emerging economies. The impact of globalization on trade can’t be overstated, just as the impact of technology on the supply chain itself can’t be. If the current growth rate of globalization is any indicator, most economies agree it’s in their best interest.
According to DHL’s Global Connectedness Index, global connectedness reached a record high in 2017. “For the first time since 2007, the shares of trade, capital, information, and people-flows crossing national borders all increased significantly.” Since these flows travel along the supply chain, supply chains also have gotten not only busier but more complex.
And that’s why it’s also hard to overstate the potential impact of globalization on trade. Since everything is connected, if some of the links in the middle of your supply chain are impacted, the whole chain is. And now because of all the interconnectedness, the disruption doesn’t just travel linearly—it ripples out across the chainmail. When your business strategy depends on these linkages, with any disruption—or even increased risk—there is cause for concern. Of course, businesses can adapt over time. The links in the chain shift around until a new, stable supply is established. But in the meantime, ensuring your operations have the flexibility to scale up or down and to adapt to the fluctuations is critical.
Some nations have begun reevaluating the terms of their connectedness, most notably the US and the UK. Since 2016, the US has worked to renegotiate NAFTA, one of the most significant trade agreements ever signed. Under the new planned agreement, the USMCA, certain industries are strongly incentivized to source commodities such as steel from the US as opposed to Mexico or Canada. The US also has withdrawn from the Trans-Pacific Partnership (TPP) and begun instituting a series of tariffs aimed at balancing what it sees as lopsided trade with China, measures which China has reciprocated.
While in Europe, the UK voted in 2016 to withdraw from the European Union, primarily over concerns about the free movement of people to the UK from other EU member countries. This withdrawal is certain to cause disconnection economically as well, as many businesses located in the UK have said they plan to relocate operations to other European countries to maintain access to the EU’s single market. Even the free flow of information will likely be disrupted, as it’s not at all clear the UK will retain access to records kept by the rest of the EU. At the very least, this will all have to be negotiated.
Despite these few notable moves away from globalization, for the most part countries are becoming more interconnected, and key barriers between them are lessening. The trade agreement between the EU and Vietnam has been negotiated, streamlining trade and reducing duties and tariffs by 99%. The EU and Japan have also entered into a trade agreement, which went into force in February 2019 creating the “largest open trade zone in the world” according to the European Commission. And even though the US withdrew from the TPP in 2016, the remaining 11 nations continued negotiations, and the new agreement—The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—has since gone into force for each of the ratifying countries.
Supply chains benefit from many of the same dynamics as the global economy. When your collaboration with suppliers is improved, you streamline everything from supplier sourcing and onboarding to PO management and document transfer—without all the compartmentalization. When you can connect with all the various players in your logistics space, you’re able to see where your goods are in real time—down to the SKU level—and respond proactively to any potential disruptions. And when all your stakeholders, both external and internal, are working together on a single collaborative platform, poor communication, inefficiency, and delays are greatly reduced.
When the diversification and interconnectedness of your supply chain mirrors the global economy, the effect really is something like chain mail rather than a simple chain. Because you’re connected to many other links instead of just one, you enjoy the safeguards produced by this diversification. You’re not dependent on the single link in the chain before yours.
This post was published on February 26, 2019 and updated on February 26, 2019.