Supply Chain Clusters - Industrial wastelands of the future!
Written by Dave Alberts, Director of supply chain consultants Crimson & Co
We all know that the geography of the modern global supply chain and the concentration of manufacturing in specific areas make supplies of many components particularly vulnerable to disruption. For example, a quarter of the world’s hard drives come from a relatively concentrated area around Bangkok. Clearly there are disadvantages to sourcing products from countries that suffer from extreme weather conditions, especially when supply is so geographically focused.
The Tsunami in Japan wreaked havoc on businesses and supply chains alike, with widespread effects across the globe. The floods in Thailand caused two-thirds of the country to be affected causing major supply problems, driving global prices higher. Companies such as Western Digital and Honda Motor were forced to stop production and some Japanese car manufacturers such as Toyota and Nissan also experienced production disruptions. Sony temporarily closed its facility in Ayutthaya and Seagate Technology had its production of hard drives affected. These are the obvious disadvantages of ‘clustering’ but some studies have shown that similar businesses located together in business or industry clusters do demonstrate seemingly better results through:
· Increased productivity via shared technology and knowledge, easy access to employees, training programmes and research and academic institutions
· Competitive advantage with the close proximity of customers and suppliers making end-to-end optimisation easier
· Increased innovation with more direct customer relationships allowing businesses to recognise new innovation opportunities and share resources, intellectual property and information
Singapore has since the mid-seventies developed a thriving electronics industry comprising of large and small original equipment manufacturers, and suppliers who manufacture a range of products, subassemblies, components and parts for both the industrial and consumer markets. Also, modern high-tech clusters often group around high profile universities to leverage research. Silicon Valley is near Stanford University, and similar high-tech clusters gather around MIT close to Boston in the United States and around Cambridge University in the United Kingdom. The Silicon Valley cluster has now evolved beyond technology to become a hotbed of activity for the development of a wide range of disruptive business models.
But are these clusters sustainable when you strip away the support provided by regional bodies and agencies offering industry friendly incentives and a range of other benefits?
A strongly developed cluster does push up wages across the industry. These clusters can also increase some of the other costs of doing business such as land and property prices and rents. And even the physical location should no longer be a source of competitive advantage in an era of global competition, rapid transport and high-speed telecommunications.
So, the world's increasingly global businesses should be above and beyond geography. But unfortunately supply chain folk continue to consolidate sites largely for all the wrong reasons, including worries from investors about the ‘number of dots on maps’, and a general feeling that fewer and therefore bigger sites are better. This has involved closing flexible low cost facilities and concentrating in heartland sites, which are largely there for historic rather than optimisation reasons. Given that production technology has hardly changed and the economies of 24 hour working are low, little has been relatively gained from this change but great deals of flexibility and closeness to markets & customers have been lost. But at least it has eased the supply chain directors travel schedule!
In developing markets you could argue there is a temporary advantage from clustering in obvious bridgehead locations located close to logistics hubs allowing relatively fast shipping “up-country”. But there is very little clustering logic that drives close location. The technical skills are relatively stable and can be either recruited anywhere or can be relocated without much difficulty – it’s not like the cross-fertilisation you get in electronics.
Eventually the economic benefits will wane and unless you can use the cluster as a platform to develop a stream of innovative products or disruptive business models to drive continued growth, (like in Silicon Valley) industrial wastelands beckon.
Will Public Procurement Budgets Increase in 2021?
Procurement is more than just a private enterprise. COVID-19 reminded us that sourcing materials is an essential part of the government’s role. Throughout 2022, tiny departments sourced massive amounts of personal protective equipment (PPE), medical supplies, and emergency vaccines and testing kits. Even non-procurement professionals were pulled into the fray, as frantic timelines demanded nothing less.
According to Celeste Frye, co-founder and CEO of Public Works Partners, the crisis brought procurement to the attention of skilled employees who had never considered it. As non-procurement personnel stepped up to help their coworkers, many found that they’d stumbled upon a critical and rewarding job. “Existing public employees have seen the essential nature of the work”, Frye said. “[They’ve] gained some critical skills and possibly [grown] interested in pursuing procurement as a longer-term career”.
Small, Local Suppliers Take Charge
Frye, whose firm helps organisations engage stakeholders and develop long-term procurement strategies, thinks it well worth the effort to open one’s mind to new opportunities. Cooperative contracts, for instance, can help public departments and municipalities save money, time, and effort. By joining together with other towns or cities in the region, public procurement teams aggregate their purchasing power and can drive better deals.
These cooperative contracts have the added benefit of advancing equity. Smaller suppliers that struggle to compete with established firms for government contracts can act as subcontractors, helping big suppliers fulfil bits of the project. Once they get their foot in the door, small, local, and disadvantaged suppliers can then leverage that government relationship to take on additional projects.
Especially as governments start to pay attention to procurement resilience, public procurement departments must expand their requests for proposals (RFPs) to take into account innovative solutions and diverse suppliers. According to Frye, Public Works Partners—a certified female-owned firm—has benefitted from local and state requirements that specify diversity.
Post-Pandemic Funding Swells Procurement Budgets
And the pandemic won’t be the end of it. City governments need to build sustainable energy infrastructure such as solar panels, charging stations, and recycling plants, ensure that masks and medicines are never in short supply, and source new technologies to keep up with cloud and cybersecurity concerns.
Public procurement budgets will likely increase to match demand. As Peter Ware, Partner and Head of Government at Browne Jacobson, explained, “in a non-pandemic world, the [U.K.] government spends on average around £290 billion on outsourced services, goods, and works...anywhere between 10% and 14% of Gross Domestic Product (GDP). Post-pandemic, city procurement will only increase as national governments provide local divisions with emergency funding.
And in truth, government employees might jump at the opportunity. Frye noted that public procurement could give immediate feedback on new programmes: “[Procurement] is where new laws and policies ‘hit the road’ and are implemented”, she said. “Professionals in these fields get the satisfaction of creating real change and seeing quantifiable outcomes of their work”.