Podcast – The Future of Global Supply Chains

Global supply chains are at the start of a digital revolution. Brian from the Worldwide Supply Chain Network discusses how Global Supply Chains are being affected by Brexit, Tariff updates, trade wars and digital innovations.  We discuss how businesses involved in the import export process can minimize the impact these changes will have to their business.

• How tariff changes can impact supply chains and airfreight and seafreight flows in the short term
• How industry changes can impact supply chains in the long term
• The different options that companies have to absorb the increased costs or pass them onto end consumers within each industry
• Which new technologies will have the biggest impact on manufacturing and global trade in 10 years time
• How the first New York Supply Chain Meetup attracted over 150 attendees, and how that has expanded into The Worldwide Supply Chain Federation

Read full Transcript here:

Ben: 00:05

Hi everybody, it’s Ben Thompson here from the Import Export Podcast. Today,we’re talking about the current situation of tariffs, trade wars, and the impact that it’s having on global supply chains. There is just so much happening right now in the world of global trade. So today, we’re joined by Brian, who is the co-founder of the Worldwide Supply Chain Federation and REFASHIOND Ventures. Brian, welcome to the show.

Brian: 00:29

Thank you, Ben. I’m excited to be here.

Ben: 00:33

Today, I wanted to give our listeners some insight into what is actually going on in global trade right now. There’s so much happening and I want to discuss how the changes are impacting global trade, and how businesses that are involved in that import/export process can try to minimize the impact that it has to their business. Before we get started, Brian, I heard you’ve had quite a lot of experience in global supply chains, so tell me a bit about the experience you’ve had.

Brian: 01:10

Sure. Perhaps, a more accurate description is that because of my upbringing, I have a broader view of the role that supply chain plays in driving economic growth. I grew up in West Africa, specifically, in Ghana in Nigeria. I took an operations class in business school at NYU. Then, starting in 2014, I started to think about how the dominant companies of our day are companies that have mastered a supply chain. There’s Apple, there’s Amazon, there’s Alibaba,there’s JD.com, there’s Walmart. They all became a dominant because of supply chain and operations.

I also started to think about how supply chain is both a physical thing, that is supply chains move physical goods, but I also started to think about how supply chain is also about data and information. Then it dawned on me that we’re entering this stage in human history where the companies that have mastered the supply chains for data and information can build an overwhelming advantage over the companies that have only mastered a physical supply chain. I believe that this could have consequences that are very profound because it could lead to situations in which industries which have been immune to change for a really long time can really be transformed.

To give your audience a little more perspective on where I’m coming from, like I said, I grew up in West Africa. I did my elementary schooling in Nigeria. Then, my secondary school in Ghana. Came to the United States in ’97 to go to college. I studied Math and Physics. I hold an MBA from NYU. I became a chartered financial analyst in 2017. I spent 10 years in investment management. Specifically, I’ve spent the last eight years as a member of a team that built a venture fund from scratch to a $98 million of assets under management.

I look at the world from the perspective of a professional investor. I’m very focused on research. I like to think in terms of frameworks and mental models. I try to develop a way of thinking that’s very general and can be applied to a number of different problems, rather than being a very specific.

Ben: 03:53

That’s quite a background. Sounds like you’ve done quite a lot of different things. You’re right. This industry is at the start of change. The companies that are getting the physical and digital aspect of the supply chain sorted are definitely going to have a significant advantage.

When it comes to the environment we’re seeing today. In the past 12 months there’s been Brexit, there have been the potential trade wars between China and the US, you have tariffs being changed, tariffs being increased and used as negotiating tools. What impact is that actually having on global supply chains? Are we seeing any significant impact in different areas.

Brian: 04:52

I’ll start with a definition. People who know me would normally tell you, “Brian is always trying to define things.” I think, in order to ground the conversation and something realistic, it’s important to know what we’re talking about. Often, when you talk to different people, supply chain means a different thing to each person that you talk to. The definition for supply chain that I like is one from Martin Christopher in his book, “Logistics and Supply Chain Management.” The definition says, “a supply chain is a network of connected and interdependent organisations that are mutually and cooperatively working together to control, manage, and improve the flow of materials and information from suppliers to end users.”

At the outset, supply chains were really built in order to facilitate military expeditions. The Alexander the Great’s of the world became great conquerors because of their supply chain. But today, supply chains exist to facilitate trade between countries. So we’ve gotten to this point where products are designed to account for raw materials and parts that might be sourced in one part of the world. Then, they might be exported to a different part of the world in order to be assembled. And then they are shipped to another part of the world where the consumers who actually want to use those products, buy and use them.

Supply chains are absolutely important. Like any actions that make it more difficult for those activities to take place is something that affects a supply chains in a bad way. So, in the current scenario in which we are living, you can think of a producer in the United States who is now substituting a major supplier in China with one in some other country, let’s say in Vietnam or maybe in Ethiopia. They have to do that even though the supply in China is the most efficient supplier that they could be dealing with. What this does is that one, it makes the physical and information infrastructure that they have developed in China redundant. So, that goes to waste. They now have to source products and raw materials from a place that might not have the capacity to meet the volume that they need, or that is going to cost them much more money.

So the bottom line is that barriers to trade make the supply chain distorted by forcing people to do things in a less efficient way. They make both producers and consumers less well-off than they would have been if there was no trade war, or tariff, or embargo.

Ben: 08:13

I guess, it may be too early to tell what are the long-term changes, what people and companies will do. Are we seeing any changes in freight flows with sea freight or air freight? Or is it again, too early to tell?

Brian: 08:38

What you would expect to happen is that once companies realized that this is something that might happen, that there’s a tariff or there’s some trade embargo that’s going to come into place, immediately they rush to import or export as much as they can. So, in the very short term, you would expect a noticeable increase in the flow of freight and you would especially expect to see that increase in airfreight because with shipping it’s a little more complicated. There’s really not much that you can do to get ships to move faster. Although, you could increase the volume of shipping by sea, but it’s airfreight that is probably going to be the most noticeable.

Then, as you get to the point where the tariffs have been implemented, let’s assume that they actually are enforced, then you’d expect, and in this case, let’s focus on China and the United States, specifically. Once the tariffs come into play, you would expect that freight flows would either decrease or they would normalize. Then, you also have to think about the long-term. The infrastructure that enables trade is expensive. It can’t be put up overnight, and so on, and so forth. There’s alot that goes into building that capacity. So, once it becomes clear that the tariffs are here to stay, then companies have to start thinking about,”Well, if this is going to be a permanent thing, how should I be thinking about my supply chain? Do I move my production to Vietnam? Do I move it to other areas of South-Eastern Asia? Do I move it back home because that will be possible to do that for a production at home? Do I move it to Africa?”

But then, the other thing to consider is that if the products that you are manufacturing or producing advanced and require a lot of skill, then you don’t have a lot of options. If the manufacturing that you’re engaged in is very basic, then it’s probably easy to set up shop anywhere. It’s a more complicated question than people like to admit. and I don’t think there’s an easy answer. Maybe, what I am trying to say is that over the next six to 18 months, which is what I consider the short term, you would expect to see a significant increase in freight flows. After 18 months, it’s difficult to say because then the considerations are much more complicated. I hope that makes sense.

Ben: 11:48

It does. It’s a very hard question to answer. It is so complicated really. There’s so much that affects these things around the world. It’s hard to say. Like you said, I think with the current situation of tariffs and potential tariff increases, it’s still not 100% confirmed. Countries can use them as negotiation tactics but whether they actually follow through is another thing and then it might impact change a bit quicker after that.

Brian: 12:33

Yes. That’s what makes this all so difficult, right? Nothing is guaranteed. There’s politics involved. There’s grandstanding. There’s sabre-rattling and white noise. It could entirely be that this is just posturing on the parts of the Trump administration in order to extract some concessions from the Chinese. It could also be that the Chinese response right now is just grandstanding on their part in order to make it seem like they’re not ruling over to the American body. It’s really hard to say that.

The difficulty for people who are running companies and doing business around the world is that if China is really your best alternative for sourcing or manufacturing or those other activities, then if you act too soon and make any permanent changes, you’ve put yourself at a disadvantage in relation to your competitors. On the other hand, if you wait too long, you could– It’s like being caught between a rock and a hard place. I don’t run a big company but what I would assume is that the CEO and his executives and the people who lead the teams that run strategy for these big companies are considering these things, day in and day out, or at least on a quarterly basis.

If you understand that the role of operations and supply chain is to increase efficiency, to increase throughput, and increase profit while reducing cost, then what you have to do is, periodically, you have to make that assessment and decide staying in China is still the best thing, based on all the information you have; and if not, then, you make a different decision. The other thing that can happen too is that you could change– you could modify the mix, so to speak. Maybe you’ve not left China completely but you’re doing more in Vietnam. And then, when things change you can reverse that actually. It’s a hard question. When I’m watching TV and people give a very specific and precise answer, I scratch my head.

Ben: 15:29

Sometimes, you need that crystal ball..  Some tariffs into the U.S. now from China have increased already.  Potentially, a lot of products could increase from 10% up to 25%, and like we said, potentially. Say that these tariffs do significantly increase, how do you think that some of these importing companies will respond to those increasing costs? Do you think will we see a trend of working towards absorbing some or all of that costs, or will they pass on some or all of that cost? Will the end consumer essentially pay for these changes?

Brian: 16:25

There’s no easy answer. It depends. When you’re thinking about passing costs onto the consumer, which is essentially increasing the price, you have to make that decision by taking into consideration what economists call the “price elasticity of demand.” Basically, that is this notion that for every 1% increase in price, there is a change in demand. There are number of variables that you should consider. If price is a variable that’s changing, then we’re talking about the price elasticity of demand. If income is a variable that’s changing, then we’re talking about the income elasticity of demand. And if it is the price of related goods that’s changing, then we’re talking about cross elasticity of demand.

You can think about cross-elasticity of demand in relation to substitute goods or complementary goods. A complementary good, think of if you’re buying a car, you absolutely need to buy some fuel, right? How does that affect me? If we’re talking about luxury goods,then you can assume that luxury goods, companies producing luxury goods can probably pass those costs on to their customers. Now, because they can pass the cost on to their customers does not mean that they will, because they operate in a competitive market.

At least in the short term, it’s not clear to me that costs will automatically be passed on to the consumer. I think what will happen is that, again, companies will take a wait-and-see approach. If this looks like it’s a short-term thing and it will be sorted out quickly, then it’s unlikely that they’ll pass the cost on to the consumer. They’ll find a way of eating those costs.

Once it becomes certain that the tariffs are here to stay, then the question becomes, “How much of the additional costs you’re bearing can you pass on to the consumer without hurting demand for your product?” That again, there’s no easy answer. To use an example that’s been in the news, I think, Ryan from Flexport, he was on TV not too long ago talking about Apple. I expect that Apple, a company like Apple could get away with increasing it’s prices. Other companies, I do not know. It’s this funny thing where Apple goods become more attractive to people the more expensive it is.

Ben: 19:44

It’s not a bad business to have..

Brian: 19:47

There are very, very few companies that have that brand power. What we will see across the board is that companies will make lower profits, and as a result, consumers as well will be less well-off.

Ben: 20:10

How are these changes affecting China’s export volumes, China’s freight flow? Is it decreasing or is it having much of a change on their volume?

Brian: 20:25

This is a question that’s related to foreign currency exchange rates. I’m not going to delve into the details because if I do, then your audience will probably fall asleep. It’s really funny. By engaging in this trade disputes, what is happening is that pressure is being put on the Chinese currency. So, the Chinese currency is becoming weakened. As the Chinese currency is weakened, people with foreign currency from Western Europe, from North America, and other parts of Asia, from Australia, from Mexico, the biggest countries that do business with China, as the Chinese currency gets weakened, products from China become cheaper. So, suddenly with the same amount of foreign currency, you can buy more from China. While Chinese trade with the United States might dip a little bit, and the data so far does not suggest that that’s happening yet, China’s trade with other parts of the world will go up.

At least, in the near term, I don’t expect that China will see a market decline in its exports. That’s why it’s very questionable if these trade disputes accomplish the goals of the parties that start them, because, again, it’s such a complicated puzzle that no one really knows what the effect is going to be.

Ben: 22:20

Now, that’s a very interesting point. How do you see the trends and shifts in the future of global trade? What are the things that you will see change the most that will actually affect the supply chain in say, 10 years’ time from now? What does that look like? Are changes in technology going to bring changes to supply chains through cheaper manufacturing technologies or other things like that?

Brian: 23:06

Yes. I tell people that I used to be an actuary. When I started training to become an actuary, I was very confident that one can predict the future and make projections and those projections will be correct, and so on and so forth. And I learnt the hard way that that is often not the case. I think, and this is related to what I’m doing now with the Worldwide Supply Chain Federation and REFASHIOND Ventures.

I believe that technology is at the point where it can make a really big difference in the way that supply chains around the world operate, right? I think some technologies are at the state of maturity where they can really make a difference now when they could not do so, say five or ten years ago. How that is going to play out is difficult to say. If I had to make a guess, my guess is that China, specifically, will be doing a lot more advanced at manufacturing in 2030. But I think China will still have the biggest chunk of basic manufacturing at that time just because of the size of the country, the size of the population, the investments that the government has made.

Then I think another thing that we will see happen is that certain types of basic manufacturing will continue to chase the lowest common denominator. Some of it will leave China, it will go to other parts of South-Eastern Asia, to parts of Africa, to parts of South America. Then, the advanced manufacturing will stay in those areas where there’s a combination of the people with skills, the regulatory environment, and the customer base for what they’re making. In order for that to happen, technology is going to have to be part of it, right? So, like I said, the supply chain for information and data, the supply chain for physical goods,both will have to become much more efficient, much more effective, much more responsive.

One thing we’re seeing is that many more companies now than before are trying to figure out how they marry the globalization of supply chains with the localization of supply chains. What you have to source from the global market, you source from the global market. But what you can source and produce locally as close as possible to your customer, you do that as well. I think over the next 10 years or so, over the next five to 10 years I think we’ll see more of that trend playing out.

Ben: 26:18

Interesting. Tell me a bit about the work that you, guys, do at the New York Supply Chain Meet Up. I understand that you’ve recently expanded that into the Worldwide Supply Chain Federation. Tell me a bit about what you guys do.

Brian: 26:40

I think the genesis for this goes back to 2014 when I spent some time thinking about how operations and supply chain was really becoming a source of competitive advantage for startups, especially startups operating the on-demand business models. So this was the peak of Uber, of Uber for everything. In 2017, I decided I wanted to become a specialist VC and that I should focus on supply chain.

At the time I made that decision, I felt I should be hanging out with two primary groups of people. One, the entrepreneurs and technologists who are building the new technology to reinvent supply chains, and the professionals in companies who would be using these new products. That was the idea for the New York Supply Chain Meetup. It was to bring these two groups of people. I met these two groups of people together.

I met my co-founder, Lisa in 2016. She’s obsessed with the project. She looks at it specifically from the perspective of the fashion industry. I registered the New York Supply Chain Meetup on August the 23rd of 2017. We had our first meetup in November. 150 people showed up. I thought we would maybe have 20 or 30. We’ve got more than five times that number.

Then as we started to have success in New York, people in other places asked us if we could help them start communities like that themselves where they live. And so, we’re working on that framework. It’s almost done. I should be able to circulate it sometime next week. Before then, a company in Bangalore called Locust, it’s a ‘logistics as a service’ platform. They decided to go ahead and start a meetup in Bangalore. They launched on November the 24th. Presumably, it was successful and they’ve mentioned to us that they’d like to launch a chapter in Jakarta in January if it’s possible, and maybe one more besides that.

Ben: 29:21

That’s great. I think it’s a great thing for the industry in every country. People need to, like you said, come together and be connected and work together because we are at such an important period of the change within the industry. The more communications, more open forums, the more collaboration on projects, it’s going to be very beneficial to everybody.

Brian: 29:55

That’s precisely it.  The goal is simple. Let’s bring the people who are creating new innovations in supply chain together with the people who would be using these new innovations. And let’s enable them to talk to one another because the thing about the startups like IncoDocs that are building these innovations is that you need early business partners, you need investors, you need expertise, you need community, you need early customers.

Hopefully this is an environment in which, without anything being at stake, you can have a conversation, you can talk about what you’re doing, how you’re doing it, and so on and so forth. Maybe you can get some friendly feedback. Maybe, that is what leads to a more formal conversation about actually doing business with one another. It’s a very simple proposition, but hopefully it’s one that has a lot of value.

Ben: 31:06

Yes, absolutely. And where can listeners go to become involved? What can theydo to become involved around the world?

Brian: 31:18

The way we’re approaching it now is we call it “optimizing for enthusiasm.”  What it really requires is someone on the ground who says, “This is such a great idea,” “This is something we need in our city so I’m going to take the lead in making it happen.” What we in New York will do, is we’ll share what we’ve learnt over the past year. We’ve now done nine events. We’ve had more than 100 people at each of the events. Given that, we’ve bootstrapped from the beginning I think it’s a phenomenal sign of what’s possible. Once someone on the ground decides to make it happen, we empower them to go do that. We’ll work with them directly.

Ultimately, the goal is that each of these meetups should be directly connected with one another, right? So, when Brandon was in New York, for example, if there was no New York Supply Chain Meetup I do not know if I would have met him. I do know that I thought I’ve been able to make the introductions that I made. The same goes. You can see how as the network grows and as the networks are connected to one another, it enables people to do things much more easily. If you’re travelling from Brisbane to New York, you either know who to reach out to in order to make your trip to New York much more efficient. Hopefully that person can plug you into other people in the New York community.

But your specific question was how do they get in touch? They can visit the website. It’s www.theworldisasupplychain.com  That’s an alias, but hopefully it’s easy enough for people to remember.  theworldisasupplychain.com is part of our mantra. If they visit that, they’ll get a lot of information about what we’re doing. Then they can reach out to myself or they can reach out to Lisa. We’re easy to find on LinkedIn or Twitter. There’s a lot of ways to reach out to us.

Ben: 33:34

I encourage anybody out there in any different country that are enthusiasts to reach out and find out how they can grow this because it’s absolutely what the industry needs. Communication is lacking between the technology and some bigger companies. That’s a great thing. Congratulations.

Well that’s it. Thanks, Brian. Thanks for your time. I think, it’s quite a complicated topic when it comes to power changes and global supply chain impacts. No one knows the answer. But there’s definitely quite a lot of change happening. I guess we’ll see what impact it has over time.

Brian: 34:32

My guess is that this trade dispute will go away. I think the trade dispute is going to go away. I do not think it works to anyone’s advantage to have this trade dispute continue. So, I think the politicians will find a face-saving way. They’ll find a face-saving way of making it go away.

Then, on the broader question of supply chain and technology, I really believe that supply chain is the biggest investment opportunity of the next 20 to 25 years. That’s why we’re building REFASHIOND, that’s why we’rebuilding a grassroots community. I believe that the innovation starts at the grassroots. Then it moves up. If someone who’s listening to this and believes that, then you should join our community and start forming a community in your own city.

Ben: 35:49

That’s good, it’s an exciting time. Well, thanks, Brian. I appreciate your time.Anybody that came to get involved go ahead along to the website and let’s spread the community.

Brian: 36:06

Thank you, Ben.  It was great to talk to you.