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Lines to Circles: Fixing the Global Supply Chain

Tien Tzuo

As my daughter went back to school this year, we decided to buy a color laser printer. I was tired of the fact that my inkjet printer kept smudging. To my shock, nothing was available. Nothing from HP, Brother, Epson. Amazon was selling used models for two times the MSRP of new ones! Almost two months into the school year, still no printer. Welcome to what the Economist calls the Shortage Economy.

Stress in US supply chains is making a material impact on the national economy. According to the Federal Reserve, US industrial production actually fell into negative territory last month (-1.3%). Similarly, industrial factory capacity fell to 75%. Some third quarter GDP estimates are dropping to below one percent. Right now there are well over 100 cargo ships anchored off the ports of Long Beach and Savannah as a result of worker and trucking shortages.

But here’s the thing — the disastrous state of the current global supply chain has me increasingly convinced that we are on the verge of a newly invigorated manufacturing industry that could see double digit growth for decades to come. That’s right — the same kind of growth and productivity that we’ve seen happen in technology over the past twenty years is coming to the industrial manufacturing sector, and all those container ships moored off of Savannah and Long Beach are only going to hasten that transformation.

Let me explain what I mean by that.

Google is great, but we can’t have real growth without manufacturing. The last three sustained periods of global economic growth have all been the result of manufacturing innovation: the Industrial Revolution in the mid-19th Century, the advent of mass production in the early 20th Century, and the first wave of factory automation during the 1970s. IoT will bring us the next wave of sustained global productivity and growth.

But in order for that to happen, we’re going to have to build things differently. I’m certainly not the only person who thinks this way. This idea also happens to be the premise of a fascinating (and, as it turns out, highly prescient) 2016 TED Talk by industrial systems thinker Olivier Scalabre that I mention in my book. As Scalabre notes:

“It’s not as if we’ve done nothing with manufacturing since the last revolution, actually, we’ve made some pretty lame attempts to try to revitalize it, but none of them has been the big overhaul we really need, to get us growing again. For example, we’ve tried to relocate our factories offshore, in order to reduce cost and take advantage of cheap labor. Not only did this not inspire productivity, but it only saved money for a short period of time because cheap labor didn’t stay cheap for long. Then, we’ve tried to make our factories larger, and we specialize them by product. The idea was that we can make a lot of one product and stock pile it to be sold with demand. This did help productivity for a while, but it introduced a lot of rigidities in our supply chain.”

Emphasis mine! Anyone reading the business news lately has seen all sorts of examples of those supply chain rigidities in action: cars, electronics, pharmaceuticals, household products, even books and vinyl records. It would be easy enough to explain all this away as a pandemic-induced demand issue — we’ve all been at home buying stuff all year long (including a bunch of folks who are brand new to e-commerce), and the beleaguered manufacturers and shippers just can’t keep up.

But that would be mistaking the symptom for the disease, which is of course, the system itself. Over the past fifty years, we’ve created a vast network of far-off factories that crank out billions of mass-produced commodities to be shipped, purchased and eventually discarded. We’ve created a monster; a globally integrated landfill economy.

Fortunately, that’s all about to change. Countries that are used to off-shoring their manufacturing needs are going to start making things closer to home. Manufacturers are going to start making products that are much more compelling and less generic. And they’re going to start making things out of sustainable materials that are actually repurposed. What’s more, all this is going to happen not just because of good corporate citizenship, but because it makes business sense.

In short, the Subscription Economy is shifting our global supply chains from lines to circles. By that I mean we’re moving away from rigid and linear “conveyor belt” models of transnational manufacturing and distribution towards circular models that are much more nimble, personal and local.

Why are we going to start making things closer to home? Because the dramatic improvements in productivity and efficiency we’re seeing from IoT connectivity and analytic platforms are also going to have a huge impact on global cost competitiveness for domestic manufacturers. We’re already starting to see this happen. Manufacturing labor costs in China, Mexico and Vietnam are all increasing at double-digit rates, which they should be! Thanks to the IoT revolution, re-shoring is starting to make real economic sense. As Scalabre notes, linear “East to West” trade routes are going to be replaced by circular “East to East” and “West to West” routes.

Why are companies going to make things that are less disposable and more compelling to consumers? Because new advances in custom manufacturing and 3D printing are going to mean that we buy things that are built for us, according to our own specifications (and as a result we hang onto those things for longer). Why buy a mass-produced suit, or piece of furniture, or pair of eyeglasses when you can buy one that’s perfectly fitted for you? As more and more circular feedback loops develop between consumers and manufacturers (as opposed to linear conveyor belts of disposability) both stand to benefit enormously.

And lastly, why are less commodity purchases going to wind up in landfills? Because as I discuss in my piece on “Peak Stuff,” as more manufacturers shift towards owning their assets and offering them to consumers on a subscription basis, they have much more economic incentive to use materials that can be recycled. They start to think cyclically about the end stages of their products, because at the end of the day, they’re going to be responsible for them. They’ll make more money if they repurpose their stuff in a smart way.

Of course, those manufacturers also get to benefit from having a stable source of recurring revenue. In fact, I was recently talking with the CEO of a hardware company whose entire customer base is on service subscriptions. They’re facing supply issues like everyone else, but the CEO told me that they were fine with paying more money to be “ahead of the supply chain,” even though that certainly meant lower gross profits per unit of hardware.

Why? Because their subscription revenue more than makes up the difference. As I discussed in last week’s column, that’s what happens when manufacturing companies start prioritizing circular metrics like Customer Acquisition Cost and Customer Lifetime Value over linear metrics like unit margins.

No more stuck ships, empty shelves and huge landfills. It’s time to move from lines to circles.

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