UNDERSTANDING THE SUPPLY CHAIN: A DOUBLE-EDGED SWORD

DR. ASOKE K. LAHA
Chairman-Emeritus and Founder, InterraIT

These days, one frequently hears new-fangled terms and coinages that require some introspection to understand what they really mean. One such term is Supply Chain Management (SCM). Often used in management and economic discussions, SCM refers to the oversight of the entire flow of goods and services—from sourcing raw materials to delivering the final product to the end consumer. It encompasses planning, sourcing, production, logistics, and even handling returns. The goal is to improve efficiency, reduce costs, enhance customer satisfaction, and optimize the overall supply chain. The manager who is overall responsible for Supply Chain management is very important executive in any company. For example: Tim Cook of Apple. He started his career as SCM manager. Because of his unique success, Apple became highly profitable. He was rewarded with the CEO position of Apple after Steve jobs.

Hardly any board  meeting,  seminar,  or  speech  on  business or economics goes without referencing SCM. Dedicated sessions are often held to address SCM issues specific to industries such as IT, pharmaceuticals, and automobiles. For every industry, the components of the supply chain may be different. Yet, there is a common thread that is built into it. In the case of manufacturing, the supply chain begins from sourcing raw materials and ends at retailers’ shelves. There are various processes involved in between, which are subsumed into the coinage supply chain.

Every product that comes to market has backward and forward linkages. It cannot come out of the blue. Meticulous planning and execution go into that. Raw materials come from one country or a specific region within the country, the first level of processing takes place in another place, and manufacturing in yet another area. Then products are transported through different modes of transport and finally reach the customers. Multiple organizations and people are involved in a supply chain. There is nothing new in the process. That has been happening since the advent of production, millennia ago. But that happened in a natural way, and no one has paid attention to that and realized the significance of various stages of the supply chain from a management perspective.

How has this suddenly become important? I can cite a few reasons. Foremost is the emergence of globalization, wherein the focus has turned to price competitiveness and quality since people have a wide choice to select a product from anywhere they want, unlike in a closed economy, where choice is limited. I recall writing a piece in this very column years ago about a celebrated book written by a famous monetarist, Milton Friedman. Somewhere in his book, he had compared a closed economy with an open one. He cited an Indian experience of continuing with the same model of cars and other vehicles on Indian roads, which were not fuel-efficient. We all know how long brands like Ambassador and Fiat cars monopolised the Indian car industry and how they exited the Indian market when it was opened up. Market dynamism, therefore, has compelled people to become cost and quality-competitive to stay in the market. SCM has become an effective tool to address price and quality.

In an open market, people produce goods and services for the global market and not necessarily for the domestic market. Products have to traverse long distances to cater to the markets in different countries and continents before reaching the end user. That requires meticulous planning and execution so that the supplied products arrive on time and in good condition. Every movement of the goods in transit -from the raw material stage to the consumption point - has to be tracked and monitored. That needs an elaborate arrangement, involving scrutiny from beginning to end. That is why SCM is important in modern business practices.

Let’s briefly look at the origin of the term. Keith Oliver, a management consultant, coined the term Supply Chain Management in 1982. However, the idea behind it likely existed long before, albeit in different forms. I recall reading G.K. Chesterton’s famous essay, A Piece of Chalk, in which he explores the origin and manufacturing of chalk. While this may be a simplistic example, it reflects the underlying concept of a supply chain. Another example is Ford Motors, which revolutionized the automobile industry by introducing the assembly line—one of the earliest large-scale applications of SCM principles.

I have a specific reason for writing about this topic. Discussions around SCM often revolve around  two  categories  of  people: those who benefit and those who are adversely affected. My own experience lies in the IT and ICT sectors, where supply chains play a critical role—especially in electronic hardware. Every modern household now has a plethora of gadgets: televisions, refrigerators, air conditioners, computers, smartphones, and more. Many of these devices rely on batteries and rare materials, particularly in electric vehicles and smartphones.

Yet, not many people know where the raw materials for these products come from. Whether it's electric vehicles, wearable tech, or medical equipment like glucometers, the raw materials often originate in developing nations—Latin America, parts of Africa, and Myanmar, to name a few. These countries export rare earth metals and minerals for a pittance. However, once transformed into sophisticated products, their prices skyrocket. The real profit accrues to companies in developed countries, while the mining communities often suffer from low wages, hazardous working conditions, and environmental degradation. This stark imbalance is a darker side of the global supply chain.

This leads to another concept: the weaponization of supply chains. Countries that possess cutting-edge technologies can use them as leverage, denying access to others. A prime example is the semiconductor industry. Chips—essential to everything from smartphones to defence equipment—are produced mainly by countries like the U.S., Taiwan, China, and the Netherlands. These nations can restrict supply, either for strategic reasons or economic advantage, creating disruptions often referred to as trade wars or proxy wars. Supply chain disruption is also prevalent in the food sector. Ghana and the Ivory Coast, for instance, are the world’s top cocoa producers—the raw ingredient for a multi-billion-dollar chocolate industry. Yet, farmers earn only a few dollars per kilogram, while multinational chocolate companies make billions. This is another example of how those at the lowest end of the supply chain are often the most exploited.

Why does this happen, despite global concern? The root issues lie in a lack of transparency and the dominance of technological and industrial power by a few countries. Take oil-rich African nations as an example. Over 14 African countries have oil reserves, yet few, apart from Nigeria, have functioning refineries. As a result, they export crude oil at low prices, only to import refined oil at much higher costs. This again illustrates systemic imbalances within global supply chains. Many have proposed solutions, including forming producer cartels to increase bargaining power. While theoretically feasible, such ideas face practical and political challenges and may not offer a universally sustainable solution.