Long supply chains offer innovation and lower prices

Many companies believe that the logical response to Covid disruption is to shorten supply chains, but a new academic study suggests longer supply chains may actually provide more innovation and economic benefit.

A team of academics from the University of Oxford and Harvard University found supply chains – in which producers bought input goods, converted them into other goods and sold them to other producers – amplified the effects of technological improvements and price reduction.

“Longer production chains for an industry bias it toward faster price reduction, and longer production chains for a country bias it toward faster growth,” said the report.

In its findings the reports shows first, that the rate of change of an industry’s price is a function of its position in the production network. This happens because productivity improvements accumulate along supply chains. As a result, industries that rely on longer supply chains experience stronger price declines than others. 

Second, they show how this observation can help explain cross-country differences in economic growth. 

Because an industry’s position in the production network and the industrial composition of a country are slow-moving variables, aggregate growth can be predicted from the structure of a country’s production network. Intuitively, countries whose final demand relies relatively more on industries with longer supply chains should grow more quickly. 

The academics found that detailed observations across industries and countries are consistent with both predictions and help explain why some countries grow faster than others.

The study comes as firms have sought to reduce risk by shortening supply chains and researchers admitted their results were “potentially counter-intuitive”.

Doyne Farmer, professor of mathematics at Oxford University, said: “The more steps in the process, the more opportunity there is for innovation. Industries with greater supply chains do better. We have been able to predict this over long periods. It does not explain everything that happens, but the principle can be seen operating.”

The report said an industry benefited from “both its own productivity growth and the accumulation of productivity improvements in its upstream suppliers”.

“As a result, the longer its chains of production, the faster its expected rate of price reduction.”

James McNerney from Harvard’s Growth Lab and lead author of the study, said: “We show that production chains accumulate the benefits of technology improvement so that long production chains facilitate faster price reduction in industries and faster GDP growth in economies.

Our experience does show that shorter supply chains offer many of the same benefits, including cost-savings, access to skills, and the flexibility to scale up, down, or in a whole different direction.

Shorter supply chains (near-shoring) may also offer better collaboration and communication due its close proximity to the client, striking an appealing middle ground between the convenience of a domestic development team and the affordability of using far-off vendors.

Near-shoring also allows businesses to conduct processes, such as warehousing and logistics services further downstream, in order to be more efficient and reduce costs. 

Extended supply chains (off-shoring) and shorter supply chains can offer benefits and often a blend of both is appealing. 

Whichever strategy customers select, we work with them to improve supply chain resilience in five key areas:

Understanding – With a thorough understanding of our customers’ requirements and objectives we create supply chain solutions that draw on all options available in the current market.

Visibility – Our cloud-based supply chain management platform, MVT, links all participants and critical time-scaled events to provide end-to-end visibility across the extended supply network, with global control down to individual SKU level.

Agility – Slower moving lines from any origin can be deferred, while priority orders can be highlighted and expedited, to increase speed to market and accelerate the cash-to-cash cycle.

Flexibility – It is simple to change supply lines, adding and monitoring new vendors, product flows and outbound order data, from any location.

Contingency – MVT’s exception alerts and rules-based solutions, correct operational non-conformities, without human intervention, or alert users to issues outside set-parameters for corrective action.

For specific information, or to discuss how our technology could support your supply chain, please contact Simon George our Technical Solutions Director or Elliot Carlile.