By Stephen DeAngelis
“For decades,” writes economic journalist Peter S. Goodman, “major companies have behaved as if geographic distance were almost irrelevant. A factory in China was the same as a factory in Michigan. The internet, container shipping and international trading arrangements had supposedly shrunk the globe.”[1] He adds, “No longer. The pandemic and geopolitical upheavals have exposed the risks of depending on faraway industry to make critical things like computer chips, protective gear and medicines.” Over the past 15 years, I’ve written a few articles stressing the importance of geography. Back in 2009, I wrote, “We have all heard someone say, ‘The world is getting smaller.’ The fact that we can witness events happening around the world in real-time or talk with someone half-way around the world using the Internet or travel by air to a distant location in less than a day adds credence to the proposition that the world is getting smaller. The U.S. Navy, however, has for years insisted that when it comes to moving goods or forces around the globe, geography still matters and the world remains a rather large sphere.”[2]
A few years later, I wrote, “Those who go to sea understand that the world remains a very big place and getting from here to there takes time (i.e., you can’t load goods on a ship in Amsterdam and deliver them to Shanghai the next day). … At 12 knots/hour, it takes over 24 days to travel from the Strait of Gibraltar to Singapore taking the short route through the Suez Canal (a distance of 6953 nautical miles). Taking the longer route around the Cape of Good Hope (a distance of 10679 nautical miles), it takes over 37 days.”[3] As most people are aware, recent Houthi attacks on shipping in the Red Sea have motivated many companies to take the longer, slower route.
The Return of Geography
Diego A. Cerdeiro and Niels-Jakob H. Hansen, economists at the International Monetary Fund, observe, “Historically, supply chains were simple and operated within confined geographic areas. National producers would make simple products such as wine, cloth, or bread. By and large, all the components to put together such products could be found near where the end product was consumed. However, in our modern economy, supply chains are highly complex and involve numerous producers around the globe.”[4] Like Goodman, they note that the pandemic motivated many companies to rethink their supply chain strategies. They describe three such strategies:
• Reshoring. “First, some have called for ‘reshoring’ — that is, disintegration from global supply chains by moving foreign production back home.”
• Diversification. “Second, some have argued for greater diversification — in other words, increasing the number of foreign suppliers for any given input, even if it entails higher costs. Unless all supplying countries are hit at the same time, this would allow producers to better withstand supply shocks.”
• Increase Inventories. “Third, companies could decide to hold excess inventory. A higher level of inventory would allow firms to better weather temporary supply shocks.”
All three of those strategies involve geographical considerations in one way or another. Nearly a decade before the pandemic hit, journalist Patrick Lane argued, “Geography matters as much as ever, despite the digital revolution.”[5] Nevertheless, Lane observed that some people don’t find that observation to be an obvious truth. He wrote, “Reports of the ‘death of distance’ (the title of a 1995 special report in [The Economist]) have been much exaggerated. … Talk of the ‘end of geography’ (another phrase from the mid-1990s) is about as convincing as the ‘end of history’ when the digital presence of different places varies so much.” Supply chains have always been tied to geography. A few years ago, academics from the San Diego State University (SDSU) noted, “With the rise of the Internet and the new era of globalization, some have argued that the world is flat — geography is dead.”[6] SDSU professor Ming-Hsiang Tsou bluntly stated, “We disagree with that.” So do most supply chain professionals. Yet the idea persists.
Geopolitical Considerations
Goodman insists that one of the reasons companies are looking to change their supply chains is geopolitics. He writes, “A central reason for concern [is] the rise of geopolitical tensions. China [isn’t] merely the world’s factory; it is also an autocracy that, under President Xi Jinping, has become more aggressive in asserting global influence.” According to Tim Marshall, former Diplomatic Editor at Britain’s Sky News, countries (and those living in them) are what he calls “prisoners of geography.” In a book by that name, Marshall argues that all sorts of decisions, but especially political decisions, are influenced by geography as decision-makers confront the reality of the Earth’s mountains, rivers, valleys, and oceans. Commenting on Marshall’s book, journalist Daniel Dombey wrote, “Tim Marshall’s book is a reminder of the salience of geography in international affairs.”[7] He adds, “At the heart of his work is a thesis as dispiriting as it is radical: that the present dysfunctional state of the world is where we were always going to end up.” Marshall’s arguments are fairly straight forward: Locations blessed with the right climate, resources, and access to global markets will always do better than countries without such gifts. The question today is how will climate change alter those variables.
Pressure for companies to change their supply chains is also coming from domestic political sources. At the height of the pandemic, Willy C. Shih, the Baker Foundation Professor of Management Practice at Harvard Business School, explained, “Manufacturers worldwide are going to be under greater political and competitive pressures to increase their domestic production, grow employment in their home countries, reduce or even eliminate their dependence on sources that are perceived as risky, and rethink their use of lean manufacturing strategies that involve minimizing the amount of inventory held in their global supply chains.”[8] He added, “Yet many things are not going to change. Consumers will continue to want low prices (especially in a recession), and firms won’t be able to charge more just because they manufacture in higher-cost home markets. Competition will ensure that.”
Concluding Thoughts
Geography and geopolitical concerns have had their impact. Gartner analysts report, “Building resilience, agility and flexibility into their supply chains is the top priority of supply chain managers. According to a new Gartner survey, 73% have added or removed production locations from their supply chain networks in the past two years.”[9] Nevertheless, changing supply chain configurations is not easily accomplished. A couple years ago, journalist Lydia O’Neal explained, “Companies looking to make their supply chains more resilient with nearshoring strategies may only be bringing production problems closer to home, experts say. U.S. importers who are studying shifting their sourcing from the Asia-Pacific region to Mexico and deeper into Latin America are finding it tougher to find suppliers with the right raw materials, production quality and networks for getting their own components that have been established in manufacturing hubs like China and Southeast Asia. Reproducing that capacity and re-creating clusters of suppliers under a nearshoring strategy will take years.”[10] Both business and political leaders are trying to find the right strategies to make supply chains more agile and resilient. Geography will play a big role in how things eventually shake out.
Footnotes
[1] Peter S. Goodman, “The Changing Supply Chain,” The New York Times, 12 August 2024.
[2] Stephen DeAngelis, “The Importance of Geography,” Enterra Insights, 13 January 2009.
[3] Stephen DeAngelis, “The Importance of Geography and Place,” Enterra Insights, 13 April 2012.
[4] Diego A. Cerdeiro and Niels-Jakob H. Hansen, “The Stretch of Supply Chains,” International Monetary Fund, June 2022.
[5] Patrick Lane, “A Sense of Place,” The Economist, 27 October 2012.
[6] San Diego State University, “Despite digital revolution, distance still matters,” ScienceDaily, 18 July 2018.
[7] Daniel Dombey, “‘Prisoners of Geography’, by Tim Marshall,” Financial Times, 9 August 2015.
[8] Willy C. Shih, “Global Supply Chains in a Post-Pandemic World,” Harvard Business Review, September/October 2020.
[9] Staff, “73% of Supply Chain Networks Have Shifted in Past Two Years,” Material Handling & Logistics, 16 August 2024.
[10] Lydia O’Neal, “U.S. Companies Face Hurdles in Moving Production Closer to Home,” The Wall Street Journal, 18 April 2022.
