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Chain reaction

¡¡¡¡"The great manufacturers in the Yorkshire and Lancashire districts tell me that, under modern conditions, they have got into the habit of laying in supply not for a period of two to five months but they are dependent week by week on the importation of the raw material." So Sir George Parkin described the alarming business practices found in Britain at the dawn of the 20th century. As a leader of the Imperial Federation League, he sought to replace the British empire with a bigger group of trading partners, so as to guarantee supplies. A hundred years on, Sir George would have marvelled at globalisation, but been aghast that today's manufacturers measure their inventories in only a few hours of production.

¡¡¡¡The great manufacturers now have amazingly lean operations. They have outsourced business to contractors that can do the work more efficiently, often in places where wages are lower. A huge logistics industry has sprung up to move stuff around the world at dazzling speed.

¡¡¡¡Contain erisation has slashed the cost of shipping. Express airª²freight has made overnight delivery possible to most places on earth. Moreover, such services are within the grasp not just of the supply departments of giant multinationals but also of anyone trading on eBay from the spare bedroom.

¡¡¡¡The logistics business is one of the marvels of commerce, but it is not without its risks. Supply chains have become ever more complex and extended. Some great manufacturers and great service companies may have become too lean in their relentless drive to reduce costs, outsourcing not just their nonª²core activities but essential ones too. If one link of a company's supply chain snaps, the consequences can be grave. Ericsson and Nokia found this out when they both relied on the same supplier for a special chip in their mobile phones. After the chipmaker's factory was hit by lightning, Nokia swiftly locked up all the alternative supplies whereas Ericsson suffered a severe parts shortage and later quit making handsets on its own.

¡¡¡¡A company's best protection from its own supply chain is to expect failure, not to hide from it. Toyota last year narrowly escaped a parts shortage when an American supplier went bankrupt. The carmaker has now introduced an earlyª²warning system in Europe to try to detect any looming problems with suppliers before they bring production lines to a halt.

¡¡¡¡The good news is that many companies are now trying to identify the choke points and weak links in their supply chains. What about Sir George's concern-the wider threat to national economies? With so many people worrying about oil supplies and a birdª²flu pandemic, the prospect of supply chains collapsing around the world can seem a scary idea.

¡¡¡¡It shouldn't be. There are a few industries where it makes sense for governments to keep some emergency stocks of a few essentials such as energy, munitions and medicines. But the logistical apocalypse is not a good way for politicians to think about everyday life, let alone to start interfering in markets.
Natural disasters are not, in fact, a common cause of supplyª²chain disruptions. Most are the result of humdrum internal problems, like bad planning or the choice of an unreliable subª²contractor. That can be terrible for a particular company, but hardly poses a threat to society at large. After all, if Ericsson and Nokia cannot supply you with a mobile phone, Samsung would be only too happy to get one to you tomorrow.

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