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Before being able to understand the changing nature of global value chains, it is paramount to first understand how global value chains have evolved over time. In Chapter 1, Donato Masi and Janet Godsell outline how global supply chains throughout history have undergone substantial change adapting to the many different innovations that ultimately have shaped this trajectory. They provide an overview of the history of supply chains, from ancient times to more recent times, and discuss some trends that will determine the nature of supply chains of the future.
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1.1 Ancient times
In ancient times, the vast majority of supply chains were local, limited to a city or a small region. The exchange of materials relied on a set of basic transportation technologies, such as horses or boats; the cost of moving materials was therefore relatively high. However, the exchange of information was quite efficient, since customers could directly communicate with the producer and specify what they wanted. This was the case of pre-industrial artisan manufacturing, which included village weavers, potters, blacksmiths and cobblers. Similarly, in the agrarian supply chain, a farmer would cut the wheat, send it to a mill for grinding into flour, then send it to a baker to make into bread and finally it would be sold at a market stall.
Because of the high transportation costs, long-distance supply chains only traded high-value items such as spices, weapons and luxury goods. For these high-value items, however, there are some noticeable examples of global supply chains that mirror modern ones, at least in terms of geographical extension.
A noticeable example is the olive oil supply chain of the Roman Empire. This supply chain originated in North Africa, where people were effectively cultivating olive trees. These cultivations dramatically influenced the characteristics of the local landscapes, and traces of the roads, ditches and waterworks used to support the cultivation of olives are still visible today. Oil warehouses stored oil in shipping containers called amphorae. Large ships of the grain fleet would then carry wheat and olive oil from Africa to the port of Rome. The technology of the time facilitated the trade, with some examples of solutions like cargo loading cranes that are surprisingly similar to the ones currently employed.
Other noticeable examples of global supply chains in ancient times are the Silk Road through Central Asia and the spice route over the Indian Ocean. The Silk Road was an ancient network of trade routes, formally established during the Han Dynasty of China, which linked the regions of the ancient world in commerce between 130 bc and 1453 ad (Ancient History Encyclopedia, 2018). The goods transported from West to East include wool, carpets, textiles, gold, silver and camels. The goods transported from East to West included silk, tea, dyes and precious stones. These ancient supply chains had the power of influencing the imagination of artists: the Italian explorer Marco Polo travelled on the silk routes and described them in depth in his book Il Milione.
1.2 The Industrial Revolution
The Industrial Revolution that started in the late 18th century radically changed the scale and the nature of global supply chains. Several technological shifts created radical changes in the way of producing and transporting goods.
In 1781 the inventor James Watt built the rotary action steam engine. This engine represented a breakthrough and provided an alternative power source for several industries, such as textile, coal and iron. The textile industry exemplifies well the changes that transformed the supply chains of the time. Textiles were initially slow to adopt the steam engine because of its costs and risks. However, in 1830 steam was the main source of power in the industry and it enabled the creation of new factories as well as large increases of productivity. A global supply network progressively emerged, and it involved shipping cotton from the United States to mills in England. The finished cloth was then shipped out to the rest of the world. Similarly, the coal, iron and steel industries used the new engines for deeper mines and greater coal production; these changes lowered the prices of fuel and steam, thus increasing the demand for coal.
Other innovations in the field of logistics also contributed to modifying the scale and the nature of global supply chains. Railways enabled faster, easier and cheaper transport of goods over longer distances. Rudimentary hand trucks and other tools made it easier to handle goods. Communications improved thanks to steamships and railways able to carry letters.
The industrial structure and the supply chains of the early 20th century were the results of all these innovations in manufacturing and logistics, with communication tools that were still relatively rudimental. The difficult communication between the various echelons of supply chains produced vertically integrated industrial structures, where Fordist production lines would mass manufacture goods, later centralised at major transportation hubs.
The advent of mass production also created strong social tensions. From 1800 to 1850, the population of England and Wales doubled, from 9 million to 18 million. At the same time, the proportion of people living in cities rose from 10 per cent to 50 per cent. The flow of rural people into cities overwhelmed the physical facilities. Poorly built houses were hosting crowded masses of people, and suburbs lacking adequate facilities could not keep pace with the growth in population. In 1845 Engels published âThe Condition of the Working Class in England,â a study that denounced the poor living conditions of the industrial working class in Victorian England, suffering from long hours, monotonous labour, widespread employment of children and low wages. Serious environmental changes also started to emerge. Coal was the universal fuel to power factories and heat homes, and burnt coal covered English cities, turning many buildings black over time and contributing to air pollution, both inside poorly ventilated factories and outside.
Supply chains became very important during World War II, as military organisations needed efficient supply chains. Supply chains manufactured military hardware and supplies, and the demands of war pushed a consolidation of industrial engineering and operations research into supply chain engineering.
1.3 Supply chains from postwar to current: From offshoring to reshoring to right-shoring
1.3.1 Offshoring
After World War II the decline in barriers to the free flow of goods and services and important technological changes determined the beginning of the globalisation phenomenon. Globalisation implied a shift toward a more interdependent and integrated global economic system, the merging of historically separate national markets into one huge global marketplace, and the possibility of sourcing good and services from locations around the globe. The internationalisation of business activities implied the creation of institutions to govern the global marketplace, such as the International Monetary Fund and the World Bank, both created in 1944, and the General Agreement on Tariffs and Trade (GATT), created in 1948. Industries worldwide thus entered a new era of intense global competition. Manufacturers in particular had to achieve world-class status to compete effectively in global markets, and they had to interlink and incorporate marketing strategy and manufacturing strategy with the corporate strategy (Skinner, 1969, as cited in Deshmukh, 2001). In this context, manufacturers also started to recognise the strategic importance of factory location decisions, also called âshoring decisionâ (Kinkel and Maloca, 2009). Offshoring, namely the relocation of parts of production processes to locations abroad irrespective of the ownership mode (Kinkel and Maloca 2009), progressively became one of the most popular location strategies. The outsourced processes were initially operational or supporting processes such as manufacturing or accounting; however, after some time companies started to also offshore technical and administrative services.
Historically, most outsourcing has been directed at the developed nations of the world, as firms based in advanced countries invested in othersâ markets. During the 1980s and 1990s, the United States was often the favourite target for foreign direct investment (FDI) inflows. Investors include firms based in Great Britain, Japan, Germany, Holland and France. The developed nations of Europe have also been recipients of significant FDI inflows, principally from the United States and other European nations. These developed nations still account for the largest share of FDI inflows (te Velde, 2006; UNCTAD, 2019).
The outsourcing location had a different direction for manufacturing companies with non-advanced manufacturing technologies that perceived labour cost as a large proportion of the overall manufacturing cost. Several of these companies started to relocate their manufacturing plants to Far Eastern locations, where the labour cost was a fraction of the cost in the original locations in developed countries. FDI into developing nations and the transition economies of Eastern Europe and the old Soviet Union progressively increased. The majority of FDI inflows into developing nations had been targeted at the emerging economies of Southeast Asia. Recently, the world economy saw the growing importance of China as a recipient of FDI; the country attracted about $60 billion of FDI in 2004 which steadily rose to a record of $139 billion in 2018 (UNCTAD, 2019).
A key reason for offshoring was the possibility of exploiting national differences in the cost and quality of factors of production such as labour, energy, land and capital. The cost of labour has always been among the most important drivers for offshoring among manufacturing firms. A survey of 1663 German companies by Kinkel and Maloca (2009) revealed that the cost of wages was the most popular driver for offshoring in emerging markets in the years 1999 to 2006. Access to new markets and the vicinity to foreign markets were two other key reasons for offshoring. The United States has been an attractive target for FDI because of its large and wealthy domestic markets, dynamic and stable economy, favourable political environment, and the openness of the country to FDI. The reasons for the strong flow of investments into emerging markets and into China are similar, considering that China represents the worldâs largest market with its population of more than 1.3 billion people. The presence of related and supporting industries was another important reason for offshoring, since manufacturing companies are often dependent on alliances and partnerships with other companies in order to create additional value for customers and become more competitive. Suppliers were especially mindful to enhancing innovation through more efficient and higher-quality inputs, timely feedback and short lines of communication. Other offshoring drivers included access to a skilled labour force, access to new technologies, capacity constraints in the home country, increasing speed to market and vicinity to foreign customers.
1.3.2 The global economic crisis and the emergence of reshoring
Since 2005 some changes in the business environment started to call into question the paradigm of offshored manufacturing. Firstly, the global economic crisis implied a significant increase in the price of major commodities, raw materials and oil. Therefore, the transportation costs for long-distance deliveries increased significantly. Secondly, a survey conducted by Manning (2014) revealed that companies were starting to feel the difficulty of dealing with communication barriers and cultural differences generated by their offshoring strategy. Thirdly, the macroeconomic situation of some offshoring destinations changed, and increases in labour wages reduced the cost related advantages of offshoring. Fourthly, the business environment saw an increased attention for customer satisfaction, with supply chains forced to be more flexible and responsive, in opposition to the cost advantages given by offshoring strategies (Fratocchi et al., 2011).
As a result, offshoring lost many of its initial strategic advantages. An increasingly high number of firms started to question the real benefits of their âoffshoringâ strategies (Holweg, Reichhart and Hong, 2011) and they started to move their offshored production back to their original countries (Kinkel and Maloca, 2009).
This was the beginning of the phenomenon called âreshoring.â Fratocchi et al. (2014) defined it as âthe back relocation of earlier off-shored production activities, and one of the strategic options available to manufacturing firms in terms of international relocation of manufacturing activities irrespective of the ownership mode (in-sourced and out-sourced)â (p. 56). Simply put, right-shoring is âthe placement of a businessâ components and processes in localities and countries that provide the best combination of cost and efficiencyâ (Investopedia, 2019...
