Complex economic coordination is a wonder of human civilisation. In the book If We Can Put a Man on the Moon, Deloitte’s William D. Eggers and Scudder Kemper’s John O’Leary ask the question: “Who is in charge of getting the right number of chickens to Manhattan every day? After all, few chickens live there, but a lot of chickens get eaten there.” The answer is that nobody is in charge: “When it comes to the essence of the chicken delivery system – how much chicken, of what kind, at what price – it is the invisible workings of supply and demand that align the productive activities of a loose network of thousands of people (and companies) in making sure New Yorkers get their chicken potpie, chicken vindaloo, and extra-spicy buffalo chicken wings.” Middlemen are the reason New York isn’t full of farmers travelling in from the countryside every day, chickens in hand, visiting restaurants in an attempt to offload their produce. Wholesalers make supply chains cheaper and more efficient.
BETTER THAN GOVERNMENTS
Hubristic central planners throughout the ages have assumed that they can employ resources better than middlemen. The nineteenth-century economist Frédéric Bastiat, in section six of his famous essay What Is Seen and What Is Not Seen, exposed the fallacy of this belief. Bastiat defended the “profiteering” of middlemen, precisely because unlike government officials they are directed by the comparison of prices, distributing food beginning always at the highest price, that is, where the demand is the greatest. Bastiat wrote: “It is impossible to imagine an organisation more completely calculated to meet the needs of those who are in want.”
It is not just man-made interventions that can impede the market process – natural disasters can cause havoc too. Richard McIntosh of Inverto says: “Geopolitical, social and natural events are occurring all the time.” He adds “procurement functions are dealing with supply chain disruption on an ongoing basis, from civil unrest in Egypt, natural disasters such as ice-storms on the eastern seaboard of the US or to give an example more closer to home, the rapid emptying of supermarket shelves from the fuel blockades of 2007.” In these circumstances, the profit motive of middlemen finds solutions.
Complex supply chains bring challenges for producers, wholesalers and retailers. According to Coolin Desai, who is Head of UK Transportation & Logistics at PwC: “The supply relationships between producers, suppliers and consumers have become more complex and more accident-sensitive in the last few years.” PwC estimates that currently 90 per cent of the worldwide trading volume is concentrating on about 39 gateway regions. As such, Desai says, “if only a single one of these hubs fails, the economic consequences could be enormous after just a short period of time, and affect most economies around the globe.” He notes that last year’s volcanic eruption in Iceland caused a ripple effect across the world, with the airline industry losing around $1.7bn in revenues, when over 100,000 flights were cancelled in six days. Added complexity pushes businesses to change.
Emma Scott of the Chartered Institute of Purchasing and Supply (CIPS) says: “The very nature of these events are that they are unpredictable in their location as well as in their timing.” She relates the example of AstraZeneca, which had a data centre in Mumbai that was disrupted by the terrorist attacks in 2008. Their backup plant was on a small Indian coastal town and all business was switched over within hours. However, “within days this site was hit by a freak tidal wave flooding the whole town.” For Scott, the calculation facing businesses is: “When does your investment outweigh your risks?” Failure is inevitable, but risk is better taken by businesses than governments.