The Box - Marc Levinson [146]
Before the 1980s, logistics was a military term. By 1985, logistics management—the task of scheduling production, storage, transportation, and delivery—had become a routine business function, and not just for manufacturers. Retailers discovered that they could manage their own supply chains, cutting out the wholesalers that had stood between manufacturers and consumers. With modern communications and container shipping, the retailer could design its own shirts and transmit the designs to a factory in Thailand, which used local labor to combine Chinese fabric made from American cotton, Malaysian buttons made from Taiwanese plastics, Japanese zippers, and decorations embroidered in Indonesia. The finished order, loaded into a 40-foot container, would be delivered in less than a month to a distribution center in Tennessee or a hyper marché in France. Global supply chains became so routine that in September 2001, when U.S. customs authorities stepped up border inspections following the terrorist attack that destroyed the World Trade Center in New York, auto plants in Michigan began shutting down within three days for lack of imported parts.
The improvement in logistics shows up statistically in reduced inventory levels. Inventories are a cost: whoever owns them has had to pay for them but has yet to receive money from selling them. Better, more reliable transport has permitted companies to obtain goods closer to the time they need them, instead of weeks or months in advance, tying up less money in goods sitting uselessly on warehouse shelves. In the United States, inventories began falling in the mid-1980s, as the concepts of just-in-time manufacturing took root. Manufacturers such as Dell and retailers such as Wal-Mart Stores have taken the concept to extremes, designing their entire business strategies around moving goods from factory floor to customer with minimal time in between. In 2004, nonfarm inventories in the United States were about $1 trillion lower than they would have been had they stayed at the level of the 1980s, relative to sales. Assume that the money needed to finance those inventories would have to be borrowed at 8 or 9 percent, and inventory reductions are saving U.S. businesses $80-$90 billion per year.4
This precision performance would have been unattainable without containerization. So long as cargo was handled one item at a time, with long delays at the docks and complicated interchanges between trucks, trains, planes, and ships, freight transportation was too unpredictable for manufacturers to take the risk that supplies from faraway places would arrive right on time. They needed to hold large stocks of components to ensure that their production lines would keep moving. The container, combined with the computer, sharply reduced that risk, opening the way to globalization. Companies can make each component, and each retail product, at the cheapest location, taking wage rates, taxes, subsidies, energy costs, and import tariffs into account, along with considerations such as transit times and security. The cost of transportation is still a factor in the cost equation, but in many cases it is no longer a large one.
Globalization, historians and economists have hastened to point out, is not a new phenomenon. The world economy became highly integrated in the nineteenth century. The decline of tariffs and other trade barriers in the years following the Napoleonic Wars led international trade to increase after decades of stagnation, and the introduction of the oceangoing steamship in the 1840s sharply reduced transport costs. Ocean freight rates fell 70 percent between 1840 and 1910, encouraging increased shipment of commodities and manufactured goods around the world, while the telegraph—the nineteenth-century counterpart of the Internet—gave people in one location current information about prices in another.