Professor Martin Christopher’s observation that supply chains compete not companies carries greater significance in the economic downturn that we are moving through. Increasingly, companies are looking to cut costs and retain cash and they are trawling the globe for options. Recently, Russia, China and India were the top 3 destinations of Foreign Direct Investment by multinational retailers. What happens when the agri processing industries in these countries are dominated by the informal sector? And, as International Retailers stretch the terms of trade to pay later – what are the implications for the small scale suppliers?
Outsourcing to cut costs is opening up all sorts of linkages between the formal and informal sector that few have monitored closely. In fact, we are starting to witness a formal sector that is increasingly parasitic on informal processes and the dismantling of any form of labour regulation or social protection. Despite these moves, formal operators are reluctant to recognise the implications of such dependence on an informal economy without which some businesses cannot survive the current downturn.
There are many issues to explore. Fundamentally, the asymetircal power position between the uninformed small time suppliers and the big players from the formal sector can lead to abuses in price – especially in markets with high price volatility such as vegetables. Following on from this, low margins trap the small trader in a vicious cycle of low productivity due to a lack of access to funds to invest in more productive physical and human capital.
Asymetries in power lead to asymetries in information and investment that acts as a brake on local development into global markets. Take the case of the Australian fishermen who supplied tuna to the local canneries for low prices – because the tuna was going into the low end canned trade. Enterprising fishermen used the internet to access information on pricing in other markets and discovered that their catch could demand premier prices in the Tokyo fish market. It is a similar story with the Kerala fishermen who had landed their catch in their home village for an age. This meant that the agent dictated prices. Discovering that mobile phones could be used 30 kms out at sea, the fishermen started to compare prices and landed their fish to the highest bidder.
How many more supply chains in developing, emerging or transitional economies can be transformed through a focus on ways to simplify, combine or eliminate asymetrical factors in information, investment (human and physical capital) and market access?