[Dialogue of Guangming International Forum]
Original title:Where does the economic recovery and development after the epidemic come from?
The management of "isolated" companies divorced from industrial chain information is extremely unreliable.
Lu Lijian: After the outbreak of the COVID-19 epidemic, leaders and industry experts in various countries gradually realized the importance of industrial chain management and studied measures to improve the stability and competitiveness of the industrial chain. As leading scholars in the field of industrial chain management and digital economy, Professor Federgren and Professor Maglas, can you introduce the development history of industrial chain management from a professional perspective and how to see the impact of the epidemic on the world economy?
Lu Lijian: Professor of Business School of Hong Kong University of Science and Technology, winner of the Nicholson Award of the International Institute of Operations and Management, and former global vice president of quantitative investment of Goldman Sachs Group.
Federgren:Industrial chain management is very popular now, and high-quality enterprises with core competitiveness have a very professional and perfect industrial chain management system. But 20 years ago, this major was almost a niche discipline. Only the analysts and middle managers of the expert team were concerned about the difficult problems in the design and management of the high-efficiency industrial chain, and these problems rarely even appeared in the company’s board of directors or government cabinet meetings. Even similar business administration majors in business schools rarely offer related courses or only a few students are interested in such courses.
Awi Federgruen: Charles Professor at Columbia University Business School, head of the Department of Risk Decision-making and Operation Management, and academician of the American Academy of Engineering.
Nowadays, this phenomenon has changed dramatically. On the one hand, because of the crisis caused by the COVID-19 epidemic, many countries realized that the key elements of products were seriously inadequate overnight, and the news media kept reporting the serious shortage of medical materials. In addition, the grounding order and factory closures around the world have caused serious deficiencies in other key elements of the product line unrelated to the epidemic. For example, Procter & Gamble, the world’s top 500 company, is a manufacturer of household products such as laundry detergent and toilet paper. More than 9,000 kinds of raw materials needed to produce 17,600 kinds of finished products depend heavily on more than 400 different suppliers in China, and its first-line suppliers in other countries are also facing a shortage of raw materials. The serious shortage of core key production factors like this makes enterprise managers and economic policy makers realize that the traditional "isolated" corporate management mechanism that is divorced from the upstream and downstream information of the industrial chain in which the company is located is extremely unreliable. For the sustainable, healthy and stable development of the economy, we must reshape the stability and competitiveness of the industrial chain from the perspective of the industrial chain.
According to a survey conducted by the American Supply Chain Management Association at the end of February and the beginning of March 2020, about 75% of the companies reported that the COVID-19 epidemic caused the interruption of their industrial chains, and 44% of the companies did not have any plans to deal with such interruption risks. Among Google’s 2.5 trillion global search keywords throughout the year, the frequency of the word "supply chain" has increased fivefold from early January to mid-April 2020.
In fact, industrial chain management, as the core part of the company’s strategy and the core driving force of the company’s profitability, existed long before the COVID-19 outbreak, and will continue to exist in the future. Some industries have been completely changed because of the innovation of industrial chain strategy. For example, Amazon can lead and monopolize the global electronic retail industry, not because it provides better or different products, nor because its price is more competitive than its competitors. Its unprecedented success is only because of its innovation in industrial chain management strategy. For the same reason, Wal-Mart has nearly $517 billion in global revenue. Wal-Mart is by far the largest comprehensive retailer of physical stores and e-commerce in the world.
Maglas:The COVID-19 epidemic has brought great loss of life, economic interruption and uncertainty. The global health care system, political system, the ability of relevant institutions to respond to the crisis, and the economic relevance and dependence through the convergence of global industrial chains are facing severe challenges from the epidemic. In addition, the epidemic has aroused great concern about social injustice, especially among some people who have health and economic income crises caused by the epidemic.
Costis Maglaras: Dean of Business School of Columbia University and Professor of David and Lynn hilfing.
Many of us have been involved in a natural experiment for nearly a year. After the outbreak of the epidemic, many countries implemented the isolation policy of closing cities and homes, and some countries are still studying and working remotely. Although some industries, such as food and agriculture, have not stopped operating during this period and have returned to normal operation to a large extent, a large number of economies related to service industries will continue to work remotely. Such a situation has accelerated the trend that appeared before, and has produced a butterfly effect on urban transportation, working methods, workplace, shopping methods, service methods, reading methods and supply and demand.
Lu Lijian: That’s true. The China government has done an excellent job in controlling the epidemic, and the epidemic has been effectively controlled at home. I found that the word "industrial chain" or "supply chain" has a frequency of nearly 100 million in China. The impact of this epidemic on the world economy is extremely great. Taking the United States as an example, the epidemic caused a large number of enterprises to go bankrupt, involving a wide range. The traditional service industries such as transportation, catering, hotels and tourism were the most affected, followed by industrial enterprises, especially manufacturing.
The globalization of industrial chain is related to the safe production capacity.
Lu Lijian: The industrial chain in the 21st century is closely related to economic globalization. After the outbreak of the epidemic, the media in individual countries hyped the topic of "anti-globalization" and proposed to stop globalization and let manufacturing return to their own countries. Even some politicians in individual countries regarded globalization as a political game and chip. What does Professor Federgren think of the phenomenon of "anti-globalization"?
Federgren:A key strategic question is, from the perspective of efficiency and flexibility of industrial chain, does a company need to localize suppliers, or outsource to other countries or regions, or use both internationally? In the past few decades, an obvious practice in the United States or most European countries is to gradually outsource manufacturing to countries and regions where labor and raw materials are cheaper. Recently, we have also seen the momentum contrary to this. For example, between 2000 and 2003, 240,000 manufacturing activities were outsourced to areas outside the United States every year. However, this figure was reduced to 50,000 in 2016. In the same year, 70,000 similar manufacturing activities were brought back to the United States, and the direct impact was to increase and promote job opportunities in the manufacturing industry in the United States. Before the COVID-19 epidemic spread, the new information provided by Bank of America confirmed this phenomenon. In a survey involving 3,000 companies, the researchers found that in 12 global industries with a total market value of more than 22 trillion US dollars, more than 80% companies located in North America, Europe and Asia except China are implementing or announcing plans to move back to the United States from their current regions, which shows that the localization trend does exist.
This is a container photographed in Banrang Port Area, Brazil, Singapore on August 17th, 2020. Xinhua news agency
So how to explain this trend against globalization? First of all, the company realizes that the selection of suppliers should not only depend on the direct production costs of purchasers, but also take into account the total landing costs of all costs associated with suppliers, including transportation, warehousing and customs costs, as well as the costs needed for safe inventory to meet local needs. The costs associated with these inventories can be enormous, especially when the distance from suppliers to the local area is very long, full of uncertainty and the need to maintain high quality of service. In addition, suppliers usually have capacity constraints, and their capacity varies greatly. Secondly, the increasing risks of the global economy have prompted companies to constantly change their supplier selection decisions and corresponding procurement strategies. In the past 40 years, the cost of production labor in some countries has also been increasing. In the current trade friction, the United States, China and Europe are rapidly changing their trade tariffs, which makes the fluctuation of logistics costs and commodity prices constantly increase. In addition, foreign exchange and interest rates are constantly changing rapidly. All these fluctuations have an important impact on demand, cost and production capacity. Generally speaking, due to sudden supplier closure, quality problems, rational distribution plan and other factors, the theoretical capacity level is very different from the actual production process. Thirdly, due to the limitation of suppliers’ production capacity, it is necessary to purchase from two or more suppliers in a volatile environment.Even what companies are eager for. Of course, the difficulty of the global purchasing strategy of multiple suppliers is how to decide the allocation problem of each supplier and how to dynamically adjust the allocation decision between suppliers by using inventory information. In most cases, enterprises can use contracts similar to the concept of financial options to solve the problem of supplier allocation, that is, enterprises can book or invest in the capacity of suppliers in advance to ensure that they have the corresponding capacity when needed in the future. Similarly, for a multinational company with two or more assembly plants distributed in different regions of the world, and the cost and delivery cycle of these factories to serve customers are different, it faces the same dilemma.
This is a 2×660 MW ultra-supercritical coal-fired power station in Paajala, which was filmed in Bodu Acali County, southern Bangladesh on November 11th, 2020. China Machinery Import and Export (Group) Co., Ltd. participated in the investment and construction. Xinhua news agency
Lu Lijian: You returned to the objective law of economic development from the dimensions of total economic landing cost, economic risk and production capacity, and expounded the "anti-globalization" that appeared in recent years. Your analysis makes people understand the truth that whether an enterprise implements globalization strategy is determined by the efficiency and flexibility of the industrial chain of its product production. Indeed, the globalization of industrial chain is the objective requirement of the development of social productive forces and the inevitable result of scientific and technological progress. It does not plague economic development as some politicians and media say. Their purpose is to "politicize" the issue of globalization. In your opinion, how to improve the flexibility and competitiveness of the industrial chain in the post-epidemic era?
Federgren:In most industrial chain configurations, the volatility level or risk level is the primary driving force for high operating costs. Under the global production and procurement system with multiple suppliers, due to the full and effective sharing of orders and capacity resources among suppliers, the industrial chain system has enhanced its ability to resist risks, thus having higher flexibility and operational efficiency. Therefore, the globalization of industrial chain is an important measure to improve the production capacity with safety guarantee.
In addition, we should also consider that the supplier’s channel is in a state of partial or complete interruption during the epidemic. The COVID-19 epidemic has produced a large number of actual cases as described above. However, the problem is not limited to the once-in-a-century COVID-19 epidemic. Other factors, such as the flood disaster in Thailand, the earthquake in Japan, the hurricane similar to Katrina in the United States, local fires and factory pollution, will also cause worldwide production and supply disruptions. In the vaccine manufacturing industry, due to the small number of international suppliers and the frequent long-term closure of production equipment, the problem of insufficient production capacity has always existed. Therefore, the consideration of industrial chain flexibility also provides additional incentives for multi-supplier global supply strategy.
In fact, my team’s latest research shows that compared with the procurement strategy of a single supplier, the benefits brought by the procurement strategy of multiple suppliers, even if only two suppliers, are very obvious. Even in an environment with stable cost, stable demand and risk-free production capacity, the benefits of global decentralized procurement are also very significant. Of course, in a volatile market environment, the effect of decentralized global multi-supplier configuration will be more obvious. However, to realize and realize the benefits brought by globalization requires the most advanced industrial chain configuration models and algorithms, and these studies are also the focus of my research team at Columbia University Business School.
Lu Lijian: From the perspective of reducing the fluctuation level of the industrial chain, you discussed how to rationally use the procurement decentralization and incentive mechanism in the process of globalization to effectively improve the efficiency of the industrial chain and reduce the fluctuation. From the perspective of historical development, economic globalization has promoted the flow of goods and capital, the progress of science and technology and civilization, and the exchanges between people of various countries, providing a strong impetus for world economic growth. Of course, economic globalization will not be smooth sailing, it is a double-edged sword, and there will be various problems, such as geopolitical risks, high dependence on production links in a certain region caused by high concentration of suppliers, and insufficient response ability to abnormal demand. However, simply blaming the problems that plague the world on economic globalization is neither in line with the facts nor helpful to solve the problems. In the face of opportunities and challenges, it is more important to ease trade frictions, remove barriers to enterprise development, work closely together to cope with all difficulties and challenges, work together to achieve comprehensive economic recovery and healthy development, and advocate formulating strategies according to local conditions to enhance the flexibility and core competitiveness of the industrial chain.
Technological innovation is an important driving force for economic recovery and development.
Lu Lijian: In recent years, technological innovation including big data technology has developed rapidly and been widely used, playing an increasingly important role. Professor Maglas, please talk about the application of this technology in service and digital economy and its significance to economic development in the post-epidemic era.
On October 28, 2020, in Sejong City, South Korea, the staff showed an auxiliary distribution robot that could follow the courier’s movement. Xinhua news agency
Maglas:Although the COVID-19 epidemic has caused great losses to the world economy, it has also accelerated technological innovation in many fields, which is an important driving force for economic recovery and development.
First of all, in the field of transportation, all kinds of enterprises are trying to overcome the problems encountered in the resumption of production and work caused by the COVID-19 epidemic, set a safe social distance, and formulate detailed rules that people should abide by in the halls, elevators and open office environments of commercial buildings. In the city business center, the problem of employees commuting safely is particularly worrying, because it is a process that relies heavily on the public transportation system. At present, the public health policy requires to reduce the congestion of the transportation system and increase the utilization rate of bicycles. However, this model is not enough to meet the transportation needs of millions of commuters on a large scale, especially for long-distance commuting. For example, in the urban subway transportation system, assuming that the safe distance between people is doubled, for example, from 2 feet to 4 feet, the traffic capacity will be reduced to 75%. This requirement has a particularly serious impact on peak hours. The safe social distance during peak hours is usually close to 1 foot, and the requirement of increasing the social distance to 4 feet will reduce the transportation capacity to only 5%.
So how to deal with the extremely shrinking traffic capacity caused by the epidemic? Here, I will focus on analyzing and expounding the principle of demand smoothing in management, that is, the idea of reasonably dispersing demand throughout the time interval. Managing an economic society in a special period of gradual resumption of work and production forces us to rethink the most basic assumption in daily life, that is, most people have the same working hours and need to take the public transport system at the same time every day. This basic assumption can and should be removed, for example, by staggering the working hours in some way. This process of smoothing demand and reducing the load utilization rate during peak hours will greatly reduce the congestion of public transportation systems, road networks and office buildings. For example, assuming that the current system has a 60-minute peak period and a 90-minute busy period every four hours, a simple calculation shows that a subway will improve its transportation capacity by more than 30% and maintain its operation at a utilization rate below 85%. Considering different traffic networks, only the way of smoothing demand will make up for 50% of the loss of traffic capacity caused by the increase of social distance during the epidemic, and increase the traffic capacity in the post-epidemic era by 30%. In addition, it will reduce the congestion delay and total traffic time caused by full subway cars and crowded platforms.
The method of demand smoothing is also being applied in the road system, aviation and power network system in the United States. Generally speaking, such smoothing can be achieved through price incentives, such as giving a certain discount on electricity consumption at night, and charging higher fees for driving in special areas during peak hours. However, before shifting to price incentives, we should try to reduce the structural impact of the convergence of daytime working hours on the peak infrastructure load. Car sharing is another feasible solution to traffic congestion. In order to promote the use of shared cars, we need to invest in the optimization of technical schemes such as scheduling and pricing mechanism. At present, many difficult problems in the field of shared cars will lead to more in-depth thinking and guide a large number of sustainable technological innovations.
The second area is telecommuting. After the outbreak, almost all employees switched to telecommuting overnight, which greatly affected the service industry and my higher education. Many people are studying such a topic: to what extent the emergence of telecommuting will be a long-term trend, and what kind of science and technology and management tools can be used to create an inclusive, innovative and dynamic organic culture. Although telecommuting has achieved great success during the epidemic, it is still uncertain whether this method can be successful for a long time. In the current environment, telecommuting is facing great difficulties and challenges. For example, it is very complicated to hire and train new employees, and the process of innovation requires intense and purposeful joint research and development, which are difficult to achieve by telecommuting; Corporate culture is also difficult to maintain and evolve through telecommuting, and personal relationship networks usually rely on spontaneous and informal communication — — It is almost impossible for "cold water communication" in remote mode to replace it. Most people may rely on scientific and technological tools for projects, documents and other work, or work together through online meetings, but these tools can’t solve the problems and challenges in interpersonal communication mentioned above.
In order to fill this defect of telecommuting and cope with the current epidemic crisis, many very meaningful innovations are currently under way. For example, some innovative works combine the virtual network and virtual reality technology that are currently being created. A large part of this work draws on the knowledge and technology of online game industry. It is a very necessary measure to improve our ability to maintain close relationship and virtual communication. In addition, how to fully combine offline communication to achieve the best results also requires in-depth thinking and guidance from team and project management.
Finally, innovation also plays an important role in the recovery of other service industries. Education has been transformed during the epidemic, and the experience we have quickly explored and learned will continue to play a role. The scientific and technological tools of distance learning will allow scientific research institutions to provide online and offline hybrid teaching methods, focusing on interpersonal interaction activities that can be most beneficial to students’ learning, and enhancing the value of the educational projects we provide. In addition, we can quickly get familiar with and use distance education tools, and then improve the education level in remote and poor areas lacking teachers or professional educators.
In a word, the epidemic has brought about great changes in many aspects of our economy, forcing us to rethink and rethink many aspects and habits of life. This process is subversive, but it will continue to lead long-term innovation and changes to our global economy.
Lu Lijian: You discussed the important role of technological innovation in economy. Search, socialization, payment and entertainment constitute the infrastructure of the online world, and the digital and intelligent upgrading of the industrial chain is also the infrastructure for building the future data productivity era. After adopting digital technology, industrial chain enterprises are not only an individual in the economic sense, but also a source of data production, and these industrial chain data are of extraordinary significance for Industry 4.0, intelligent manufacturing and the possible AI+ manufacturing revolution in the future. In the post-epidemic era, technologies such as big data, artificial intelligence and blockchain will play a more important role in the industrial chain. First of all, through the decentralized, open, autonomous, anonymous and tamper-proof characteristics of blockchain, problems such as data leakage, theft of sensitive information and geopolitical interference have been effectively solved. Secondly, because data can objectively reflect the truth and development law, rich and comprehensive data greatly improve the geographical limitations in the process of traditional globalization, increase the efficiency of information communication and accurately trace the source of problems. This kind of big data technology helps to reduce the cost and obstacles of information communication in the industrial chain and greatly improve the efficiency and competitiveness of the industrial chain. In the future digital era, whoever has the most comprehensive data volume and has mastered intelligent technologies related to big data processing and business analysis will have the core competitiveness of this market.
Guangming Daily (January 23, 2021, 08 edition)
