Localizing the Global Supply Chain

In 1958, Leonard Read—founder of the Foundation for Economic Education—wrote “I, Pencil,” an essay chronicling the mysterious, global life of a pencil. For Read, the harvesting, mining, and refining of a pencil’s materials across an immense global network revealed the “miracle of the market:” the creative spirit of freedom that could produce whatever man desired through the happy cooperation of millions around the world. Milton Friedman borrowed from the essay in a 1980 PBS television show, where he called upon the pencil’s complex creation to preach about a global market that would “foster harmony and peace among the peoples of the world.” For both Read and Friedman, the pencil’s convoluted international footprint was a testament to the efficient, productive, and coordinated workings of global manufacturing, which could miraculously combine cedar from Northern California, graphite from Sri Lanka, and rubber from Indonesia to create the magnificent, freedom-loving pencil.

In 2022 we find ourselves disillusioned about Read and Friedman’s miraculous pencil. The global supply chain is not a mysterious force that we happily overlook while it brings us our every desire: it is a clogged and overstrained system that we consistently confront and blame for high prices and slow delivery. Nor do we view the international life of a pencil as an assurance of global harmony and peace: instead, we question the working conditions of the pencil’s producers and the carbon footprint its production leaves behind. Industry leaders face increasing pressures to transform their supply chains into more stable and sustainable systems that reduce waste and pollution, limit disruptions, and disclose labor conditions. Consumers, investors, and policy makers are not content with a mysterious, self-regulating, expansive supply chain, and instead desire a more transparent, sustainable, and accountable one.

Certain industries particularly suffer from wide and wasteful supply chains, and fashion is one of them. Consider a pair of jeans: first, cotton is picked in the United States. That cotton is then cleaned and spun into yarn in Indonesia. The cotton yarn is next dyed in one factory in China, that dyed yarn is woven into denim in another factory in China and shipped to Vietnam. The denim is cut into different pieces of fabric in Vietnam. Those pieces are sewn together somewhere else in Vietnam, appended with buttons and zippers that might be sourced from India, and finally the jeans are hemmed, pressed, folded and shipped to the United States to be sold. As the cotton is continually transported from one country to another, it leaves behind a large carbon footprint, faces potential shipping delays, and further conceals the labor conditions of each worker in the process.

Now imagine that a fashion company decided to make its jeans completely in-house—cleaning, spinning, dying, weaving, cutting, sewing all in one place. Most obviously, this would cut transportation emissions dramatically. But it would also mean that a company truly invested in sustainability could ensure that responsible technologies were used at every step of production—e.g. waterless dying, ozone washing, and the digitization of design. As a single factory would have oversight over the entire process, there would be less waste and more straightforward opportunities for recycling. The company could also better capture data to ensure that their practices were indeed sustainable. They could ensure the quality of their working conditions across all operations and report these conditions authoritatively to consumers. They would also be far more protected against disruptions in the supply chain, as they would control the most essential materials and operations involved in production. Not only would such a vertically integrated company have more power over their product, but they could also offer consumers more transparency and meaningfully reduce carbon and water pollution. 

Now, while entirely self-sufficient manufacturers do exist, in reality such extreme vertical integration is hard to scale. Obviously manufacturers disperse their supply chain for a reason: they capitalize on the comparative advantages of different geographies (finding the cheapest place to manufacture each piece of a garment), and they win competitive advantages over other industry players (e.g. with lower cost of capital, more diverse skills, and further product specialization in certain regions). But manufacturers can still progress towards vertical integration without fully sacrificing these advantages. With a “blended supply chain,” manufacturers can co-locate more steps in the supply chain in the same countries. For a recent example of this move, we can look towards Vietnam—the world’s third ranking exporter of textiles and garments. While Vietnam historically boasted massive yarn and garment manufacturing, it significantly lagged in fabric manufacturing: this disconnect created major supply chain imbalances, and it also reduced companies’ transparency and sustainability goals. But in the past 5 years there has been heavy investment in fabric manufacturing, which now allows a significantly greater portion of exports to be 100% (or nearly 100%) “made in Vietnam.” Such a system may not be as sustainable, efficient, and resilient as an entirely vertically integrated manufacturer, but it is certainly preferable to the sprawling nature of business as usual.

Climate change and supply chain disruptions are the two primary challenges facing the fashion industry today. But these are also interlinked challenges: as long as the supply chain remains unsustainable, we will face even more natural disasters that will disrupt the supply chain in the future. The solution is similarly double-sided: vertically integrate supply chains as much as possible so that they both pollute less and resist disruption. This does not mean that we abandon global manufacturing altogether: vertically integrated factories (or at least countries) can responsibly operate around the world, transporting final products or major components to other countries, while massively reducing their footprint overall. But we need to leave behind the idea that the market looks either like an extremely vast global supply chain or a hyper-localized operation. Instead, we need to embrace solutions that smartly replicate how local communities work, but on a global scale. Such “blended” supply chains will actually save the globe and reduce inequality amongst all stakeholders in those chains.

By Oliver Niedermaier

Founder, Chairman and CEO