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End of the Line

End of the Line

Unfettered globalization is not creating the wealth and global stability its supporters claim. Rather, the new world economic system makes first-world economies more vulnerable to terrorism, war and natural disasters. CIOs have a role to play in protecting these fragile supply chains

A butterfly flapping its wings in the Amazon might have minimal effect on Western production systems, but a 60-second earthquake in Taiwan some years ago almost destroyed the US economy.

We populate a planet where an epidemic in China can imperil America's capacity to assemble automobiles and aeroplanes, and where closure of a single factory in England can deprive Americans of half their nation's supply of flu vaccine.

Corporations have created a global production system so complex, tightly geared and leveraged that a breakdown anywhere can mean a breakdown everywhere, warns Barry C Lynn, author of End of the Line, The Rise and Coming Fall of the Global Corporation.

A war on the Korean peninsula could slash global production of DRAM chips by 50 percent and NAND flash chips by 65 percent, massively disrupting the electronics and other industries. Widespread adoption of offshoring means an uprising in southern India could cost many global companies, including banks, their ability to process information. An avian flu pandemic in industrial Asia could destroy the system the US relies on for medical respiratory masks, among other calamities . . .

In a flat world, an "everyday disaster" far away can heavily disrupt the industrial systems on which nations depend, causing major job losses and stopping production of consumer goods. Worst-case outcomes can be bad - very bad. Lives can be lost and financial systems can collapse.

For these reasons and more, Lynn, a fellow at the New American Foundation in Washington DC and former executive editor of Global Business magazine, says we should be very, very worried. And, he says if CIOs want to vaccinate their own organizations against such disasters, they should be getting very, very busy.

"Our corporations have built the most efficient system of production the world has ever seen, perfectly calibrated to a world in which nothing bad ever happens," Lynn writes. "But that is not the world we live in. Not only is human civilization riven routinely by earthquakes and hurricanes, but so too is it shattered by wars and acts of terror and simple human error. Which means it is only a matter of time until we experience our next industrial crash, perhaps one much worse than any we have yet known."

Just look at his evidence. Lynn's "60-second earthquake" hit Taiwan (the world's number one source of made-to-order advanced semiconductors) in September 1999. The upheaval demolished infrastructure, cut off electricity and caused the deaths of more than 2500 souls on the island. Although the plants manufacturing the chips suffered relatively little damage, factories as far away as California and Texas soon felt the impact. As semiconductor chip supplies stalled, companies like Dell and Hewlett-Packard began shutting down production and sending workers home.

A disaster whose sole impact a decade earlier would have been local threatened to create a major global crisis, with world output of electronics falling 7 percent below predictions in October that year alone. And disruptions continued well into the new year, threatening an economic tsunami for the global economy, Lynn says.

Citing case studies from US multinationals such as Cisco, Dell, FedEx, General Electric, General Motors and Wal-Mart, Lynn shows how cost-cutting and outsourcing have left corporations dangerously exposed to even minor supply chain disruptions.

He also provides perhaps the most complete guide to how IT has remade global industrial systems. And he foresees similar disasters ahead as long as companies continue their "reckless" determination to outsource and move offshore every possible step in the supply chain.

Lynn bolsters his case with plenty of examples. For instance in 1993 a chemical plant explosion in Japan slashed half the world's supply of a resin used to produce computer chips. Within a month the price of memory chips had doubled, driving laptop prices up by $US100. In 2002 a 10-day US West Coast stevedores' strike cost the US economy $US20 billion in lost production, with American factories unable to import parts. And in 2001 the September 11 terrorist attacks shut down air traffic for days and slowed the movement of goods from Mexico and Canada.

Together they show just how closely connected the world now is and just how radically different are the dangers we now face. Lynn says CIOs are not only in the perfect position but also have a supreme responsibility to estimate and address those risks. That means helping their firms understand and keep track in real time of all their sourcing - from tier one suppliers down - and removing vulnerabilities. He does not just mean physical supply chains, either. Organizations must track their process supply chains too, he says. It means pushing executives, boards and even governments to grasp the extreme fragility of the global supply systems.

Lynn says organizations should be able to sit down together to discuss their sourcing strategies and to coordinate their contingency plans.

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