How US fiscal, monetary policy impacts sourcing decisions

By Ron Keith

In 2005 Pulitzer Prize winning journalist and fellow closet economist Thomas Friedman boldly proclaimed "The World is Flat." His treatise on globalization for the common man became an instant bestseller and brought the realities of globalization home to the first generation of world citizens living the new paradigm of truly global economics.

In this new global world of compressed topography, the interconnectedness of all things economic is dramatically enhanced.

As manufacturing, business process outsourcing (BPO), software development and numerous other industries flock to offshore locations with specific advantages in factor input costs, some of the underlying issues impacting these costs are changing in real-time, and could ultimately shift the input factor fundamentals in an entirely new direction.

Being a closet economist, I have come to appreciate the generally self-correcting nature of virtually all aspects of macro economics operating in free and unfettered markets over long periods of time. But, as a supply chain and manufacturing professional, I operate within a different set of micro economic constraints in a system where the self-correcting nature of things is best explained by "The Population Ecology of Organizations" (Hannah & Freeman 1977), whereby certain companies get de-selected from the population based on their inability to compete.

Thus being unable to allow for the time required for the various feedback loops of global economics to run their course, OEMs and brand owning enterprises must be perpetually forward looking and seek to understand the underlying social; political, and economic factors influencing the supply chains of today, and shaping the supply chains of tomorrow, lest they be marked for ‘de-selection'.

Although supply chain management is critical in all product industries, the electronics industry is particularly sensitive to supply chain issues and material costs as an estimated 68% of the manufactured cost of electronic products globally is in the cost of the raw materials (or about 88% when viewed at the system level).

But, in an ever flattening world, it is simultaneously interesting, curious, and a bit concerning the world's raw materials continue to be priced in US dollars.

In the more than 35 years since the collapse of Bretton Woods, the US dollar has been the dominant world currency of international trade, the currency of favor for central bank reserves, and as it relates to this article, the primary denominator for the world's major industrial commodities.

But as the United States' preeminence in all things economic is challenged by both developed and newly industrialized nations; the fiscal and monetary policies of the US, coupled with the countries' general behavior patterns in trade and consumption, are exerting tremendous inflationary pressures on global supply chains.