Globalization, Trust, and the Supply Chain

Stephen DeAngelis

August 30, 2011

Charles Mann, author of the new book 1493: Uncovering the New World Columbus Created, recently wrote an op-ed piece in the Wall Street Journal about globalization. [“The Real Story of Globalization,” 6 August 2011] He began his article this way:

“In the great tropical harbor of Manila Bay, two groups of men warily approach each other, their hands poised above their weapons. Cold-eyed, globe-trotting traders, they are from opposite ends of the earth: Spain and China. The Spaniards have a big cache of silver, mined in the Americas by Indian and African slaves; the Chinese bring a selection of fine silk and porcelain, materials created by advanced processes unknown in Europe. It is the summer of 1571, and this swap of silk for silver—the beginning of an exchange in Manila that would last for almost 250 years—marks the opening salvo in what we now call globalization. It was the first time that Europe, Asia and the Americas were bound together in a single economic network.”

The rest of Mann’s article is about how invasive species, carried in the ships and cargo that circled the globe, changed the face of the world forever. Mann explains:

“The silk would cause a sensation in Spain, as the silver would in China. But the crowds that greeted the returning ships had no idea what they were truly carrying. We usually describe globalization in purely economic terms, but it is also a biological phenomenon. Researchers increasingly think that the most important cargo on these early transoceanic voyages was not silk and silver but an unruly menagerie of plants and animals, many of them accidental stowaways. In the sweep of history, it is this biological side of globalization that may well have the greater impact on the fate of the world’s people and nations.”

It’s a fascinating article and well worth reading in its entirety. The biodiversity generated by globalization, however, is not what this post is about. This is a post about trust. Trade has always been about trust. The Spanish and Chinese tradesmen, who “warily approach[ed] each other, their hands poised above their weapons,” weren’t trusting because they had no relationship. Trust must be earned and that normally takes time. Tim Cummins, founder of IACCM, reports, that trust seems to be eroding rather than strengthening and, surprisingly, he blames globalization for trust’s decline. [“Loss Of Trust Carries A Heavy Price – But How Heavy?” Commitment Matters, 16 December 2010] Cummins writes:

“According to a report for the World Economic Forum, levels of trust have fallen by 44% in the last 10 years. Whether or not we can rely on the precise statistic, the underlying message is important for anyone engaged in the world of contracting and relationship management. Trust is commonly understood to be fundamental to the health and sustainability of relationships. Its erosion therefore has significant consequences, many of which are in fact already evident in our daily work. Globalization has been the key factor in the decline of trust.”

That’s a bold claim. Cummins, however, goes on to offer some of the reasons he believes it is true. We’ll get to those reasons momentarily. Commenting on Cummins post, Steve Hall, a senior staff writer for Procurement Leaders, writes, “Sometimes it might seem like stats and graphs might be the best way of understanding a foreign supply market, but let’s not be mistaken, for procurement trust is [a] hugely important issue and one that requires you to look a little deeper.” [“Global sourcing is about trust, not just statistics,” ProcurementBlog, 20 January 2011] Let’s examine Cummins’ reasons for believing that globalization has eroded trust. His first reason involves familiarity. If “familiarity breeds contempt,” Cummins asserts that lack of familiarity breeds mistrust. He writes:

“As we work increasingly with new and unfamiliar companies and trading partners, often spanning jurisdictional, cultural and linguistic barriers, a sense of caution is inevitable and trust is a casualty.”

Having had some souring experiences of my own working overseas, I know exactly what Cummins is talking about. I believe, however, that widespread corruption and an absence of the rule of law are what breed mistrust rather than “cultural and linguistic barriers.” If you can’t trust the law to enforce contracts, you have good reason to be cautious. Globalization exposes companies to trade with countries in which the rule of law is applied unevenly (or sometimes ignored altogether); but you can’t blame globalization for internal national politics. I agree more fully with Cummins’ second reason for declining mistrust. He writes:

“The networked world has disrupted traditional methods of doing business – in particular, face-to-face meetings are far less common. Many relationships are ‘virtual’ and lack the forms of bonding that are essential to establishing trust.”

In a recent blog, Jonah Lehrer wrote, “There is good reason to question whether any new technology … can effectively imitate our face-to-face interactions. There’s a long history of such claims, and none of them has panned out.” [“Social Networks Can’t Replace Socializing,” Wall Street Journal Head Case, 6 August 2011] He explains:

“First there was the telephone, which was supposed to reduce demand for communication in person. The same was said of faxes and then email. In the late 1990s, when dot-com fever was at its peak, many technology enthusiasts predicted that cities would soon become obsolete, since we no longer needed to share sidewalks and cafes. Cheap bandwidth would mean the end of expensive office space. But the data show that the opposite has occurred: Cities and face-to-face interaction have become even more valuable. As Edward Glaeser, an economist at Harvard, notes in his recent book ‘The Triumph of the City,’ business travel has dramatically increased since the invention of email. Attendance at business conferences has spiked since the invention of video-conferencing. Businesses still pay hefty rents to be downtown. A similar lesson emerges from a recent study led by Isaac Kohane, a researcher at Harvard Medical School. After analyzing more than 35,000 different peer-reviewed papers and mapping the location of every co-author, he found that scientists located closer together produced papers of significantly higher quality, at least as measured by the number of subsequent citations. In fact, the best research was consistently done when scientists were working within roughly 30 feet of each other—that is, when they didn’t need to interact via screens.”

Although I agree with Cummins that the lack of face-to-face transactions can erode trust, it’s hard to lay blame solely at globalization’s feet. Technology and rising travel costs have contributed to the increase in virtual meetings. If you really want to point the finger of blame at someone, point it at the terrorists who have made security screenings so onerous that they have sapped the joy from travel. Cummins next reason for declining trust involves culture. He writes:

“It is widely understood that different cultures operate at different levels of innate trust. For example, Scandinavia is a high-trust region; the United States and Latin America are not. The dominance of US corporations and contractual models in driving international trade has undermined more trusting, relationship based models. ‘The transaction’ has replaced ‘the relationship’.”

Cummins is correct that the days when a man’s word was as good as his bond are gone forever. For that, you can thank unscrupulous businessmen who fostered corporate scandals at Enron, WorldCom, Tyco and other companies. Ronald Reagan, speaking about arms negotiations with the Soviets, famously said, “Trust but verify.” That’s pretty good advice in today’s business world. Cummins final reason for the decline of global trust does connect more closely to globalization — the search for the lowest price. He writes:

“Within business, a core reason for the explosion of international commerce has been the incessant hunt for the lowest price. Relational loyalties have been sacrificed in the search for perceived savings. Among the consequences of this loss of trust has been the rise of the importance of the contract and formalized contract and performance management.”

Globalization has indeed been an enabling factor in this search. Commenting on this subject, Hall writes, “Frequently, the reason to go overseas is that it’s cheap. But that shouldn’t mean that contracts and the general interface with suppliers isn’t given the due attention.” I’ve been saying for some time, however, that the consequences of this search for low prices is going to be mitigated as regionalization within the broader scope of globalization gains more traction. This regionalization will result from several factors, including high fuel costs, rising international wages, and pressure to create jobs.

 

Although I might argue with Cummins about whether blame for declining trust should be laid at solely at globalization’s doorstep, I agree with him that declining trust is a matter of global concern. He continues:

“During these 10 years, we have witnessed a drive for more and more precision over commitments and their measurement, accompanied by a steady increase in focus on ‘penalty terms’ – or the consequences of failure. Negotiations have become dominated by the allocation of liabilities and indemnities; battles over intellectual property rights, data protection and confidentiality. All principles of ‘my word is my bond’ appear to have been abandoned in the interests of low prices and the destruction of loyalty. It is right to believe that many traditional relationships were too comfortable and had become inefficient. But it is also very clear that this pursuit of low prices has brought with it enormous additional costs and overheads. … And while [finance executives] sustain this behaviour, calls from other senior executives for ‘more collaboration’ and ‘improved relationships’ will continue to be frustrated.”

In other words, Cummins believes the business world has gone emotionally cold. It’s now — dare I say — all business. Since Enterra Solutions® started offering supply chain optimization solutions, I have become more aware of the dizzying array of compliance penalties that undoubtedly strain relations between manufacturers and retailers. Our solutions try to alert clients to potential problems so that they can work with one another to solve them before they result in penalties or empty shelves. This kind of collaboration should help develop relationships rather than continue down the chilly path of confrontation. I agree with Cummins and Hall that trust is about building relationships. Hall writes:

“Taking risk out of global sourcing is also an exercise in supplier relationship management and simply put, it isn’t always done well. I’d argue that understanding what it takes to build trust with overseas business contacts is at just as valuable as having every scrap of economic and financial data. And clearly, if failing trust is a consequence of globalization then that’s still a lesson that requires a great deal of attention.”

For his part, Cummins concludes:

“The erosion of trust is not inevitable; it is a corporate choice whether or not to build sustainable relationships with its key customers and suppliers. But so far as I know, we do not have the economic data to demonstrate the relative value of trusting versus untrusting trading relationships. Isn’t it time for commercial experts to explore these impacts and to provide insights to the best performing contract and relationship models?”

Back in 1571 when the Spaniards met the Chinese in the Philippines, trust really wasn’t much in play. They were meeting face-to-face with goods (and weapons) in hand. They didn’t have to sign contracts or make promises. They simply had to exchange goods. As trading increased, so did its complexity and the increased requirement for trusting one another. I suspect that the reported 44 percent decline in trust is more subjective than objective; but, it doesn’t really matter. For most people, perception is reality. If the perceived level of trust has declined, for all intents and purposes, it has actually declined. Over the past five years I’ve written over a half-a-dozen blogs focused on the importance of trust. Over the past five hundred years, I don’t think its importance has diminished. That’s why I agree with Cummins that loss of trust carries a heavy price.