Procyon Mukherjee, December 2020

Jean-Baptiste Say, born in 1767, was an unusual Economist and thinker to have coined the first thoughts around the idea of a supply chain in late 1700; his famous words, which later was well-known as Say’s law, “Supply creates its own demand”, may be the first vision of a supply chain, although Say may have had a completely different reasoning for his argument that had more to do with “production precedes consumption” and it could well be that much later in the late 1940s Keynes immortalized Say by exactly coining the phrase, “Supply finds its own demand”.

But think of it, Say hit the nail. Let me illustrate with a powerful example, that of a demand for ice-cream in a remote village in Sub-Saharan Africa. You could have a single unit of demand to collective units of demand, but the scales are tilted towards supply as a starting point, not demand. For that matter any amount of demand in that place would be meaningless if a supply link is not connected, which must be good enough in terms of cost to satiate this demand.

A single unit of demand therefore must immediately be connected to a network of supply, or to put it differently, a supply network should be such that it is able to absorb an additional unit without much additional cost. This is the power of a supply network, that its capacity to absorb additional units or the marginal cost of absorption of additional units is close to zero.

So the solution to the puzzle of ice-creams in Sub-Saharan Africa is to create a supply network that would connect on the foundations of overall supply chain efficiency, such that it would be able to pick up islands of demand at little marginal cost. If these efficiencies are not good enough the cost of ice-cream would be so high that reaching a place of high demand will be next to impossible. You will have to start with cold chains that must be able to store frozen ice-creams up to a point and then serve at the right temperature band when it would be tasting its best. The wastes that may have to be borne as a cost will weigh against all the efficiencies that may be part of the supply chain design between stocking points, nodes and flow systems.

The next most unusual thinkers to have influenced the area of logistics in supply chain design, were two Mathematicians, W.R. Hamilton and Thomas Kirkman, who framed the Travelling Salesman problem in 1800. The problem simply stated, “Given a list of cities and the distances between each pair of cities, what is the shortest possible route that visits each city exactly once and returns to the origin city?” Who would have known that this simple problem led to several branches of Mathematics and to the birth of optimization based on which every day logistics problems are solved. From Linear programming to algorithms that run all complex systems may be traced to this simple Travelling Salesman problem, which had to wait for many decades for its solution. Operations planning, the backbone on which all sales and manufacturing planning processes are built had its origin from this basic thinking that from first order heuristics to any amount of computational complexity, there is a way to optimize an objective function. No supply chain can be created if this basic understanding of optimization is missed.

Stanford Mathematician, Harold Hotelling, was the next candidate who created his Principle of Minimum Differentiation in 1929, which stated that in many markets it is rational for producers to make their products as similar as possible to each other; this is the reason why fish markets have all the salesman with their wares next to each other, or restaurants adjacent to each other or even two ice-cream vendors next to each other in a beach. By avoiding to create a disadvantage of walking additional distance, the two similar products avoid the differentiation between them which could be the place of sale itself, prompting customers to move equal distances; the product in this case becomes the place. The exact opposite of this principle, took almost fifty years to ideate and it was Harvard Economist, Michael Porter who created the idea of differentiation as a powerful force to create competitive advantage, although his ideas did not have mathematical rigor. Today’s supply chains are built on the principles of competitive advantage, much of that owes to Porter.

Logistics created its niche identity, thanks to one of the most renowned Economists of our times, Paul Samuelson, the Nobel Prize winning economist, who proved that logistics was the source of dynamic equilibrium between two spatially separated markets, in his 1952 treatise, “Spatial Price Equilibrium and Linear Programming”.

I will not miss Paul Krugman, the MIT Economist and his international trade theory (1974) that got him Nobel Prize later. His theory helps to explain why trade will happen between two similarly endowed countries in respect of factor endowments, tastes, technology, etc., as against the classical theory of trade between differently endowed countries. This last piece helped to create the backbone of global supply chains as it meant that global trade was sustainable even if the principles of factor advantages did not hold good. The theory delves into product differentiation or distinction, large scale production, decreasing costs or increasing returns as guiding factors.

Supply chains are built on some of these foundations, thanks to these great thinkers, Mathematicians and Economists in particular, that Supply Chains progressed so much to make products available at fraction of the costs and make trade happen internationally as well domestically.