As a result many firms are now re-thinking their business models. Is outsourcing still the best option, or should they be trying to claim more of the value chain for themselves? Should they still be offshoring, or will near-shoring bring greater profits in the future?

Vertical integration

In the past, deciding whether outsourcing was right for you was a matter of simple mathematics: what could you save? Outsourcing allows businesses to focus resources such as people and capital, transfer risks to suppliers, and free up more resources for sales growth. When businesses and economies are growing strongly, this works well. On top of it, growth tends to be very forgiving if you make a mistake.

Now, however, businesses are preparing for a period of much slower sales growth and thinking instead about how to grow profits. Controlling more of the value chain is important here. As things stand, some companies see 60 to 80 of every 100 euros they sell go back to others in the value chain. If they control more, they get more.

Other benefits of a vertically integrated business include the ability to get to market faster, and a faster flow of information. This in turn helps to reduce risk – something that has had a high profile association with outsourcing in recent months. Just think of the Gulf of Mexico oil spill: BP accused its supplier of providing a poor product and poor engineering, but ultimately it was BP that had to wear the damage. In the past, many companies thought that they could pass risks to suppliers, but it is obvious that they cannot. The risks stay with the biggest company.

Vertical integration also offers protection against pricing volatility. The cost of many raw materials has become increasingly volatile – the price of commodities such as milk, iron and aluminium is changing by 50 percent a year – so some companies have decided that the best way to guarantee price stability is to control that part of the chain themselves. In some cases they may take over production directly, while in others they cooperate much more closely with suppliers, for example by agreeing on a price for two years. This moves us towards the next possibility, which is the creation of a new attitude of partnership between customers and suppliers along the value chain.

The partnership model

The current business model sees competition within industries, with growth measured by an increase in sales. With this approach, the power dynamic operates against collaboration between customers and suppliers. However, a partnership model would see groups of companies, customers and suppliers competing as teams across business models rather than between one another. In this scenario, growth is measured by an increase in profit, not merely in sales. One example: Apple is now lending money to its suppliers so that they invest in capacity for their components.

Water mapping

Whether you put it down to climate change, water mismanagement or simply the growing needs of a more populated world, there is no doubt that water is one of our most critical resources—and it’s under stress.

Australians are perhaps more acutely aware of this than any other developed economy. The Murray-Darling no longer flows to meet the sea; we live with water restrictions as a daily part of life; we have desalination plants popping up around the country; and we also live with extremes of droughts, floods and other unusual water patterns.

Australia, unlike many countries, price and meter water, so there is a clear economic cost to its use. Yet we don’t label products by their water efficiency, and businesses don’t routinely map out the water used during their production process to lower usage rates.

Water mapping is the idea of mapping the world’s fresh water resources to identify where the resources are concentrated. Water ‘stress’ comes when water use in geographic areas outstrips supply and fresh water resources deteriorate. In a business sense, these water maps could be used to guide business decisions about where to put operations.

A report in The Economist recently estimated that Nestlé, Unilever, Coca-Cola, Anheuser-Busch and Danone consume almost 575 billion litres of water a year, enough to satisfy the daily water needs of every person on the planet. If water was a key influence in their investment decisions, which it could well be in 10–15 years, then a multinational like Unilever might think twice about locating to Australia, for example.

This scenario is already not too far from the truth. SABMiller have operations in Tasmania because of a ready supply of fresh water. A drought made operations vulnerable to rising costs on two levels: fresh water for production processes became more expensive, as did their energy bills because a reliance on hydroelectric power meant they had to source energy from the mainland during the drought. This energy came from coal-fired plants, meaning that while input costs were rising, so was their carbon footprint, with the potential of upsetting their consumer base.

While simplistic at present, it’s not unimaginable to think about a time when Australian jobs and our economic wealth could be threatened by investment and/or supply decisions being made around the issue of water.

The emergence of the organisational water map, and a possible water footprint label are both fairly recent developments that have emerged from the increasing focus on water issues. An organisational water map, simply tracks the amount of water used at each step of the supply chain, from paddock to plate, and plate to waste. A water footprint is the sum total of this map, and refers to the amount of fresh water a business needs to produce and distribute its goods and services.

Liquid asset

The European Union is home to some of the most aggressive policy, business and consumer action on climate change issues. Terms like ‘water mapping’ and ‘water footprints’ are commonplace, as are discussions around whether businesses should relocate their plants and manufacturing operations away from water-stressed locations and/or whether they should only source from suppliers demonstrating good ‘water ethics’. In the UK, water mapping and water footprints may be the next big ethical marketing issue facing businesses looking to target the increasingly savvy UK consumer.

While the potential application of a water footprint label is still under discussion, we are already seeing other ways that water mapping affects business decisions in the UK. Leading UK retailer Marks & Spencer has a public target to reduce their potable water usage by 20 percent by 2012. They have already introduced a range of water saving features in their operations, including percussion taps, use of rainwater and waterless urinals. They are also working with environmental organisation WWF and key parts of their supply chain to improve the efficiency of water use during production of the raw materials and products that go into M&S products.

The logic is sound. If it takes about 2,000 litres to make one cotton T-shirt, anything M&S does at their stores to reduce water consumption is really a drop in the ocean. If however, they can work with their supply chain partners to decrease fresh water usage by cotton farmers, then their impact is significant.

Pepsico is a multinational publicly committed to working with their supply chain partners to reduce water consumption. They have even issued guidelines to all their suppliers and agricultural growers about how they can reduce their water footprint.

For Australian exporters of water-intensive products/services such as tourism, hospitality, food and beverage, textile, pulp and paper, mining, minerals, steel-based products, this focus on the supply chain’s water use is an early warning flag. The trend isn’t going away, in fact the push to reduce water use within the supply chain is getting increasingly more vigorous in the UK, often in conjunction with a push to achieve a lower carbon footprint.