Jan 6

Some of the flatteners Friedman discusses are Supply Chaining, Outsourcing, and Insourcing. These three flatteners require an extreme amount of trust between multiple companies to succeed. Friedman gives an example of Wal-Mart. For Wal-Mart to succeed in maintaining the lowest possible prices, they need to interface their supply chain system with the ordering systems of their suppliers. Also, for an outsourcing project to work, the company which is doing the outsourcing must trust the company on the other end to fulfill their contract using acceptable standards.

All of this sourcing and interaction with other companies has created demand for a particular business position; risk management. The main reason companies use these strategies revolves around efficiencies and the basic economic concept of opportunity cost. The theory is that if the opportunity cost of doing a particular activity is lower for someone else, let them do it, and let us focus on our strengths. Therefore, people have the particular job to manage the risk associated with these partnerships.

However, as the world gets more and more efficient, I believe these risks will be uncontrollable. How can we control natural disasters? How can we predict that the main shipping ports along the west coast will be backed up for weeks? For example, Samsung supplies about 25% of the flash memory in the world. Apple buys almost all of their flash memory for the iPod and iPhone from Samsung. Samsung has their flash memory plant located in South Korea (high fixed costs prevented diversification). This past summer, the plant had huge power supply issues. Because of the delicacy of the chip making process, weeks’ worth of production was destroyed. Apple wasn’t severely hurt by this issue, but a few more days of power issues would have had a material impact on their earnings. Apple can only mitigate issues like this by sourcing from different suppliers. However, in this case, it would have been less efficient. At some point, getting more efficient will be too risky, making the cost too high for the benefit. When will this critical mass be reached? How will India be affected?