Global Supply Chain Networks: Eye for Design
To take advantage of global sourcing and manufacturing cost efficiencies—and to tap into burgeoning consumer markets overseas—companies must put as much effort into designing their global supply chain as they do in managing it. Old habits die hard, but forward-thinking companies are embracing a holistic approach to design.
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In years past, companies redesigned their supply chain networks infrequently, usually in response to a significant change in operations prompted by a merger or acquisition, the introduction of a new product, or a shift in sales profiles.
Today, however, market dynamics drive leading companies to examine supply chain design more often.
Take global sourcing, for example. Many companies undertake complex global sourcing initiatives, but fail to support them with similarly diligent network design analyses, notes Iain Prince, a senior manager with Accenture's global supply chain practice.
"This is a critical disconnect, because a wholesale revamp of sourcing processes and policies affects virtually every aspect of an organization's supply chain network," he says.
Global sourcing creates a whole new network-design ballgame, he explains, because of several factors:
- The influence of low-cost labor.
- Geographic distances and their impact on service and availability.
- Barriers associated with language and technology sophistication.
- Volatility and reliability issues.
- Cultural and political barriers related to local governance.
- Additional supply chain links, handoffs, and customs challenges.
- Inventory visibility problems.
- The role of immediacy and perishability in determining the optimal network.
- The impact of extensive transit times on inventory cost and ownership.
"Companies must assess network-related tradeoffs to reconcile the convenience and reliability of local or near-shore suppliers against the economies associated with sourcing from low-cost countries," Prince says.
"If companies do not conduct a holistic assessment of global sourcing's impact on their supply chain network, their new suppliers may be the only ones who benefit from the arrangement."
The New Reality
As globalization increases, firms across all industries must grapple with a number of new realities.
"Many companies are multi-national, but do not operate in an integrated, global fashion," says Jamie Hintlian, a partner with Accenture's health and life sciences supply chain management practice.
"They may have a presence in a variety of markets on different continents, but only a limited ability to coordinate and leverage global supply and demand. That presents both a tremendous opportunity and a challenge.
"For a global organization to function effectively, it must implement a truly global planning process, with strict rules for creating and aggregating forecasts around the world," Hintlian says.
Truly global companies face many challenges—from cultural and language differences, to disparate business processes within the same company, to different rules or practices for managing supply and demand.
Many companies that grow through acquisitions, for instance, maintain extensive manufacturing capacity around the world—some of which are redundant or inefficient. In these situations, companies need to optimize or rationalize their networks to fewer sites that are capable of serving global markets.
"Companies need to ask: 'How do we establish a supply and demand network and reconcile it with global sales and operations planning so we make the most of our rationalized corporate infrastructure?'" Hintlian adds.
Companies have also begun to recognize that the supply chain is critical to making international business strategies function effectively.
"Organizations are starting to develop business and supply chain strategy concurrently and collaboratively," Hintlian says. "In the past, business strategy was developed, then articulated across the organization, with various departments working independently to execute that strategy.
The result? Organizations with conflicting functional goals."
Designing for Total Landed Cost
Working collaboratively on global supply chain design requires examining different areas of the business and how they impact the supply chain. Modeling supply chain flow, and pinpointing areas for improvement, is a smart way to begin.
"Enterprises designing a global supply chain should start by surveying the business, looking at trade flows, understanding where trade partners succeed and fail, and projecting where company growth is heading," says Jim Preuninger, CEO of Management Dynamics Inc., an East Rutherford, N.J.-based software company that provides global trade management solutions.
"Based on this data," Preuninger explains, "they can model the business and run benchmarks against the information to identify and prioritize opportunities for improvement.
"One organization may look to improve customer service by providing better in-transit shipment visibility. Another may want to automate its purchasing department so it can identify the total landed cost for multiple global sourcing options," he says.
Designing and managing a global supply chain from a total-landed-cost perspective means factoring in the cost of carrying inventory over time.
"Companies are not only managing the costs of capital and carrying inventory, they are also managing obsolescence costs," notes Raj Pinkar, vice president, global solutions and implementation, UPS Supply Chain Solutions.
"A firm that manufactures high-end, high-value laptop computers with a six-month average life span, for example, shouldn't transport its cargo on a ship that adds 21 days to the supply chain."
Visibility is also critical to the success of a global supply chain. Companies that can effectively track shipments in transit have a better handle on freight status, and can make transportation decisions on the fly.
"When a shipment arrives at the destination port, a company could, for example, opt for a DC bypass model—immediately moving product to its destination instead of placing it in a warehouse—then releasing it," says Charles Covert, vice president, consulting service and solutions implementation, UPS Supply Chain Solutions.
"The availability of accurate supply chain information as needed is the real key to success," agrees C. John Langley, professor of supply chain management, Georgia Institute of Technology. "In the absence of valuable data, companies need to protect themselves. If they are uncertain about delivery reliability, they carry extra inventory.
"Instead, they should quantify delivery time variability, then scientifically determine how much inventory to carry."
Risk mitigation is another increasingly important consideration for companies designing a global supply chain.
As Western organizations continue to outsource manufacturing to low-cost countries in Asia, the Caribbean, Eastern Europe, and Latin America, the frequency and severity of supply chain disruptions increase significantly.
The repercussions of a supply chain failure can be extraordinarily severe. At stake are billions of dollars in stock market capitalization, market-share losses from failed product launches, or even the possibility of business failure.
"Most organizations are not adequately prepared to manage supply chain risks," says a recent research paper published by the Supply Chain Research Consortium at North Carolina State University.
"Recent studies suggest only 5 percent to 25 percent of Fortune 500 companies are prepared to handle crises or disruptions, and a $50-million to $100-million cost impact can be incurred for each day a company's supply chain network is disrupted," the paper reports.
"Stock market reaction to supply chain disruptions is also significant," the report says. "Firms that have announced major supply chain problems have seen shareholder values drop 10.28 percent on average, with an average recovery time of 50 trading days."
High-tech markets are particularly vulnerable. Sony, for instance, has pulled its digital camera manufacturing out of China and moved it into Japan.
"Sony executives recognized that the difficulty of coping with unpredictable market requirements for digital cameras was not aligned with the slow responsiveness, disruption potential, and inflexibility of long supply lines from China," the paper explains.
"Sony realized that manufacturing in China is not a cure-all for pricing pressure, especially in fast-changing, high-tech consumer markets."
Certain attributes of a company's global supply chain environment can amplify or mitigate the impact of disruptions, finds the research. These "disruption amplifiers" fall into one of two categories:
1. The extent to which a firm relies on global sources of supply.
2. The complexity of the product or process. (See sidebar, below, for a list of specific amplifiers in these two areas.)
"One technique companies use to protect against increased risk is creating a priority supply chain for products or materials that would have a greater negative economic impact if their supply were interrupted," notes Langley.
"Companies take a portion of the supply flow for these products and create a reliable alternative. "This strategy may be costly, but it can minimize the impact of supply chain failure," he says.
Spread it Around
UPS' Pinkar agrees.
"When companies design a global supply chain, they should not keep all their eggs in one basket," he advises. "An effective global supply chain, for example, would include a few manufacturing or sourcing locations dispersed around the globe—in China and Eastern Europe, for instance.
"That way, if one plant has difficulty getting product into or out of a manufacturing facility, the company can shift production to another location.
"Companies need to identify failure risk points and design alternatives," he says.
Once they recover from a supply chain disruption, many companies take steps to redesign their networks in order to minimize or eliminate a recurrence.
Strategies include developing tools to allow dynamic management of supply chain systems, and redesigning/re-optimizing the supply chain, according to respondents to the Supply Chain Research Consortium study.
"In supply chain systems, optimization cannot be a single, static model," the study notes. "Rather, tools that adjust with the dynamic nature of supply chain events are needed.
These tools should have global scope for enterprise redesign considerations, and need to provide solutions in real time or near real time."
Designing a global supply chain has grown more complicated as companies source and sell far and wide—and collaboration is key. "Managing a successful global supply chain today is like coaching a football team," says Langley.
"If every player does what he does best individually, the team won't win many games because it is not operating as a team. The same applies to a supply chain. If a company tries to keep inventory levels, transportation costs, and stockout rates low, it won't develop a successful global supply chain.
"Instead, companies have to balance trade-offs to facilitate optimal functioning," he continues. "Leading companies are becoming skilled at determining the mix of activities that provides optimal service at an acceptable cost."
Rethinking Transportation on a Global Scale
In 2005, American Power Conversion Corp. (APC), West Kingston, R.I., a $2-billion provider of AC- and DC-based back-up power products and services, realized its supply chain needed help. Rapid growth was straining the staff and existing supply chain processes.
"Because the business was growing so quickly, everyone was absorbed in their narrow scope of responsibility," recalls Carl Rossi, APC's director of transportation.
"The company lost sight of transportation and distribution center operations as a whole. Employees spent their days putting out fires and no one paid attention to the big picture."
It was time for a change. The company added a vice president of supply chain in September 2005, and hired Rossi in November 2005. When he arrived, Rossi found a fractured organization.
"My team was scattered around the world," he says. "We manufacture 60 percent of our products in the Philippines, 35 percent in India, and the rest in China.
"We sell all over the world, and operate distribution centers in Europe, Africa, Asia, the Middle East, North America, and South America. The DCs are all managed by third parties, but manufacturing is company owned and operated.
"I quickly found out the company captured little data on transportation movement, pricing, and service, and put no central focus on these areas," he continues. "That lack of focus meant each of our entities maintained its own processes and procedures."
In addition, Rossi realized that APC paid excessive transportation costs. In 2005, for instance, the company spent $39 million on air freight, in large part as a reactionary fix for problems that cropped up in its global supply chain.
The first action Rossi took was to meet with his direct reports around the world and craft a strategy to rein in those excessive transport costs, starting with air freight.
"Collectively, our manufacturing, sales, and logistics team members designed and implemented an approval process to shut off all but critical use of air freight while we looked at the root causes driving that use," he explains.
Air and Ocean RFQ
APC utilized too many air carriers—14—so Rossi cut that number to three, then relayed this information to the carriers. "I showed them our current volume, shared our goal, and launched an RFQ for our global airfreight business," he explains.
At the same time, the company developed a new RFQ for ocean freight, where it also used too many providers.
"We move 28,000 TEUs a year, but we weren't receiving volume pricing because we did not have one focal point for managing ocean freight," Rossi explains.
Rossi's next step was to gather APC employees from every plant around the world at the Rhode Island headquarters for the company's first global transportation meeting.
"Our field staff knows more about the daily activities of our global supply chain than the corporate executives," says Rossi. "They all felt that we could do better.
"I asked everyone attending the meeting to explain their role, and list their transportation requirements," he continues. "We quickly identified that the requirements of a factory in the Philippines are different from those of a plant in China."
A Global Transportation Council
At the meeting, the group decided to develop an actively managed supply chain that would identify and meet participants' needs, and at the same time, reconcile those needs with overall corporate demands. The group established a global transportation council to collectively oversee APC's transportation activities.
"Before this initiative, we didn't have a clear picture of our weekly transportation spend," says Rossi. "Now, one key employee—Louis Galvin in Galway, Ireland—is responsible for collecting weekly freight expenses worldwide.
"We also capture distribution costs. As a result, we can actively manage using facts rather than gut feelings."
After the meeting adjourned, the U.S. team got down to business, concentrating on reining in APC's maverick spending. A core team of APC transportation specialists conducted face-to-face meetings with the ocean carriers that responded to the company's RFQ.
After the second round of negotiations, Rossi and the specialists presented their findings to the global transportation council, and received its buy-in.
"The end result is a smaller base of ocean carriers, which allows us to conduct quarterly business reviews with each one. When we experience problems, we have a forum for resolving issues," Rossi says.
The transportation council next looked into the issue of excessive airfreight spend. What business issues led to the company's heavy reliance on air cargo?
"By 2005, production levels at our plants in India and the Philippines had grown so much they ran out of places to store packaging material," explains Rossi. "The plant began storing corrugated cartons and wooden pallets outside.
"During the monsoon season, we received wet pallets, cartons, and product coming into the United States via ocean container."
The wet pallets also provided a fertile breeding ground for bugs.
"We couldn't use the products in these containers, so we had to contract airfreight replacements to fill our orders. Our hardware products include a transformer, a battery, and circuitry—they are heavy, which means they are expensive to ship by air," Rossi notes.
In 2005, 36 percent of APC's shipments from manufacturing plants to its distribution center were transported by air. In 2006, the company cut that number to 18 percent.
"But that doesn't tell the whole story," notes Rossi. "Because of our inadequate method for tracking freight expenses, we knew we also spent $15 million on air freight for other product categories. We brought that under control, too. So in total, we reduced airfreight expenditure from $39 million to $12.5 million."
APC remedied the problems that were forcing it to use air freight by eliminating their root causes. Today, APC plants store all corrugated material and pallets inside, and the company changed its pallet composition to a type of wood that insects can't infest and that doesn't absorb moisture.
At its Indian facilities, the company instituted a container liner program—which Rossi and his team call the "baked potato"—for certain products. "We line the container with a big foil bag, load the goods, and seal it up," he says. "No moisture can get in."
Since redesigning its supply chain network to include visibility into global transportation expenditures, APC can leverage its total transportation spend with carriers.
"We have sent a clear message to the carrier base that they can't cut their own deal with our facilities in other countries," says Rossi.
The benefits of more effectively managing global transportation are impressive. Using a consensus-driven global approach, APC significantly reduced transportation costs and removed waste during the past year.
"Transportation accounted for 11.3 percent of revenue in the fourth quarter of 2005; in Q4 2006, it was down to 8.2 percent of revenue. As result of this collaborative effort, we reduced year-over-year ocean container costs by about 11 percent," Rossi says.
Needless to say, APC senior management is delighted. "My boss is quite happy," affirms Rossi. "We achieved positive results because we boosted our staff's enthusiasm about their roles.
"It's rare to achieve a direct correlation between action and clear financial results," he says, "but that is exactly what we accomplished."