Global Logistics-March 2007

Across virtually all industries and geographic regions, manufacturers share one common goal: to increase profitability by reducing costs.

A growing number of manufacturers, both in the United States and around the world, have embraced global sourcing as a fast-track method for achieving that goal.

Global sourcing first took off in the 1980s and has increased steadily over the last decade, culminating in its current position as a common business practice.

When it comes to the effectiveness of most companies’ global sourcing initiatives, however, there is still plenty of room for improvement, finds a new study from CAPS Research, a nonprofit supply chain organization jointly sponsored by the Institute for Supply Management and the W.P. Carey School of Business at Arizona State University.

The relentless focus on using global suppliers to reduce labor costs has blinded many companies to global sourcing’s other benefits, finds the study, which analyzed information from field research, as well as an e-survey of 167 sourcing and supply executives across a variety of industries in the United States, Western Europe, Canada, mainland China, and South America.

These benefits, which include improvements in supply chain performance and quality, supplier cycle time, delivery performance, and inventory management, accrue by investing in an integrated, centrally led global sourcing program—something most firms still lack.

“Firms have achieved only a low level of maturity when it comes to integrated global sourcing and supply,” explains Robert M. Monczka, Ph.D., director of sourcing and supply chain strategy research, CAPS Research, and co-author of the study, Effective Global Sourcing and Supply for Superior Results.

“The first reason many companies adopt global sourcing is because their competition is going to emerging regions for labor-cost arbitrage,” he adds. “But as companies want to compete beyond that, they need the capability to ensure that these suppliers will be satisfactory over time, and that they can add new suppliers for additional goods and services.”

Companies at the top of the global sourcing game are those that have implemented integrated, proactively planned sourcing efforts that emphasize cross-functional teams and deep supplier relationships, says Monczka.

Specifically, the study unearths eight critical factors tied to superior global sourcing initiatives:

1. A defined global sourcing process.
2. Centrally coordinated/centrally led decision-making.
3. Site-based control of operational activities.
4. Information sharing with suppliers.
5. Real-time communication tools.
6. Availability of critical resources.
7. Global sourcing and contracting systems.
8. International purchasing office support.

Even the most effective global sourcing initiatives incur some risks, such as lengthened supply lines, increased transportation and logistics costs, supplier delivery and quality concerns, and—in the case of sourcing in emerging regions—even possible intellectual property theft or geopolitical risks.

Interestingly, study participants report only minimal concern about these risks compared with the inherent benefits achieved through global sourcing. The risks are manageable with time and resources, they indicate.

“Firms are addressing these concerns by working closely with their global suppliers and putting in place risk-mitigation strategies,” explains Monczka. “Companies might, for instance, source 80 percent of business with one firm but have a second supplier somewhere else; or use a supplier in a low-cost region but also use another supplier in a more established region.”

Ultimately, the message for manufacturers is this: reaping the full benefits of global sourcing requires an integrated, highly structured, cross-functional sourcing initiative that receives proper executive support and human capital.

Short-sighted companies that flock to foreign suppliers to save a quick buck may achieve interim success, but a fully fleshed-out program is the best bet for long-term operational success.

Could logistics revitalize Italy’s flagging economy?

The country’s new transport minister, Alessandro Bianchi, thinks so. He has pledged to make the logistics industry a top priority, claiming that the sector can “relaunch the country.”

While visiting Bologna last month to study the state of transport infrastructure throughout Italy, Bianchi outlined his commitment to focus on logistics, security, and public transport over the next three years.

Italy can play an important role in wider European logistics networks, Bianchi claims, with the potential to provide key maritime, road, and rail links.

Italy’s logistics industry is one of the most fragmented in Europe and is still considered a developing industry, comprising only 11.5 percent of the country’s GDP. In addition, the prevalance of small businesses—they employ more than 80 percent of the workforce—as well as Italy’s lack of public infrastructure policies may also be stumbling blocks to logistics growth.

Bianchi’s faith in logistics as a key growth area, however, seems undeterred. Global logisticians will keep an eye on Italy to see if the country’s actions can match Bianchi’s eager sentiments.

Changing transportation initiatives and legislation throughout the European Union (EU) will have a large impact on companies working in Europe’s express, logistics, and supply chain sectors, as well as U.S. companies with extensive European delivery networks.

To foster environmental controls and address common issues plaguing commercial transportation throughout Europe’s cities—such as a scarcity of parking areas for unloading vehicles, congestion from increasing freight transportation in urban areas, and a lack of quality road networks—EU countries are enacting new initiatives in five areas:

1. Parking controls and loading restrictions
2. Access and vehicle size regulations
3. Toll initiatives
4. Emissions regulations and vehicle standards
5. Urban freight and logistics concerns

These new initiatives are likely to throw a monkey wrench into some transportation plans, shows data published in Urban Transport Policy in Europe, a new report from global market analysis firm Analytiqa.

Because legislation, restrictions, and future proposals vary by city and country, fleet managers face greater responsibility and tough challenges when developing future transport strategy and fleet investment plans.

Failing to meet vehicle size, weight, or emissions standards in certain areas could bring financial penalties or prohibit vehicles from entering certain parts of a city, the report explains.

Companies and municipalities impacted by these changes are trying to stay ahead of the curve by enacting new strategies now. On the environmental front, several companies have implemented or are testing green-friendly vehicles.

DHL Express, for example, is currently using 170 natural gas vehicles for express deliveries in Germany, while UK retailer Tesco plans to soon run its fleet of 2,000 trucks on biodiesel fuel.

For their part, a number of cities, including Amsterdam, Paris, Prague, Rome, and Stockholm, have already put in place measures to limit vehicle emissions. And officials in Berlin have proposed plans for a traffic restriction zone for high-emission vehicles in the central city area starting in 2008, notes Analytiqa.

As for concerns about urban freight transportation restrictions, companies and cities are embracing the use of freight consolidation locations outside of city centers.

These locations would serve as final destinations for logistics operators, allowing them to make last-mile deliveries to urban areas in smaller vehicles that are easier to park and have lower emissions—and helping them steer clear of new restrictions.

While these proposed regulations have drawn their share of critics, forward-thinking companies are alleviating their transportation burden by adopting new strategies.