Supply Chain Gain: Global Growth
Contingency suppliers, sourcing differentiation, special incentives, and a host of other strategies generate improvements in supply chains that reach around the world.
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Unreliable delivery. Long lead times. Poor quality. Those are the global sourcing problems cited by more than 60 percent of chief supply chain officers around the world responding to a recent IBM survey.
Globalization has altered the rules of trade for nearly all companies. “Not many companies aren’t touched globally in some way,” says Karen Butner, global supply chain management leader at the IBM Institute for Business Value and architect of the Global Chief Supply Chain Officer study.
Although survey respondents say globalization’s benefits outweigh its problems, businesses naturally are looking for ways to increase efficiency and quality, drive down costs, and otherwise improve their global supply chains.
In one recent trend, Butner says, companies are responding to variable customer demand by continually optimizing their networks.
In the past, companies conducted large projects to optimize for the long term. “They’d make changes, save money, wait five years, then do it again,” Butner says. Today, the best-performing supply chain organizations fine-tune their networks and rebalance inventories almost without ceasing, on both the inbound and outbound sides.
One strategy for continuous network improvement is forging relationships with multiple suppliers in different locations. Supplier A might be the main source of key products or components today. But the company also maintains an agreement with Supplier B, perhaps in another part of the world where it can deliver more effectively to certain markets. “A company can ramp up Supplier B if that emerging market takes off,” Butner explains.
Making contingency arrangements with suppliers in different countries also provides a hedge against marketplace risks, says Jonathan Byrnes, a senior lecturer at the Massachusetts Institute of Technology and president of consulting firm Jonathan Byrnes & Company.
“Currency fluctuates tremendously,” says Byrnes, pointing out that currency value is a component of cost. “Tax rates change overnight. Shipping capacity is available or it’s not. Companies have to pour enormous time and sophistication into balancing these factors in their international supply chains.”
Some companies maintain that balance by sourcing the same goods from suppliers in several countries. With spare capacity in place, a company can quickly switch from one source to another as conditions require.
Another strategy for keeping the supply chain agile is what Byrnes calls sourcing differentiation. “Companies are sourcing differently depending on a variety of factors, such as the type of product and where it is in the product lifecycle,” he says.
For example, global fashion retailer Zara, based in Spain, sources products from Eastern Europe while demand for them is steady and predictable. It’s inexpensive to produce in that region, but manufacturers there are inflexible, Byrnes says. When Zara gets a sudden wave of demand for certain products, it turns to a second set of suppliers.
“It sources the ‘wave’ in Spain or other countries where manufacturing is much more expensive but very flexible,” he notes.
A third strategy for responding to variable conditions is dispersed manufacturing.
Around the world, but especially in Asia, companies are working with sophisticated supply chain specialists that contract for raw materials and manufacturing capacity. Byrnes cites the example of Li & Fung, an export trading and sourcing company based in Hong Kong.
“Li & Fung maintains relationships with top manufacturers throughout Asia and around the world,” Byrnes says. Retailers contract with them to match their needs with available capacity.
Knowing which factories are expert in which kinds of manufacturing, Li & Fung might use several vendors in different locations to fill an order. Say a U.S. customer wants to produce a toy dog. “The plastic pieces may come from the Philippines, and the fabric from Vietnam,” Byrnes says. “The toy may be assembled in yet another country.”
Dispersed manufacturing offers the brand owner many advantages. “It gives them certain supply, enormous flexibility, and low prices, because they’re doing everything the right way in the right place,” Byrnes says.
For companies that establish their own operations around the globe— whether for sourcing or selling to overseas markets— one big challenge is finding executives and managers who know the local business environment, but also understand the corporation’s inner workings.
“Supply chain executives’ most urgent need is leadership talent,” finds IBM’s Chief Supply Chain Officer study. “This talent vacuum is most acutely felt in the Asia Pacific region, with nearly nine out of 10 executives citing it as a top challenge.”
To gain better leadership talent in new markets, some companies create special incentive packages for managers from developed markets who agree to spend a few years getting new markets off the ground. Then those managers train others to take over locally.
Squeezing Lead Time
For companies trying to receive their overseas orders faster, technology that supports online collaboration can help compress lead time, says Nathan Pieri, senior vice president, marketing and product management at Management Dynamics, a Rutherford, N.J., firm that provides hosted global supply chain management solutions.
Often, lead times are extended because it’s hard for trading partners 13 time zones apart to manage a project together. If a partner in Asia sends an e-mail about a problem, the U.S. partner might not get the message until the next morning.
Management Dynamics offers a supplier portal that integrates with its compliance and logistics applications. Because it establishes standard operating procedures and creates formal routines, companies using this platform can solve problems faster, Pieri says. Users are more likely to check the portal outside of normal business hours and respond to problems right away, because the technology offers a formal process for responding.
Also, because the system implements policies that users establish— for example, when it’s permissible to send a partial shipment— overseas partners can keep orders moving, rather than waiting for special instructions.
Technology also helps keep shipments moving by improving the way companies manage customs clearance, security compliance, and adherence to other government regulations.
complex compliance demands
Compliance with international trade regulations poses serious challenges. “Global trade regulations are continuously changing,” says Adrian Gonzalez, director, logistics viewpoint at ARC Advisory Group, Boston. Shippers, carriers, and their partners need to stay up to date on requirements for submitting information and creating documents.
While international shipment volumes continue to rise, not every company conducting global trade is prepared to address the complex demands of compliance, says Bob Heaney, senior research analyst, supply chain management at Boston-based Aberdeen Group. “Many companies still manage compliance manually,” says Heaney.
Others rely entirely on brokers, 3PLs, and other partners, glossing over the fact that shippers are legally responsible for complying with government regulations.
The market offers some solid technology tools for managing global trade compliance. Management Dynamics’ compliance solution, for example, helps by making sure shippers and their partners generate documents correctly.
“Shippers only issue compliant purchase orders to their suppliers,” Pieri says. With fewer errors, a shipper endures fewer delays in customs, allowing it to maintain lower inventories.
Shippers also can save 25 to 30 percent on entry fees if they provide data electronically to their customs brokers. “And they can save another 25 or 30 percent if they self-file,” Pieri notes, using the electronic data to do customs filing without a broker for goods they routinely bring into the country.
Some shippers gain improvements by taking advantage of value-added services that carriers, especially ocean carriers, have started to provide. Wallenius Wilhelmsen Logistics (WWL), for example, created customizing centers where it adds finishing touches to vehicles after it transports them.
“WWL brings in vehicles from abroad in a base form, then accessorizes them to meet demand,” Byrnes says. “That sort of service allows vehicle manufacturers to change business strategies. They consider how flexibly and quickly carriers can respond to demand.”
Getting Closer to Customers
Besides postponing the final step of manufacturing until product reaches the market where it’s sold, some companies have decided to move the entire manufacturing process closer to the customer. “Many companies are considering locating manufacturing in Mexico, Costa Rica, and South America, and some are coming back to the United States,” says Heaney.
Other companies have never gone offshore at all, because they’ve successfully exploited the advantages of foreign trade zones (FTZs). Heaney cites a Japanese copier maker with U.S. subsidiaries that are located in FTZs. They don’t pay tariffs on components they import from overseas, and U.S. law exempts the finished copiers from tariffs, saving significant money.
“The company operates seven U.S. plants and never has to go overseas to stay competitive,” he says.
Sampling the MarKET
Nearshoring is not as prevalent as people might think, says Butner. Companies in Western Europe have been looking to Eastern Europe, and U.S. companies have tried manufacturing in Latin America. But sometimes companies that move into new regions run into problems there.
“Companies are sampling,” Butner notes. “They try locating in a new area, then determine the infrastructure’s not sufficient and it is difficult to do business there. So they try other locations.”
Businesses have learned that it can take up to two years to start manufacturing in a new country. “They don’t take these moves lightly and they don’t flood certain areas,” Butner says.
But they are definitely interested in bringing production closer to end customers. “Companies are more carefully evaluating how and why to move than they were five years ago,” she adds.
Companies will continue to travel the globe, however, drawing and redrawing their networks to gain ever-greater supply chain advantage.