Global Supply Chain

Narendra Mulani who heads up the Accenture Supply Chain Management service line wrote in the August edition of Logistics Management on Operational and Technical Excellence in the supply chain.   He highlighted six (6) areas where supply chain masters excel:

• Order Capture enabling a fulfillment team to view the status of available inventory (on the floor and incoming) to support order scheduling and fulfillment
• Inventory Management which provides insight into inventory availability and supports the allocation and reallocation of inventory to optimize order fulfillment and customer relations
• Warehouse and Transportation Management that automates warehouse processes and supports automated management of rate quoting, equipment constraints and lead-times with carriers
• Reverse logistics and Returns management to improve faulty products and services
• Technology and Data Integration to leverage information across the entire fulfillment system, and
• Analytic tools that support sophisticated collection and analysis of information and improve decision-making.

Today, with the available technologies there is little excuse for companies not achieving operational and technical excellence.  There are small, medium and large software providers of sophisticated integrated fulfillment solutions at solutions at almost all price points that bring supply chain excellence capability to virtually any organization that wants to see their business excel.  The benefits to achieving excellence can be readily supported with a return on investment analysis.

The journey to achieve operational and technical excellence in the supply chain might appear daunting but with the right partner and commitment to the outcome the results are very achievable and the rewards exceptional.

Globalization – a wave to ride or a tidal wave of massive destruction?

Globalization is changing traditional business practices and for many companies the changes are of tidal wave proportions. In North America many senior managers are having nightmares of their products are drowning in a flood of low-cost import competition. The company’s or its divisions’ survival is at stake and if the company does not learn to ride the wave it will be crushed by the sheer force of the wave and render its organization uncompetitive and obsolete.

In early December 2005 I attended a supply chain summit and met with many manufacturing divisions of Fortune 500 companies that are facing the threat of globalization and the commoditization of their products. Each in its own way was experiencing a tsunami like wave in their business brought on by the rapid influx of competitive products manufactured in low-cost countries. The question that was implied but not fully articulated by each of the companies was how to respond to a competitive situation that literally turned its business on its head and threatened its very existence.

How real is their concern? Do they have time to respond or will they be swamped and weighed down by events and washed away by the influx of inexpensive products manufactured in low cost countries? What are their options? Who will survive?

The answer to these questions lies in recent history. Industries have been moving to global sourcing for years. The North American apparel and textile manufacturing industry has all but vanished in a period of 10 years. The traditional big 3 North American auto manufacturers are floundering and the historical global leader – General Motors – will in all probability lose its number one status in 2006 and has acknowledged that in order to survive it cannot continue to defend that role against its more agile and adaptable Japanese competitors – Toyota, Honda and possibly Nissan. Big steel is being overwhelmed by high quality, low cost competition from Korea, China and Japan and depends on life support by its government. Ditto the apparel, textile, footwear, electronics, consumer packaged goods, etc. industries.

Scenario: A major North American manufacturer of barbecues, located outside of Toronto, Ontario has seen its ability to compete against low-cost imports from China greatly compromised. The company’s costs relative to the imports are roughly 40% greater and their quality advantage is no longer appreciated. The market is moving rapidly to low cost imported cast-iron aluminum barbecues from the traditional domestically produced, higher cost cast iron barbecues. To make matters worse, its traditional customers have now moved to directly sourcing and importing the barbecues from China further pressuring the manufacturer. It is committed to its committed workforce and instinctively wants to resist the move to low cost sourcing of finished barbecues. Its very survival is at stake.

Scenario: A major supplier to the automotive aftermarket located in Michigan recently sold approximately $1.0 billion of glass and paints manufactured in their North American facilities. Protected for years by high tariffs and counter-vailing duties the company was able to compete successfully against low-cost glass from China. Several years ago the dumping duties were removed and the company’s business model literally changed overnight. In order to survive the company quickly expanded its fledgling sourcing group to purchase the majority of its glass from low cost sourcing countries. The result of the tectonic shift was a complete change in its competitive environment. Its margins were quickly eroded; its quality advantage evaporated and its major competition was now import/distributors not glass manufacturers. The company recognizes that it is on steep learning and execution curve to catch up to its non-asset based import-distribution competition in order to survive. Time is of the essence for this division.

Scenario: In 2003 a leading U.S. manufacturer of home furniture located in North Carolina was manufacturing 80% of its products in the United States. By 2005 it had shifted its sourcing to low-cost producing countries and imported 80% of its product line. Although it benefited from lower costs it found that its margins had been eroded so that now it was marginally profitable. It recognizes that its business model and competitive position has changed but does not fully understand the drivers that will allow the company to return to the levels of profitability it previously experienced.

In each case the competitive environment apparently shifted in a matter of months. The competitive comfort that each company had as a manufacturer shifted dramatically and their new paradigm threatens the very existence of the organization. The new model strips their previous competitive advantage –design and manufacturing excellence – and positions them in a business environment where they have little core competency and equally deficient execution and management capability. These companies each recognize that they are in serious trouble and if they don’t respond to the new challenges that they face in global commerce execution they will go the way of the dinosaur.

Without exception each company that I met with (and there were 10) all had the same fundamental problems:
The ERP systems designed to support their manufacturing and financial business are grossly inadequate in supporting their global commerce requirements.
Their business processes are designed for manufacturing and not global sourcing/distribution.
The competency of the organization lacks the expertise and experience in the area of global sourcing, logistics and importing.
Costs visibility is immature and doesn’t provide the necessary granularity to understand the best procurement strategy or true cost of goods.
Lack of visibility into outsourced partners reduces the organization’s ability to control the supply chain and negatively impacts inventory levels.
They are making costly errors and don’t understand what is required to resolve them.

Each company is wrestling with the problems it faces and is working through their own challenges. Some are embracing the new paradigm while others resist. Some are looking strategically at globalization and others continued to respond tactically to the shifting environment.

The good news is that those companies that are moving strategically understand that their business model has switched from a four-wall centric view where manufacturing drove their strategic competitive advantage to a “four-corners of the world” approach where managing the global supply chain dominates the battle for strategic competitive advantage.

So what do companies have to do to execute an efficient global commerce strategy?

Firstly, it is critical that senior management understand the magnitude of the threat that globalization presents to their companies. Secondly, it is vital to create a sustainable strategy to respond to the threat and actively support the initiatives to develop the capabilities and infrastructure for the new paradigm. It is important to recognize that the new model is about designing lean, flexible global supply chain networks that include both domestic manufacturing and global sourcing and provide the organization the agility to move quickly in response to global conditions of supply.

Whatever the level of global competition companies are currently experiencing, creating lean global commerce organizations is critical for profitability in the new paradigm where margins are much thinner, supply chains much longer, more complex and highly risky, and mistakes much more costly and harder to correct. Finally, creating an organization that thrives on constant and accelerating change is vital because the organization is required to adapt to continuous monstrous tidal-changes in the business current as the tectonic plates underlying global commerce shift.

Globalization is a challenge and an opportunity. The options for companies that are experiencing sustainable global competition are to develop workable strategies and processes to survive and thrive or die. Being global is not an option for many companies. Developing a comprehensive global strategy is critical to remain viable.

Surf up or is it a Tsunami? In this case it all depends on how you respond to the opportunity that globalization provides.

With globalization and outsourcing of manufacturing capabilities to offshore producers it is time to look at the effect this is having on inventory across the global supply chains. The analysts, Gartner, Aberdeen, ARC and AMR who have looked at the issue of inventory in the supply chain have come to the conclusion that globalization is beginning to have a major negative impact on the amount of inventory in the supply pipeline.

Much has been written on the value proposition of managing inventory across the supply chain. In most instances the issue of inventory control is discussed in terms of domestic supply chains. This perspective is understandable because until recently most companies were not participating in global sourcing and therefore the need to understand supply chains from a global perspective was not of much interest. However, this view of inventory pre-supposes relatively short supply chains that are reasonably forgiving. The literature generally focuses on the ability of organizations to position their raw material and semi-finished products to meet their tight manufacturing or distribution environments.

Companies like the automobile manufacturers, computer manufacturers (Dell comes immediately to mind), and others have been able to lean their supply chain by working with their suppliers to have supplier inventory pods close to their facilities to meet their demanding manufacturing schedules. True, they collaborate with their suppliers, to a greater of lesser extent, and share demand information so that suppliers can adjust their production and distribution schedules. But the reality is OEMs have been able to “lean” their supply chains by pushing the inventory back onto their tier one, tier two and tertiary suppliers.

Research has shown that over the past 10 years the amount of inventory in the supply chain has declined very little. I am hearing from these same analysts that their research is beginning to show that with globalization and the outsourcing of manufacturing to off-shore companies the amount of inventory across the supply chain is beginning to swell and this is a hidden component that most domestic manufacturers are as yet unaware of and ill prepared to address.

There are 3 major strategic areas that a manufacturer must address if it truly wants to take advantage of globalization. Firstly, it must understand whether its business model is still fundamentally a manufacturing model or has shifted to that of a brand-marketing model. Secondly, it must recognize that if its model has changed the skills required of some key people in the company are fundamentally different from those that have been employed. Thirdly, it needs to understand that the way to manage outsourced manufacturers and the logistics providers requires extremely different tools than are currently being offered by their ERP suppliers.

Without understanding the impact in the change in the supply model because of globalization, companies will not begin to take the required action to address the opportunities that are promised. There are many solutions that are being offered that address elements of the global supply chain. Global Track and Trace, Global Customs Compliance, Total Landed Cost calculators, and the 3PL phenomenon are several that immediately come to mind that are designed to extend ERP systems and make them adaptable to the global sourcing environment.

While each of these solutions is of value by themselves, they are limited constrained in truly helping companies manage their global supply chains. Our experience shows that track and trace solutions that are currently supplied by software ASPs or 3PLs and focus on global shipments (purchase order and shipping information) are really limiting. In truth one of the areas that is most offered as a solution but is most controlled in the global supply chain is the shipping/logistics component. Carriers have very tight schedules and barring major disruptions due to congestion compounded by security issues goods that are prepared for shipment will most likely be laded and arrive at the port of receipt as planned.

The areas of the supply chain that are the most difficult to monitor and control are:

• the performance of the suppliers in preparing products to meet shipping schedules
• the tracking of raw materials, semi-finished parts and components, and packaging materials from primary and secondary global sources to suppliers
• the ability to manage costs in a complex multi-level outsourced contract supply chain environment
• the managing of compliance at multiple levels – country, supplier, service provider, product, customs, security, etc.

To create a complete global supply chain solution requires strong ERP functionality where owned manufacturing capability is a strong component and equally powerful global supply chain management functionality to manage the global outsourced contract manufacturing environment. Both systems must be integrated and synchronized and provide a global view of the entire supply chain. Without integrating full ERP and full global supply chain functionality into one seamless environment information will be maintained in disparate systems and provide limited actionable information.

ERP systems are fundamentally designed to manage within the four walls of the organization. In many instances large organizations have multiple ERP solutions or multiple instances of the ERP solution. The corporate information environment is far from homogeneous and getting a view of the entire organization is virtually impossible. ERP solutions are augmented with additional business intelligence systems that are intended to collect and normalize information and provide it in a manner that is actionable.

This business environment is now made more complex with globalization. A global supply environment requires different tools and skill-sets than are currently available within the organization. To build a complete environment to support direct manufacturing and outsourced supply chains requires a comprehensive strategic view of the entire supply demand environment. Companies that understand this will have a powerful advantage over their competitors.

Companies are going global but there are very few that understand what the real benefits are and fewer still have a plan of how to achieve them. Those companies that build the infrastructure to take advantage of global sourcing will have significant competitive advantage that delivers dramatic and continuous value across the entire organization.