The China syndrome

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Having management systems in place to handle that and deal with any problems is a key issue for companies.
George Hadley of De La Rue warned: “When people source in the Far East or low cost countries or where there are long supply chains they don’t look at the whole solution from day one. They very often will rush out and try and purchase low cost parts and put a process in place just to deal with that.”
The aim, he said, must be a shortened supply chain at lower cost. “So, rather that buying 2,000 individual components, you buy three sub-assemblies through your supplier. “You then manage the local supply base in partnership with your strategic alliance supplier and then they ship, to a forecast, ‘vanilla’ modules to a configuration centre in the continent where you are going to be selling them.”
Clearly, there is the risk of disruption but, said Hadley, it could be controlled “if you have a developed strategic alliance partner where you have all the due diligence in place, you are comfortable with the relationship, the company is providing you with all that you require and you have picked a partner that has multiple sites.
“One of the things we insist on,” he said, “is that there is a risk assessment done on the business and a business continuity plan done so that if anything does happen we know that we have six to eight weeks to uplift that product to move it somewhere else. We build in protection stocks with some degree of consignment stocking agreement where if there is an occasion where there is a major disruption you have always got that continuity of supply.”
Cranfield’s Richard Wilding argued that many businesses hadn’t thought enough about the real opportunities and costs.
“All they see is that they can get a component for 40 pence in China rather than £2 in Europe. But at the end of the day your supply chain strategy has to come from your competitive strategy in that market. “
Configuration and postponement were key elements in the global supply chain. Fashion houses like Zara had fashion scouts watching what is going on.
“They are shipping globally ‘vanilla’ product and then configure it in local markets. People like Benetton have been doing that as well. The key thing is understanding the market you are selling to. Men’s white shirts are not a fashion item – the retailer does not need very short lead times, they can source on very long pipelines but other products they know they must have local suppliers who are very agile.”
David Hindson of TDG agreed pointing out that Zara has a very agile supply chain enabling them to get to a point where forecasting became redundant. Moving quickly from “mind to market” helped it stay ahead of its competitors.
Operating successfully on a global scale could mean developing more than one supply chain model. In fact, Iain Pearson of Shell pointed out that a lot of companies have two or three different supply chains.
“We have three different supply chain models,” said Hadley. “We have commodity items, then we have intermediate projects which build ‘vanilla’ and customise at the other end. Then we have bespoke £1m a time special builds and they go through a completely different process.”
Bombardier had two basic supply chain models, said Chris Shoesmith, – one for standard products and one for bespoke products. “The lead time we have is easily forecast because we know, usually well in advance, where the build is going to be and for which country. So we work backwards to where we need to start the process – including sourcing from wherever we are. It is a fairly structured way forward – it does not change with the weather. Yes, we have big issues if the ship goes down – then there is airfreight and buffer stock for that eventuality.”
George Hadley highlighted the importance of developing a tier structure for suppliers as exemplified by the automotive sector where tier one suppliers manage tier two and so on.
“You just deal with one company. You have involvement with the others and are involved with the selection of those other suppliers. But at the end of the day you slim your supply chain down and remove a number of steps and interfaces so that you are working more efficiently with a smaller number of contacts.”
Changing the sourcing strategy clearly has huge implications for a company and David Hindson asked if the sourcing strategy was changing the core competence of businesses.
A lot of supply chain people have traditionally been plant based people, said Iain Pearson. “Operations was the hero and would fix things when they went wrong because demand by definition wasn’t forecastable. Whereas an integrated perspective would have you identifying demand and managing that and then managing the sourcing to support it and not relying on the flexibility of production.”

George Hadley pointed out that it was possible to have a successful business that didn’t own a factory or piece of real estate anywhere. De La Rue has been setting up a series of international hubs. These are not associated with an existing factory, said Hadley. “In some cases the European hub is a virtual hub made up from people in different offices in different countries working together in a cohesive network.”
Chris Shoesmith pointed out that there was a move away from bespoke products. In the past, he said,”we have been delivering bespoke planes and trains and one-offs. We are now producing standard products. Our business has changed from manufacturers of rolling stock and planes to integrators and assemblers. We are pushing the responsibility down the supplier base by issuing functional specs. We have carefully selected the suppliers of course. The suppliers design from our functional spec and give us the product we require and we integrate them together.
“It is making my organisation, in terms of global sourcing, a far better organisation than five or six years ago.”
Components were coming mainly from Mexico and Asia Pacific. Castings and so on often come from eastern Europe. Bombardier assembles at the most suitable of its 21 plants throughout the world and as a result the cost of final assembly is reducing as a proportion of the total cost.
Woolworth’s business is quite different to Bombardier’s but Geoff O’Neill said it was also going for a lot more standardisation “so we can move production around more quickly and respond to market pressures. Christmas trees are a good example. We will order our Christmas trees for 2006 before we have sold through Christmas 2005 so we can get the best production. We will go for the cheapest production and then work out the balance of how much it is going to cost to freight and store it and everything and when is the right time to make it. This idea of configuring at the last possible minute is something we are doing more of.”

Potential problem

O’Neill highlighted another potential problem. “We are selling LCD televisions just now. What we have found in sourcing the products that they are all coming from the same factories and they have two little holes on the front to put the badge on. This applies to the secondary brands – they are coming out of the same place and you get offered them from three different sources with just a different badge on it.”
“This raises a real issue of risk in the supply chain,” said Richard Wilding. “You might go out to multi-source but what you don’t realise is that all the products are coming through one particular source.”
Iain Pearson agreed. “The dynamics have changed a bit over the past couple of years. Quite a few people have had to think very carefully about where they are strategically dependent on a small number of sources and where they need to make other arrangements.
“It is not only a question of technical or operation expertise in supply chain operations. It is understanding the characteristics of the market and embedding the supply chain design into the marketing,” said Pearson.
David Hindson pointed out that logistics is increasingly becoming a marketing activity. “Twenty years production and marketing were linked because what you could make was what you could sell. That linkage is now breaking down and it is logistics and marketing.”
“Linking marketing and logistics was now coming to fruition within the business arena, agreed Wilding. “We use the demand chain management [at Cranfield]concept because what we are saying is: ‘turn the supply chain on its head’. Rather than designing the product and designing supply chain and pushing stuff into the market, we say we need to start from the market and engineer things backwards.”
George Hadley argued that supply chain managers needed to adopt an entrepreneurial approach but TDG chief executive David Garman said: “We deal with a fair number of customers in the different sectors in which we operate and much as I love them I can’t say that I come across too many that I would describe as entrepreneurial in supply chain management terms.
“A significant number of the companies we deal with would still be relatively control-oriented and controlling which tends to go with being risk-averse. As soon as what is happening doesn’t conform to the control that they want it’s a short step from there to becoming slight adversarial and judgemental.
“We operate predominantly in Europe but northern Europe is not a high growth environment. The companies that are most disposed to be collaborative with you are the ones that are growing fastest. If a company is growing rapidly then all the focus is on how to meet the growth requirement and the supply chain is about responding to that. That encourages a collaborative approach because you have to get the volume moving through,” said Garman.
Richard Wilding pointed out that “lots of companies come to us saying that they want lean supply chains. Well that is fine with those products into that market – but it won’t work here. But the message from the board is we need to ‘lean’ everything…”
“But in many cases that is right,” said Paul Reilly of British American Tobacco. “You have got to go through lean before you can get agile. That is the reason that the board message is get lean first then get agile. In the meantime there is nothing to stop you doing the things in terms of customer segmentation and understanding the route to market. But there are some very simple basics that many companies have got to put in place first.”
Reilly argued that sourcing in the far east was not inevitably the cheapest solution. “A lot of companies are charging east and they haven’t fully understood the true cost of working that supply chain. It is always the hidden cost that can come up and bite you.”
George Hadley pointed out that there was a danger with people tinkering with small parts of the supply chain – particularly the procurement.
“If you are measured as a buyer – if you can buy a component for $100 in Germany and only $40 in China: ‘look what a star I am’. Because the logistics costs are picked up by a different department, as they often are, then one guy has done a fantastic job, or so he thinks, but he has just pushed the problem elsewhere. You have to look at the total picture.”
Chris Shoesmith is senior director, international procurement organisation Asia/Pacific for Bombardier Transportation. His brief is to source one third of Bombardier engineering material spend from Asia/Pacific by the year 2007. He is responsible for total project management, including the functions of sourcing and supply base development, procurement, legal and contracts, logistics and HR. Bombardier is a world-leading manufacturer of innovative transport solutions, from regional aircraft and business jets to rail transportation equipment, with an annual turnover of US$15.8 billion.

George Hadley is global operations director, cash systems at De La Rue. He has extensive senior management experience in world class manufacturing, global procurement, supply chain & total customer service. De La Rue is the world’s largest commercial security printer and papermaker, involved in the production of over 150 national currencies and a leading provider of cash handling equipment.
Iain Pearson is global supply chain support manager at Shell Lubricants. He has been instrumental in setting up Shell Lubricants’ supply chain function and currently has particular responsibility for right-sizing infrastructure support to a supply chain tasked with delivering a single, global, lubricants product portfolio. Shell Lubricants is a global leader in finished lubricants, selling 13,000 tonnes of lubricants a day to customers in approximately 120 countries.
Richard Wilding is senior lecturer, logistics and supply chain management and director of customised executive development in SCM at Cranfield School of Management. He works on logistics and supply chain projects with European and international companies in all sectors, including pharmaceutical, retail, automotive, high technology, food and drink and professional services.
Geoff O’Neill is head of central logistics for new sales channels at Woolworths. Woolworths Group is principally a UK retailer, focused on the home, family and entertainment. It has 806 stores in the UK.
Paul Reilly is strategy manager, global supply chain at British American Tobacco. he is responsible for direction of BAT’s supply chain strategy, which includes developing and introducing standardised processes based on group best practise, integrating planning across primary and secondary organisations and introducing a planning toolkit above the ERP platform. The group is also working on network and inventory modelling. British American Tobacco is the world’s most international tobacco group, with brands sold in 180 markets around the world.
David Garman is chief executive of TDG. Since joining the company in April 1999, he has reorganised the group behind a European growth strategy, based on innovative supply chain solutions and the development of a wider range of services for major customers. TDG is a leading supply chain solutions provider, with operations in seven countries across Europe, employing more than 7,000 people. TDG works in partnership with many major blue-chip companies, particularly in the chemical, FMCG, industrial and retail sectors.
David Hindson is group director of strategy and marketing at TDG and is responsible for TDG’s strategic marketing programme which includes account management, commercial frameworks, new product development and marketing communications. Prior to joining TDG he has held senior positions with Diageo and Exel, and has extensive supply chain consulting experience including 5 years with PWC.

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