Strategies for managing global supply chains are changing fast. Unit price is no longer the overriding concern; proximity to the customer is becoming a critical issue. By Nick Allen.
Manufacturing is now global. Components destined for products assembled in the UK or USA are just as likely to be made in China or Brazil as they are to be sourced close to the point of assembly. But whereas outsourcing the manufacture of goods to distant locations was undertaken, until recently, with little thought to issues of supply disruption and market volatility, thinking and strategies are changing and so are supply chains.
Prof Alan Braithwaite, chairman of LCP Consulting and visiting professor at Cranfield School of Management, believes a shift is underway in global sourcing. He says: “There is a move to near-shore or re-shore. So there are some shifts going on in how companies determine their sources of supply, and that is going to drive strategy.
“Interestingly, it’s not just re-shoring to Europe, but it’s global companies moving their manufacturing closer to their customer base,” he says. “We have two engineering clients who are actually moving significant blocks of their manufacturing to Asia, because that is where their customers are now.”
He is keen to point out the difference between this shift and outsourcing. “One of them owns these factories, it hasn’t outsourced. And the other one is moving a complete product range, which is mostly used by customers in Asia, and they are moving that entire product range from the UK to Asia. However, they are also moving some activity that they were doing in Asia back, so that they are closer to the customer.”
Does this mean the developing domestic markets of Asia are changing the shape of global supply chains? Braithwaite believes they are but adds, “There are those that are bringing supplies back because they are not getting the flexibility in the market. The big trend is to bring supply closer to demand.”
In addition, Braithwaite sees changes taking place in global networks. He says: “There is a big move towards regional hubs. So, rather than having a product made and then ship it into the theatre where it is going to be sold, they’re moving it through regional hubs so that they get more flexibility on inventory deployment. And that is proving to be a significant technical challenge because it’s clearly not economic to do it with all products.
“Consequently, you are getting into very sophisticated segmentation of the range and network operating rules,” he says. “But doing this will save quite a lot on inventory and can save on transport as well, as you then just ship direct into markets to customers rather than moving through, say, European distribution centres.”
Mitigating supply chain risk has become a major focus for companies operating on a global basis.
Duncan Brock, customer relationships director at the Chartered Institute of Purchasing and Supply, says that people are analysing the risks associated with their supply chains a lot more than they ever used to, and “not just disruption to supply, but financial risk and risk to reputation,” he says. “Procurement people, are now having to understand risk, analyse it and look at how to mitigate it and that is driving decision making about ‘how off-shore do you want to go?’
With regards to outsourcing, Brock is aware of a number of studies where organisations asked if they are outsourcing more say ‘yes’, but he believes the challenge for those companies will be in having the right in-house talent to manage the relationship.
“You tend to outsource and think, ‘thank goodness I’ve got rid of that’, but actually, the work starts then in making sure that the outsource provider does what they are supposed to do and is continuing to innovate and drive improvements,” he says. “You need someone internally who is really going to focus on that relationship and manage that relationship effectively.”
“There are quite a few organisations that have done training development of their people in ‘total cost management’, but we are seeing a lot more organisations doing more analysis and taking into account the total cost of acquisition rather than just a piece price variance. It’s still a developing area for procurement,” he says.
“But I know a number of organisations now where they are mapping out logistics, inventory holding costs, cash tied-up, freight costs, and how much time it takes to get through customs control.”
So are more organisations mapping their supply chains? “I think they are,” says Brock, “although the organisations we talk to are very good at mapping their first tier suppliers, and some of them are good at going down to tier 2, but, there are not many who, if you talk to them about tiers 3 and 4, that would really understand those supply chains and the vulnerabilities around them.” He says the means of assessing supply chains at those levels is not easy.
The horse meat debacle is the latest manifestation of buying organisations having poor visibility of suppliers at tier 2 and beyond. Research findings just released by supplier information company Achilles, suggest that “one in five (18 per cent) companies in the UK hold no information about their tier 2 suppliers across the world”.
But a particularly worrying aspect of buyers’ attitudes, revealed by the report, is the apparent complacency over the issue. The report indicates that despite the lack of information on tier 2 suppliers, 92 per cent of companies say they are ‘satisfied’ that their current supply chain allows them to identify and mitigate potential risks.
Mapping out the supply chain down through, often, many tiers of suppliers is highly complex and regarded as “too difficult” by many large companies. However, the automotive sector is getting to grips with the issue.
Achilles has just launched a global community for the automotive sector, in partnership with Toyota Motor Europe, Jaguar Land Rover and Aston Martin – with several other multi-national car companies providing input. Adrian Chamberlain, chief executive officer of Achilles, says: “We are working with these companies on technology that will enable them to map and understand their supply chains right through the many tiers, allowing them to see the interaction and dynamics of them, and risk-assess in a way that has never been done before.”
Automotive supply chains are widely regarded as the most complex of any industry, so managing such complexity on a global scale requires close collaboration with all parties.
According to Chris Roberts of Unipart Logistics, creating the most efficient global supply chain comes down to understanding its linkages. “Ninety per cent of our energy goes into trying to ensure that we understand the lead-times of all the various hand-offs in the supply chain at a really detailed level and then looking to continuously improve those processes by taking waste out – often that results in reducing lead-times,” he says.
Roberts points out that reducing lead-times brings benefits in terms of improved customer service, “because you have a predictable supply chain that is robust and operates within minimal deviation from the norm.”
Research- Manufacturers put supply chain at the heart of strategy
Manufacturers are placing the supply chain at the centre of their efforts to achieve their strategic priorities, according to a study by An Economist Intelligence Unit research programme sponsored by KPMG International.
The report, Global manufacturing outlook competitive advantage: enhancing supply chain networks for efficiency and innovation”, said global manufacturers’ ability to optimise performance and cost in their entire supply chain would be key to helping them become more competitive and resilient.
The report is based on a survey of 335 senior executives in aerospace and defence, automotive, conglomerates, engineering and industrial products, and metals. Respondents are distributed globally, with nearly a third each from the Americas; Asia-Pacific; and Europe, the Middle East & Africa. Key findings include:
– Global manufacturers are increasing transaction activity to take advantage of growth opportunities in global markets, while reassessing operations and product portfolios to control costs. Nearly a third of all companies in the survey are planning mergers or acquisitions to capitalise on opportunities in new markets, and close to half of larger companies. And 40 per cent said they plan to exit unprofitable, non-core product lines and unprofitable, non-core business units over the next two years.
– Companies are viewing their channel partners as more of a network which is critical to achieving a “demand-driven” supply chain. More effective and efficient collaboration enables firms to optimise inventory, logistics, and other operational costs.
– Visibility is the new watchword in supply chain optimisation and a major opportunity for many companies. But almost half of the companies say they lack visibility beyond their Tier 1 partners. And only nine per cent said their firm could assess the impact of supply chain disruptions within hours.
– Increasingly, companies are placing the supply chain at the centre of their strategies to innovate. Many companies are starting to see their suppliers as a source, not just of production and logistics, but also of ideas. Half of respondents said that partnerships, rather than in-house efforts, would characterise the future of innovation. Some 42 per cent expected their company to invest more than four per cent of revenue in innovation over the next two years.
– Companies see value in both breakthrough and incremental innovation to stay competitive. Nearly a third of respondents whose firms are stepping up R&D say their company will invest in breakthrough innovation. The remaining two-thirds who see a resurgence of R&D activity are focused on incremental innovation – enhancing existing product lines and services.
The report concludes: At the centre of all this is fine tuning supply chain links to work more effectively with partners. Companies that make the most of their supply chains have the potential to become more profitable in the years ahead.