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Virtually all companies are now part of more or less complex supply chains spanning multiple countries, regions and continents. They interact, transact, and collaborate on activities ranging from product development to the delivery of products to customers. In such environments it becomes important that supply chain players understand their individual strengths and sources of value creation, find a position to compete and build appropriate capabilities to sustain success.

Where supply chains compete with supply chains globally the capabilities must be combined across organisational and geographic boundaries. The extent to which companies can or want to do that will vary.

How do your supply chain capabilities compare in the global playing field?

An understanding of country and region-specific supply chain drivers is critical, regardless of whether the company is a multinational purchasing from Asian countries or a local firm selling to North American partners. Companies wishing to operate beyond their home bases will need to analyse the different factors that create complexity and drive supply chains in different regions, even if the drivers are highly uncertain and difficult to predict.

Before venturing into relationships with foreign partners a company needs to know its particular breadth and depth of supply chain capabilities. This way, organisations will be able to determine where they can best create value and sustain competitive advantage and to realise where the constraints are.

Supply chain capabilities can be categorised in terms of operational excellence, integration and collaboration and in synchronisation through networks. For companies, the significance of capabilities in a local versus regional and global context is to analyse capabilities relative to other companies in their industry. Key factors are:

Continuously striving to improve existing operational capabilities peculiar to its markets. This includes a focus on understanding market requirements and the ability to respond to these demands, such as through procurement, manufacturing and forecasting.

Integration of, and collaboration with, supply chain partners across core processes and systems. This allows companies and their partners to extract greater value from superior service to their customers say, through global supply chain planning, and e-procurement.

Networked business models allow exploitation of new value creating opportunities through synchronised network capabilities and virtualisation of supply chain aspects. These capabilities can be found in third-party and fourth-party logistics and in e-marketplaces and often include a radical redesign of the operations.

Nike Inc, the US based manufacturer of athletic footwear, shows how to successfully tackle all three capability dimensions. Nike is implementing a global electronic supply chain in order to link up with its partners around the world and facilitate better decision making. The major problem remains that many business processes, particularly those of partners at overseas sites, are still manual and paper-based, and new operational processes must be assimilated. The company’s goal is to implement these integrative and collaborative technologies and achieve a streamlined electronic supply chain process at all of its partners’ locations worldwide.

Organisations that want to play in regional and global supply chains face aspects that are to a large extent out of the control of the company itself. They are the underlying structures and the environment within which the company defines its strategies and conducts business.

Public Policy makers
Competing successfully through global supply chains requires the awareness and support of public policy makers. Impediments to foreign ownership, imports and exports, for instance, will slow the adoption of advanced business practices by individual companies, potentially slowing down the country’s economic and business development. In contrast, nations with low barriers to trade, stable currencies, and flexible capital markets provide hospitable environments for business and will encourage economic growth.

As the majority of international trade continues to be based on comparative cost advantages, it will be crucial for countries and companies not to fall behind in the adoption of new technology and associated processes. Countries that have traditionally relied on low-cost labour to attract trade will see their competitive advantage diminish if they do not also adopt new technology to generate value beyond cost savings and efficiencies.

For example in India and Indonesia, the liberalisation of the telecommunications sector has been slow and has hindered the uptake of new business models. The reason is that some countries place more importance on controlling their communication network infrastructures rather than seeking to realise the economic opportunities that can flow from liberalisation and internationalisation.

The impact trade policies and regulations can have is exemplified by Carrefour’s engagement in China. Carrefour opened its first store in China in 1996, when foreign ownership in retail business was subject to the approval of the central government and restricted to 50 per cent. By 2001 Carrefour owned 80-100 per cent of its 27 supermarkets around the country and had bypassed central authorisation, thanks to help from China’s provincial governments. Later however, three central government bodies jointly ordered Carrefour to cease unauthorised expansion. In 2002 the central government, again invoking rules on retail foreign ownership, ordered Carrefour to restructure its operations and sell stakes of up to 35 per cent in its stores to local partners.

Certain vertical industries are often early adopters of global supply chain practices, while others are followers. Presently, the most sophisticated and most globally oriented supply chains fall into three vertical industries: the high-technology/electronics industry, the automotive industry, and the retail/consumer packaged goods (CPG) industry. As a result, these industries are on the cutting edge of global supply chain concepts and related technologies. They have successfully established networks of virtually synchronised global supply chains by outsourcing manufacturing and assembly work to overseas contract manufacturers and only retaining the core design, development, and marketing functions at headquarters.

The implementation of effective global and regional supply chain architectures needs to consider business culture, organisational change constraints and leadership styles that empower a diverse workforce. Companies in Asia need to manage the fact that many business relationships depend on personal networks. Rather than ignoring this difference, success is more likely when companies address the cultural barriers appropriately. For instance, guanxi agreements in China are made face-to-face between parties that know each other and rely on informal rather than contractual relationships.

On the one hand, this emphasis on personal relationships might be a barrier to the uptake of new business models that are technology heavy. On the other hand, technology can provide a pervasive communication medium that can strengthen collaboration and enhance understanding between trading partners in Asia and around the world. Internet-enabled collaboration will not replace traditional face-to-face deals, but companies will need to adjust to new global business standards in the supply chain.

What’s your winning position in the global supply chain game?

The degree, to which a company can internalise, or respond to, global and regional drivers with its supply chain capabilities, will determine its position and eventually its ability to achieve competitive performance. The diagram provides a framework for categorizing players in the global supply chain. As with any other framework, it does not intend to prescribe a course of action, but rather help the supply chain practitioner think through the implications and alternatives. The categories that define the two dimensions in this framework are ‘supply chain capability’ and ‘geographic capability reach’.

‘Local contenders’ represent the most basic supply chain strategy. These companies focus on sustaining their competitive advantage on their home markets by concentrating on excellence in selected (mostly operational) capabilities. Many conglomerate models, particularly throughout Asia, grew on a strategy of serving local market needs with specific local capabilities and management and exporting only in an opportunistic fashion. Some commodity products that are specific to customer needs in a particular country or region might lend themselves to such a strategy. Foreign challengers have difficulty breaking into these markets because of idiosyncrasies in market demands (such as languages and tastes) or availability of resources. Many niche markets of that nature remain in regions around the world.

Significant limitations
A strategy of local focus that works well for some companies today might have some significant limitations for the future. Any advantages based on highly idiosyncratic practices and cultures are at risk to be eroded over time when economies open up and become more global. Both private and state-owned corporations in emerging economies in Asia (like in many regions elsewhere) were often able to hide operational inefficiencies such as overstaffing, low profitability and low productivity shielded by cultural and protectionist barriers. Now, political, economic and cultural barriers have been lifted and expose the inefficiencies of those companies.

Chaebols in Korea, family-owned conglomerates in Indonesia and Malaysia, and state-owned enterprises in Latin America are examples of organisations that use the concentration of power, wealth and relationships. They often stay within their geographical and cultural boundaries and take advantage of scale and scope, strong ties to regulatory bodies and governments, and long-term relationships with customers, suppliers and service providers. Undoubtedly these strengths build a basis for the creation of advanced local and regional networks.

Outsourcing supply chain capabilities in all regions of the world has been a trend in the pharmaceutical industry. Drug companies can concentrate on what they do best – bringing new patented medicines to market as fast as possible and convincing doctors to prescribe them over cheaper competition. Regional and local distributors are seeing opportunities for rationalising the supply chain, passing on the savings to the drug companies themselves. To begin with, distributors operate regional manufacturing and distribution facilities, producing and packaging products for countries across Asia from a few strategically placed plants. Although they tend to work on a country-by-country basis, they easily expand their reach and distribute products on a regional level.

Another example are trading houses which are taking advantage of existing regional networks and relationships. Li & Fung is leveraging new virtual business models, such as e-marketplaces in the Asian region. When business-to-business online exchanges first emerged, Li & Fung took the opportunity to become involved early. Instead of competing with e-marketplaces, Li & Fung collaborated with them. They provide an interface that enabled companies to access Li & Fung’s offerings for sourcing, trading and distributing diverse products throughout the Asia-Pacific region. Li & Fung leveraged its large established customer base and successfully shifted the power to its own advantage. Li & Fung also leveraged its network and became the regional fulfillment house of choice for many e-exchanges.

Many companies will seek to leverage their own existing assets and deep capabilities abroad. They do not focus on building regional or global alliances, but rather want to excel in a similar international market with ‘what they are doing best’. This strategy is feasible if products and/or capabilities are easily transferable to other countries. In many cases this will mean that companies need to find particular niches in the market where they are immune against the size and power of larger multinational competitors on the one hand and nimble local/regional competitors on the other. With regards to appropriately leveraging local competencies a company might choose to concentrate on selected aspects of the supply chain, such as access and knowledge of regional distribution.

The integration of global supply chains fosters specialisation of capabilities that can be leveraged internationally. Differentiating capabilities like development of succinct brands generate scale effects – the incremental cost of creating world-class consumer products, drugs and software varies little with volume, and companies like Procter and Gamble, Hewlett-Packard and Pfizer capitalise on this fact.

As the trade and transportation activities become liberalised globally and regionally, multi-national firms have begun to consolidate their logistics. Companies and governments in Singapore, Hong Kong and Korea for example contribute their specific capabilities and establish new centralised distribution hubs in the regions. The changing economic environment in Asia will make it increasingly feasible for multinational firms to collaborate and consolidate their logistics and distribution activities at strategic locations throughout the region.

Vopak is a logistics services provider to the chemical and oil industry in Asia. Its strategy in Asia is to invest in chemical industrial parks, hub locations and distribution terminals close to the end-consumers. Shanghai is regarded as the hub location for mainland China. Hence the organisation decided to erect a chemical industrial park in Caojin, south of Shanghai, which offers Vopak a unique opportunity to build and further enhance the capabilities needed. This will strengthen its position as logistics service provider to the adjacent petrochemical industry.

Organisations operating as global networkers extend their involvement into global supply chains and use their influence to dominate them. Global networkers leverage their assets and capabilities and seek to achieve scale to improve the utilisation of their operation. In doing so they identify supply chain inefficiencies – deliver products and services faster than local competitors and find advanced collaborative solutions to fend off competition. In many cases this might mean partnering with local service providers. The benefits are best achieved in integrated supply chains, where all interdependencies between the supply chain players are understood, integrated and optimised for the whole network.

The players in integrated multinational supply chains assume different roles. In supply chains that produce and sell labour-intensive goods, as is the case with apparel, local firms, manufacturers and contract manufacturers, assume the ownership of key processes. Large retailers, lead logistics services providers (LLP), fourth-party logistics providers (4PL) and trading houses take ownership of information and financial flows because they are able to manage the complexities of multi-level flows.

In Asia, Coca-Cola has been expanding geographically investing in a number of customer channels. After surveying local retailers the company approached local independent wholesalers to work with them. Coca-Cola’s offered training and management assistance to its wholesalers, and maintained control over order management and inventory. The company now claims a significant lead in market share in the region, has superior operational performance (comparably lower costs-of-goodssold and selling, general, and administrative expenses than their competitors) and specialises in the less asset-intensive parts of the value chain – in fact, it is transforming into managing supply chain information. This strategy permits the company to deepen its expertise in areas such as product development and branding.

The ability of an enterprise to survive and succeed in today’s turbulent international environment depends on its ability to find the appropriate position in local, regional and global supply chains and align with it. Traditionally, the world has been split into countries with supply chain partners that provided labour-intensive production resources and countries that could deploy advanced and capital-intensive assets.

Business boundaries are now becoming permeable and communities are converging across organisations, regions and industries. Electronic commerce, information and communication flows transcend time, geography and culture. This creates new change challenges for many organisations and their leaders.

Robert Ogulin is a director at Lucis (www.lucis.com.au), a strategy and supply chain advisory network in Australia. He is also a researcher and adjunct faculty member at the Sydney Business School. He can be contacted at robert.ogulin@lucis.com.au

This article is based on an excerpt from the book, Gower Handbook of Supply Chain Management. Copies of this 692 page book are available through Logistics Europe at a price of £85.00. P & P Contact nickallen@uktp.com

 

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