Supply chains go global

DISTRIBUTORS WILL be buying from more global suppliers in the future.

That's because supply chains are becoming increasingly global and there are tremendous advantages to moving in that direction, said Steve Pillsbury, director of PRTM Management Consultants.

In “Globalization of the Supply Chain: Lessons Learned from Leading Companies,” Pillsbury said supply-chain management entails all the activities associated with moving product from your supplier and their supplier through your organization to your customer and their customer. It involves the end-to-end set of strategies and activities required to meet customer needs across the extended enterprise.

He said an integrated global supply chain is agile (flexible and adaptable) and efficient (creating minimal amounts of waste).

“Effective supply-chain management is important because it improves the top line: Best-in-class companies have 25% higher sales growth than other companies,” he said. “It also improves the bottom line: Best-in-class companies have 40% higher profitability than median companies.”

He said the heavy-duty manufacturing industry is no exception, citing these footprints:

  • ArvinMeritor's CVS Division has eight separate facilities for manufacturing, R&D, etc, in China and India.

  • Haldex has 21 production facilities in Brazil, China, Germany, Great Britain, Hungary, India, Mexico, Sweden, and the United States.

  • Eaton's Truck Division purchased Pigozzi S.A. e Transmissoes, an agricultural powertrain business in Brazil.

Some examples of global growth:

  • Asia's medium and heavy truck market is expected to grow 21% a year through 2010.

  • South Africa heavy commercial vehicles (HCV) growth of 24% in 2006.

  • 10% 2005 growth in light commercial vehicles (LCV) in Latin America.

  • 5% annual heavy construction equipment growth through 2014 in West Africa.

  • 33-40% commercial vehicle growth in India in 2005/2006.

“A global supply chain can mean you're trying to figure out from a source standpoint what your optimal supply footprint looks like,” he said. “What does it mean in terms of how you expand and when you expand? Is it through investment in emerging markets to be closer to your customers? Joint ventures? Or a combination of both?

“Then you figure out how all the functions and strategies that support your own globalization play together. As you do that, you'll realize that what you're doing is adding complexity to your supply chain.”

Complexity is added

He said there is a Catch-22.

“You know that you need to expand to be global and that you need to fend off your global competition,” he said. “They're interested in taking your market share. You know this and you're working to establish a global presence to accelerate your capability in terms of managing the global customer base. But the reality is that you will be adding complexity to your business by doing that. That complexity is going to add cost to your business. High-complexity supply chains tend to have 17% more supply-chain management costs than low-complexity supply chains.”

Pillsbury said PRTM did a China Sourcing Study of 50 suppliers. Although they were in the automobile industry, he said the results have resonated across multiple industries and are applicable to the truck market:

  • Participants intend to triple their spending in China in next five years.

  • Over half realized less than 40% of their savings goals to date. “Most aren't good at it,” he said.

  • Leading suppliers achieve twice as much savings 30% faster, and with lower risk. “What separates leading companies from challenged companies is that the challenged companies think it sounds like a good idea and they give it a try by reaching out through Web sites or through buyer brokers and hope the response they get is favorable.”

  • A remote “test-the-waters” approach is bound to fail.

  • Leading suppliers have built a local presence with local staff.

  • Early adopters have highest the savings, and a learning curve of six to 10 years.

  • China sourcing requires piece-price savings of 20% or more to outweigh the risks.

He said companies need to develop a China strategy and invest in local leadership.

“Integrate China sourcing in a global strategy,” he said. “Establish critical mass with $10 million to $25 million in spending. Build a Chinese local presence.”

He said companies can't skimp on due diligence and local China support.

“Understand and manage total costs, carefully identify capable suppliers, and ensure local technical support for implementation,” he said.

And finally, companies have to proactively manage China's risks and opportunities.

“Invest in continuous improvement, protect intellectual property with all means, and manage the risks of the extended supply chain,” he said.

In managing the global manufacturing footprint, he said two key lessons learned stand out: Site assessment is tricky, so be judicious and take a long-term perspective in selecting centers of excellence; and form follows function — global footprints are managed by global organizations.

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