The trend towards sourcing from lowercost countries and looking to new geographies to expand sales continues apace, but research by Aberdeen Group shows the state of global supply chains is causing financial and corporate risk to companies.
Large companies’ international supply chains are only 50 per cent as automated as their domestic supply chains and nine out of 10 enterprises have global supply chain technology they admit is inadequate to provide the corporate finance group with the timely information it requires. Fully 87 per cent of large enterprises and 64 per cent of all respondents say their company’s staffing for managing global supply chain and trade compliance processes is inadequate.
This strain on global supply chain organisations needs to be addressed for companies to reap the full benefits of global selling and low-cost country sourcing from regions like Asia.
Ahead of the game
Best-in-class companies are significantly ahead in creating more automated, more agile supply chains that result in shorter lead times, less inventory investment, and lower total landed costs. These findings are based on Aberdeen benchmarks in May and June 2006 of more than 150 North American and European companies.
Among the most critical areas for companies to improve are: Supply chain visibility to increase the transparency and velocity of global activities; business-to-business collaboration to better match supply with changing demand; and trade compliance to ensure undisrupted movement across borders and take advantage of preferential trade agreements to lower total landed costs.
Although regulatory pressures and the immaturity of logistics networks in low-cost countries such as China receive great press attention, these factors are not what keep supply chain executives up at night. Much more concerning to them is the continued lack of critical supply chain process visibility due to manual-driven processes. The continued reliance on manual effort by internal logistics staff and business partners to get the job done is resulting in too much expediting of goods, use of higher-cost secondary carriers, administrative costs and data errors, and inventory hedging.
Some 79 per cent of large companies say that the lack of supply chain process visibility is their top concern. Mid-sized companies also report significant challenges with their ability to effectively manage their companies’ growing global operations and distribution networks. Visibility and coordination challenges also rank highly. ‘Our key pressure’, explains the CIO of a mid-market
European retailer, ‘is coordinating the diversity of forwarders and suppliers delivering a wide collection of merchandise.’
The lack of automation affects not just the supply chain organisation but also creates uncertainty in the finance organisation. An astounding 90 per cent of enterprises report their global supply chain technology is inadequate to provide the corporate finance organisation with the timely information it requires. This information includes accurate costing (especially for transportation expenses) and delivery dates for budget and cash flow planning and management.
Just as supply chain managers hedge against uncertainty by holding more inventory, so finance managers hedge against uncertainty by holding more cash. Thus the financial productivity of enterprises is being undercut by the lack of global supply chain visibility and automation, which are vital weapons against uncertainty. The effects are increased inventory holding costs which result in increased working capital requirements and reduced cash flow certainty, preventing treasurers from making use of accounts payable and accounts receivable balances and resulting in more cash being held.
Global visibility technology leads the planned IT investments by companies for their global supply chains. Three-quarters of all companies plan to enhance their visibility technology in the next 18 months.
Although many companies rely on spreadsheets, home grown applications or their logistics service providers’ technology for tracking supply chain events, nearly a third are using a commercial visibility system. Many of these commercial systems are offered in an on-demand model in which the vendor hosts the application and takes care of setting up and maintaining electronic connections to carriers and trading partners. Companies can choose to pay for these systems through a monthly or quarterly subscription rather than upfront.
Levi Strauss & Co, for instance, uses an ondemand visibility application from Management Dynamics.
‘The tool provided more complete and accurate data regarding finished goods destined for the US, which has allowed us to better manage incoming products and to address issues by exception,’ says Lisa Chan, logistics process consultant for Levi Strauss. ‘As a result, the cost of tracking inbound shipments has been reduced by 98 per cent.’
A European pharmaceutical company says that it has 180 users worldwide that use the Management Dynamics visibility system to monitor 750 trade lanes on six continents. By effectively mining the information collected the company found significant opportunities for consolidating shipments, lowering transportation spend, reducing expediting costs, and addressing potential shipping issues before they affect customer service. It also helped the company exploit more opportunities for competitive advantage in new markets. The company cut its inventory costs by $43m and lowered its total logistics costs by five per cent.
Other companies that use commercial visibility solutions report that they have been able to remove 10 days of inventory due to shorter lead times and increased certainty of goods location, and reduce import transit times by five to seven days through improved visibility and shipment management. For a typical $1bn company, this would translate into freeing up $3m to $5m in cash.
More companies are engaging in collaborative initiatives with their partners to improve global supply chain processes. Companies that still operate via arms-length transactions with serial processes between their trading partners are at a growing disadvantage in process speed, reliability, and agility.
In total, 91 per cent of respondents are doing some form of B2B collaboration. The top processes for collaboration are visibility/alert management and resolution (57 per cent of respondents), sales and operations planning (31 per cent), transportation management (30 per cent), forecasting (29 per cent), and replenishment planning (25 per cent).
Only 13 per cent report collaborating on product and packaging design but this can drive significant savings. For instance, one technology company collaborated with its logistics partners and found that it was more cost-effective to strengthen some of its products (making the unit cost slightly more expensive) so it could move to smaller, lighter packaging and thus fit more pieces into an air cargo container load. This cut transportation costs and created a lower landed cost.
B2B collaboration technology is still in the toddler stage. Only a quarter of companies say they collaborate electronically using supplier collaboration technology with more than 20 per cent of their suppliers. Nearly 60 per cent collaborate with fewer than 10 per cent of their suppliers.
Even with limited collaboration efforts, companies report cycle time and process reliability benefits. They have been able to speed up their planning and execution cycles and can reshape and react to demand faster than before. The most productive collaboration processes are collaborative forecasting, inventory management, and replenishment. The focus should be on scaling those first.
On-demand systems are assisting many companies in scaling out their B2B collaboration efforts:
According to a supply chain leader at an industrial manufacturer in Europe, using WeSupply’s on-demand supply chain solution ‘took the burden off our IT staff, both in initial implementation and on-going upgrades and support’. The ability to deploy a slice of an application for faster time to value was also instrumental to the value they were able to receive with an on-demand solution. This company has already brought 50 per cent of its direct materials suppliers onto its WeSupply ondemand system, which includes order and forecast management.
‘Assembling the right internal skills for a B2B project is not meaningful to do yourself,’ concurs a CIO for a leading global high-tech manufacturer. ‘It takes a dedicated set of skills to do this efficiently. The level of headache you save for yourself by using an on-demand specialist is huge.’
A difficult area
Trade compliance has traditionally been a difficult area in which to convince management to spend money for technology automation. But this is changing:
First, government scrutiny is increasing around areas such as import security and restricted party screenings for exports so the fees and fines are becoming more onerous. And manual compliance processes are becoming a much greater productivity drain as global trade becomes a larger part of companies’ business.
Thirdly, it is becoming increasingly wellknown that market leaders are gaining total landed cost advantages through origin management, which includes preferential treatment programmes and free trade agreements (eg NAFTA, CAFTA, EU and MercoSur), quota management, and the general process of using trade knowledge to forge lower total landed costs from product design through to final delivery.
Past Aberdeen research has shown that companies are funding improvements roughly equally across export compliance, import compliance and origin management areas. But North American companies are somewhat more likely to start first with export compliance automation while European companies often begin with import compliance. Aberdeen finds that best-in-class performers are twice as likely to have budgeted trade compliance projects as their peers.
Larger companies should move towards a single corporate-wide trade compliance platform and comprehensive origin and trade agreement management. Smaller companies should look to online tools from technology vendors or logistics service providers for restricted party screenings and total landed cost calculations. Centralised trade management information is a critical instrument for lowering the cost of goods sold. In fact, leading companies are building product and sales initiatives around trade compliance knowledge housed in compliance systems.
Renault, for instance, uses an on-demand trade compliance system from TradeBeam to help expand its business. The carmaker leverages the origin management information housed in the centralised trade compliance platform to design how the low-cost Logan car is manufactured and distributed. The vehicle is partially built in Western Europe and then exported to emerging markets for final assembly. By setting manufacturing and distribution strategies based on maximising free trade agreements and minimising duties and taxes Renault has been able to create a markedly lower total landed cost. Its compliance platform also tracks actual activity closely to ensure that currency fluctuations, ect don’t threaten these savings, which could trigger higher total landed costs than expected.
Managing international logistics is not like managing an extended domestic supply chain. It is fundamentally a multi-party process fraught with greater unpredictability in quality, lead times, costs, and risks. Rather than create the absolute lowest-cost fixed network, leaders are building into their networks more flexibility.
Figure 2 shows how frequently companies use logistics agility practices. Among survey respondents, 59 per cent employ three or more of these practices at least sometimes. But only 11 per cent use three or more on a frequent, systematic basis. These pre-emptive organisations are just as likely to be mid-sized companies as large enterprises. Their common attribute is that they are twice as likely to have highly automated supply chains as their peers. This automation allows them to cost-effectively manage global shipments and inventories in a much more aggressive manner.
For more and more companies, success with their global supply chain is the critical enabling factor for success. The research shows that best-in-class companies are much further ahead in automating their supply chains and using visibility to run agile operations that require less inventory and lower cycle times. To keep pace, companies must form crossfunctional teams to lay out a roadmap for improvement. Use Table 1 to measure how your company stacks up.
Beth Enslow is senior vp at AberdeenGroup