Supply Chain Frontiers issue #7. Read all articles in this issue.
Globalization continues to open the door to new markets--and to risks including increasing supply chain complexity and changing cost structures. Two business leaders who have spearheaded the international growth of their companies, David Abney, President, UPS International, and Edouard Michelin, CEO of Michelin, are bullish about the prospects for world trade provided companies and the international community prepare for the challenges.
Abney and Michelin are keynote speakers at the 2005 Zaragoza Supply Chain Summit. The event, "Beyond Offshoring: The Road to Globalization", brings leaders from industry, government and academia to Zaragoza, Spain, May 31--June 1, 2005, to discuss issues such as the economics of offshore manufacturing, the evolution of international supply chains, and government responses to the globalization of business.
Also on the agenda in Zaragoza is the growth of low-cost manufacturing centers in China. Although some costs have gone up, China remains an attractive option for manufacturers. In the tire industry, "often the penalties linked with the increasing cost of logistics and transportation does not outweigh the overall gains," said Michelin.
Abney agrees that China "will enjoy rapid growth as a manufacturing powerhouse" as long as it offers low production costs, improved logistics infrastructure and open markets. "China is the best opportunity of our generation, especially for global sourcing," said Abney. "At the same time, companies can also take advantage of increasing opportunities to source close to their primary markets," he added. "Central Europe, for example, offers expanding sourcing opportunities for Western Europe."
The distance between contract manufacturing operations and end markets can be an important factor in offshore outsourcing decisions. The recent 11-day strike of U.S. West Coast ports underlined how stretching supply chains internationally brings new supply chain challenges. As Abney pointed out, in that circumstance a critical consideration for companies was how to re-route inventory imported from Asia by ocean to other modes of transportation. Moreover, the complexities of managing the international flow of goods are compounded by higher customer expectations for on-time delivery, order accuracy and customer service levels. The supply chain is where these expectations can be met. "Some 75 percent of the cost of getting a product from producer to end customer is supply chain related. Manufacturing costs are only 25 percent of the picture," Abney said.
There is more market volatility "that requires new models for managing product flows and inventory, and having the right buffers," agreed Michelin. In the tire industry, for example, there are seasonal variations such as spikes in demand for snow tires in the winter, and fluctuations tied to the ebb and flow of national economies. But there are also less obvious drivers of volatility. For example, Michelin is a major supplier to the mining industry, he explained, and companies in that sector have become much more responsive to market changes such as gyrations in the price of ore. The demand for specialist products such as tires rises and falls as mining enterprises adjust their capacity in line with market conditions.
There are also broader challenges that companies face when expanding globally. According to Abney, "the earnings advantages due to accessing low-cost labor can sometimes lead to a gold-rush mentality." It is important not to overestimate the benefits and underestimate the added cost and complexity, he advised. Developing a worldwide reach requires the right level of support matched to the enterprises specific needs. For example, customs documentation needs can be addressed at a basic retail level through outlets such as the UPS global retail network of 5,200 UPS Store and Mail Boxes Etc. locations, via the Internet, or for more sophisticated players by integrating with a third-party providers processing technology.
Competing successfully in large markets is tough for global enterprises, suggested Michelin, "but excelling in small markets is a higher challenge for a large company." And niche markets can be defined in terms of their geography, products or customer segmentation, he observed. Also, it can be problematical for large enterprises to knit together business practices when customers are scattered across the globe. "It all comes down to the human challenge of having a strong corporate culture that helps a company to embrace a diversity of national cultures," he said.
In response to its growth as a global enterprise, the tire manufacturer launched its Supply Chain Breakthrough program "to significantly increase the focus on training, capacity building, and staffing the supply chain function," said Michelin. At the same time, it has developed new methods and systems that help position Michelin as a global enterprise. "We think that the operation of the company is fundamentally based on the supply chain," he said.
But a challenge that is beyond any single company to overcome is the political one. "Protectionist practices and regulations yet limit the potential of the global economy," said Abney. He pointed to the World Trade Organization Hong Kong Ministerial meeting in December as an opportunity to reach a successful solution to the Doha Development Agenda, and "remove antiquated customs procedures, taxes and duties that needlessly increase shipping costs and tie down the progress of economies."
For Summit information go to: Summit 2005 or email: summit@zaragozalogistics.com. For Summit registration contact: Viajes Mapfre Congresos, tel: +34 (976) 20 03 68, fax: +34 (976) 20 14 04, email: congresos.aragon@mapfre.com