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SETLabs Briefings VOL 5 NO 3 Jul-Sept 2007 Creating Supply Chain Flexibility in the Flattening World By Sandeep Kumar and Ashish Kumar Tewary Counter supply chain disruptions by building solid sense and
SETLabs Briefings VOL 5 NO 3 Jul-Sept 2007 Creating Supply Chain Flexibility in the Flattening World By Sandeep Kumar and Ashish Kumar Tewary Counter supply chain disruptions by building solid sense and respond capabilities Modern day business is beset with changing governance paradigms. The recent surge in business literature has veered the way corporations are getting flatter and flatter. Flat world has emerged as the mantra by which businesses are getting redefined. Flat world encompasses an environment where traditional barriers to trade are breaking down; hierarchies both organizational and customer are being flattened; information and knowledge asymmetries across competition, customers and within the enterprise are being eliminated. The competitive playing field is being leveled. EMERGENCE OF FLAT SUPPLY CHAINS The forces of globalization and the ever flattening world are exerting renewed pressure on global supply chains. Supply chain flexibility has moved beyond managing quality, cost and on-time delivery for a variety of norms and tolerances. It has come to include new product introduction cycle, partner integration and quality of supply chain collaboration, as also the process and functional modularization of supply chains. Cost pressures, dearth of talent pools and emerging markets were some of the reasons why supply chains assumed global dispersion. Following Thomas Friedman s expostulation of flat world, researchers at Infosys have identified four operational shifts that are driving mega transformation in the way demand is being created for products and services globally and the way it is being fulfilled [1]. We try to probe these shifts in the supply chain context and look at how flexibility can be achieved in supply chains in this flattening world. First and foremost, companies in their journey to being the China price, are continually looking to refine their cost structures. This journey has taken many a company eastward with their sourcing strategies. However it is not only about reducing costs but also about entering new market segments by virtue of being able to sell at lower prices, while making money. 1 As an example, GE Medical Systems (GEMS) redesigned its product offerings to offer 80% functionalities at 50% the US price. This redesign was done at its China R&D centers. GE Medical Systems is now the market leader in China for these products and it is also selling these products in price-sensitive market segments in the US. Another example is that of Cisco which funded its investment in R&D and sales expansion by releasing over $2bn from Selling, General and Administrative Expenses (SG&A) globalization by reducing SG&A as a percent of sales from 44.8% in FY01 to 36.3% Change at a rudimentary level can be observed today, in that, the demand and the supply chain are so tightly linked that the product or service design concept is well integrated with the supply chain. As an example of companies leveraging global talent and co-creation models for rapid product innovation, Eli Lilly launched InnoCentive, an online community based business model to access global talent pool [3]. Eli Lily and other pharmaceuticals/chemicals companies can post R&D problems on the portal InnoCentive (with associated award amounts) that can be solved by any of their Companies stand to win the innovation game by exploiting their global talent pools in co-creating revenue-influencing innovation models in FY05. For any new initiative, globalization is always in consideration, and Asia is always on the table [2]. A second operational shift is in the way companies are looking at the problem of customer loyalty creation and retention. It is the product and service innovation cycles today that are determinants of better customer experience. Today s supply chains need to have the required integration to help manage demand percolation seamlessly across supply chain partners. With customers being more and more integrated into the product and service creation process, customer experience calls for greater transparency and visibility into the entire order fulfillment cycle. scientists around the globe. P&G s strategy of open innovation with customers, partners and other outside sources - now produces over 35% of the company s innovation, thereby influencing billions of dollars in revenue. With over 35% of new products having co-creation elements from outside P&G, R&D productivity has increased by nearly 60% in 2006 and has helped launch more than 100 new products with significant outside participation in the last 2 years. Significantly, R&D costs have decreased to 3.4% of sales from 4.8% in 2006 [4]. Making money from information the third operational shift - has always been intrinsic to supply chain management. At the core of all successful supply chains over the years, has been, excellence in information management 2 both in terms of creating a robust information backbone underlying all physical and financial flows as well as monetizing this information for decision support and business intelligence. As an example, using a sophisticated demand driven supply networks (DDSN) strategy while leveraging an information architecture that marries sophisticated planning, fulfillment, event management and supply chain integration, Dell pioneered its famous direct distribution model that enabled it to grow its global PC market share from less than 3% in 1995 to over 18% in 2005 [5]. Likewise, embodies example, Intel timed its asset acquisitions during business downturns to manage rapid up-scaling in the boom years. By sharply accelerating spending during the 2001 recession, Intel built up additional manufacturing capacity. During recovery, Intel was able to quickly and successfully launch new products, months ahead of schedule. In 2003, Intel reported its highest rate of growth since 1996 and increase in net income by 81% [7]. From the discussion above, we understand that the forces of globalization are leading to a mutation of the supply chain models In today s dynamic business environment, only mutated supply chain models stand to absorb global supply chain risks the use of advanced multi channel commerce capabilities to efficiently fulfill millions of multiitem orders through seamless information flow and automation a feat that requires very sophisticated coordination and timing [6]. The operational shift on winning in the turns underlines the importance of being able to manage business cycles through business crests and troughs. These business cycles typically call for a close look at existing business models and predicate disruptive changes. Supply chain risk management has become a key theme in managing such disruptions successfully. Both operational risk as well as event risk need to be addressed squarely through predictive mechanisms as well as through business proofing for managing scale and scope flexibility. As an in the rapidly changing world. Supply chains are becoming increasingly global and flatter. While global sourcing and targeting emerging markets has become fundamental to every corporate strategy, it is also leading to emergence of virtual supply chains with complete supply chain functions being outsourced. The bottom-line is a greater propensity of risk in terms of supply chain management globally. SO HOW ARE SUPPLY CHAINS REACTING TO THESE FLAT WORLD FORCES? Empirical evidence suggests that supply chains are morphing to help deliver to these flattening forces. Multiple supply chain structures are emerging to successfully address changes caused by flattening forces. Emergence of 3 loosely coupled global supply chains, redefinition of core, and increasing use of counter-trade in cross-country businesses are some of the key changes. Value chain complexity is on the rise with supply chains becoming lengthier. As more links get added and niche players emerge, the moot question is on the need for command and control capabilities that allow companies like Cisco, a strong proponent of outsourcing, to manage a supply network that has more than 300 suppliers [8]. While companies have effected supplier consolidation and rationalization to manage the expanding supplier base, the move towards third party sourcing is making the average length of supply chains longer. Emergence of niche supply chain entities - As roles within the value chain get blurred, new entities are emerging that help manage global dispersion and spread of business operations as a core competency. In the process they also expand their role in the value chain. An example in the automotive industry is that of Magna, which aims to provide complete vehicle, design, engineering and assembly services to its OEM customers [9]. Globalized supply chains Supply chains are becoming more and more global with supply chain functions being physically distributed and dispersed. For example, Boeing 787 program transforms its global supply base spread across countries as dispersed as the US, Japan, Italy and Taipei into design and manufacturing partners. To beat Airbus, Boeing has deployed a radical strategy where more than 100 design partners collaborate on the design and engineering and more than 130 structural and systems suppliers synchronize their operations to achieve final assembly in Everett, Washington [10]. A thought here is that globalization and JIT do not seem to go well together as we are gravitating towards stronger and centralized planning functions. Demise of core - There is nothing called core anymore. The term core is relative and it s about supply chain modularization today. There are companies that are outsourcing complete functions that used to be called core in the yesteryears. Emergence of intricate supply chain networks - Companies are moving away from the integrated supply chain concept and today we see loosely coupled supply networks. SLAbased transactional relationships rule. Long term contracts between partners do not always work. Take a look at the high technology contract manufacturers who are trying to work themselves into shorter and more flexible contracts to help maintain their profitability. Another interesting aside is that companies today collaborate in one geography and compete in another. Hutch Essar and Bharti compete independently, but they both have entered into an MOU relating to a comprehensive range of infrastructure sharing options in India [11]. Technology is no longer the bottleneck - The single biggest disruptive influence on business has been technology. As communication costs go down to virtually nothing, processing power keeps following Moore s Law and use of technology becomes ubiquitous, many companies and economies are doing leapfrogs skipping many an evolutionary step. Retailers used to models such as re-order point based supply chain planning (primarily as a 4 consequence of the number of stock keeping units as well as the shorter planning buckets) are switching to time-phased planning techniques, as earlier constraints around processing power and processor costs have been sorted out. Technology has also made possible the concept of work modularization in the connected world where work packets can be delivered virtually out of anywhere and at any time. The G Factor As global trade barriers keep falling down, governments everywhere are putting in counter trade agreements to stimulate local industry further fuelling globalization of trade. Another aspect of the governmental factor is the regulatory norms that governments prescribe and the impact that it has on the way businesses operate. Protocols and regulations such as the Kyoto protocol and the ROHS (Reduction of Hazardous Substances) significantly impact certain businesses in certain regions. HOW DO WE QUALIFY THE NATURE OF SUPPLY CHAIN RISK? The forces that are flattening the world have created many supply chain risks in addition to the oft spoken benefits. With supply chains literally disintegrating, product designers, marketers and manufacturers that were previously housed in a single facility are now spread over several continents in organizations with different cultures, languages and business objectives. These changes have brought new risks and challenges. Long-standing challenges, such as short product lives and uncertain demand, have become even more vexing. When it comes to global supply chains, the potential for disruption comes in many forms, from large-scale natural disasters and terrorist attacks to plant manufacturing fires, wide-spread electrical blackouts and operational challenges such as shipping ports too small to handle the flow of goods coming into a country. Today s leaner, justin-time globalized supply chains are more vulnerable than ever before to natural and man-made disasters a reality that creates greater demands on companies to keep supply chains flexible and integrate disruption risk management into every facet of supply chain operations. The reason is undoubtedly that, with longer paths and shorter clock speeds, there are more opportunities for disruption and a smaller margin for error if a disruption takes place. We identify two main sources of supply chain disruption risk: Operational supply chain risk : Abrupt discontinuity of supply (when a main supplier goes out of business), people (labor strikes, talent shortages), process (internal process changes initiated through external factors or through internal process improvement measures), systems (system failures, data security) and procedures fraud Business risk: Macro business risks such as market risks, financial risks, regulatory risks (stringent emission norms driving new engine/ manufacturing process technology), socio-political environmental risks, natural hazards such as earthquakes, hurricanes, storms and risks emerging from terrorism and political insurgencies. The essence of risk management boils down to adequately appreciating the risks that a company is exposed to for different areas of business; identifying the choke points along the supply 5 chain that would completely harm a business if disruption occurred; and then taking the right set of preventive measures to allow for some protection, remembering to periodically review your supply chain plans and risk assessment priorities. ARE COMPANIES BUILDING THE FLEXIBILITY TO MANAGE FLAT WORLD SUPPLY CHAIN RISKS? We define supply chain flexibility as the ability to reconfigure the supply chain, altering the supply of product in line with customer demand. Flat world forces are changing the face of the global supply chain along with the flexibility that is needed to reap the benefit from globalization. gains flexibility to quickly realign the supply/ demand mix to satisfy the changing global demand. However, early detection of changes, demands a well structured global planning and event monitoring mechanism for global coordination across functions and partners. Globally integrated information systems are critical to reduce the cost of communications and to make relevant information readily accessible. Global supply chain flexibility is then all about connectivity and global business optimality source resources and manufacture/ deliver from where it is most cost optimal and sell where it is most profitable. Downside of this is increasing interdependency and much more In the flat world, companies that have solid sense and respond capabilities tend to amass flexibility in their supply chains Companies contingency planning to deal with eventualities and ability to reconfigure the supply network and product design at low cost to meet newer market needs are having larger impact than ever before on the supply chain flexibility. In this context of flat world forces, supply chain flexibility is about having the sense and respond capabilities to detect the changes early on and having the right supply chain structure, processes and product design in place to respond in a timely and efficient manner to the changes. By making it easier and less expensive to change the source of supply, firm risk. Managers of global supply chains should realize that they are coordinating three types of flows material, information and cash flows. Political, technological or natural events could leave organizations isolated and exposed to shortages of material. Companies that sell in the United States, but have substantial portions of their supply chains in China or in other countries with currencies likely to appreciate against the dollar, face a significant risk of mismatch in their expected U.S. revenues and non-u.s. costs. Bankruptcy of a key supplier without any prior notification can stop assembly lines of an OEM. 6 Problems can range from dock strike in California, a tsunami in Asia, hurricane in New Orleans to physical damage at a supplier that can result in catastrophic impact for a company. One example is a fire at a single-source supplier for Ericsson, which led to lost sales of $400 million dollars accompanied by a drop in the stock price by 1%, culminating in Ericsson s exit from that part of the business [11]. Even political problems can bring about supply chain disruptions. Take the case where new agreement between the European Union and China caused a limit on annual imports. This in turn caused 80mn packs of clothing impounded at EU ports and borders even though retailers had ordered their autumn stock well before this agreement was enforced. detrimental to functioning of supply chain connections. Companies should act on two overarching strategies of (i) building supply chain responsiveness, and (ii) building visibility to supply chain information. Action 1: Build Supply Chain Responsiveness through design for desired flexibility in the supply chain structure, supply chain processes and product design. I) Supply chain structure: Supply chain structure is the network of organizations that manufacture and deliver products or services from the source to the customers. It deals with Flexibility coupled with visibility to information helps companies negotiate supply chain issues with utmost ease The leverage on globalization is tempered by the management overheads of supply chain connections. It is important to ensure that all the connections are working uninterrupted to eliminate any risk to the stable functioning of the supply chain. However, companies need to do much more as Aberdeen Global supply chain benchmark report in 2006 found that only 11% are actively managing the supply chain disruption risk [12]. Availability of information at right time in combination with flexibility can enable organizations to respond to changes supply network structure, the human resource practices and workforce capabilities. 1) Supply network should have the ability to add and remove suppliers, select suppliers who can add new products quickly, vary supplier relationships and have suppliers make volume changes. Also supply network should be flexible to adapt to new security requirements and provide guidance to its partners in order to comply with new regulations. 7 2) Supply network should provide the ability to companies in transferring production from one plant to another when capacity is constrained. 3) Companies culture should allow building integral cross functional teams to prevent decisions based on local optimization. Hewlett Packard has adopted this concept for many of its products such as the Desk Jet printer, even going to the lengths of re-designing it so that a generic semi-finished global version could be built centrally with localization being performed by regional partners[13]. 4) Workforce capabilities should be looked from a holistic perspective to encourage involvement of specialists. By working closely with specialist providers, greater levels of customer value can often be achieved at lesser cost. Auto makers use 3PL specialist logistics providers, where a 3PL runs the warehouse and OEM takes ownership of inventory only when a producti
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