Globalisation brings with it several challenges for businesses managing a global supply chain. Stuart Harman, Partner at business improvement specialist, Oliver Wight International observes organisations need good visibility, communication and understanding of their extended supply chain to overcome these challenges, and ultimately create competitive advantages.
Organisations, no matter how efficient must always be prepared for unplanned events, or risk a negative impact on business. The tsunami in Japan was an extreme example where some organisations only became aware of their third or fourth tier suppliers and their impact on the business because they were in the tsunami-affected area.
Global supply chains are multifaceted and dynamic; it is therefore essential that organisations, wherever they are situated within the supply chain, consider and monitor contributing factors such as national taxes, charges, laws and regulations, not to mention the impact of economic, political or market change, and natural disaster.
The geographic location of some countries also presents additional challenges. New Zealand, for instance is relatively isolated from the rest of the developed world, and inbound and outbound shipping costs can be a significant factor, but it is the time it takes to get products into and from New Zealand that becomes the key issue. In the world of lean, transportation time is waste. Moreover, long shipment times expose the supply chain to demand and supply variability. Inventory is typically used to buffer the impact of any variability in supply or demand, but this inevitably increases working capital requirements.
These supply chain challenges can be better overcome not by increased stockholding, but by creating a more agile and efficient supply chain. The first step is to understand the global supply chain that one operates in, end-to-end. Mapping or modelling the extended supply chain can help to recognise the relative size and influence of different entities within the supply chain, and identify the most influential customers and suppliers, as well as areas of greatest complexity and risk.
A major supermarket, for example, is likely to be an influential player because their impact on the supply chain is too significant to ignore. Likewise, a supplier can be very influential, particularly if their product is in short supply, providing leverage for them to make demands on their customers.
A common problem seen in businesses across the world is their small size relative to their global supply chain. Those that are part of a global organisation in some cases have little control over sourcing and product decisions, having to fall in line instead with Head Office decisions, made with a global rather than local perspective. It is particularly important in this instance to really understand one’s supply chain to have the opportunity to negotiate terms and conditions, or else develop products differently, so as not to be constrained moving forwards.
It is dangerous to replicate assumptions used for the home market in other markets. A service driven organisation earning high returns by operating on short lead times may not necessarily be able to deliver that offering in another market. One will need to set up a different set of assumptions and strategic drivers so that business plans and expectations can be aligned to the specific market.
Once a good understanding of the supply chain has been achieved, partnerships need to be formed with those that have the greatest impact on the business. Good communication is essential for this, and for ongoing understanding. Businesses that have very little dialogue with their supply chain partners end up with very poor visibility of drivers behind customer demand and supplier costs.
The right processes have to be in place to allow visibility. Integrated Business Planning (advanced S&OP), a business management process for running the entire organisation, not only provides a 24-36 month rolling horizon, it directly links the corporate strategy and financial plans, and exerts control over the extended supply chain.
One global electrical components manufacturer, an Oliver Wight client, saw demand reduce globally by 35% in 60 days in 2008 as a result of the GFC. Unable to re-plan their supply chains as quickly as the change in demand, inventories soared to over $250 million, decimating profitability. Having come through this, they have now introduced an Integrated Business Planning process, which enables them to model different supply chain scenarios, making them much better equipped to anticipate and react rapidly to ever-changing demand.
The events of the past five years –the GFC and various natural disasters included – have made the need to optimise the global supply chain ever more pressing. Understanding one’s supply chain footprint, communicating effectively and forming strategic relationships throughout the extended supply chain contribute significantly towards overcoming the varied challenges of today to effectively meet customer demand in the most profitable way.