by Kent Brittan

Recreating the Supply Chain
For Western industrial companies the result of these new manufacturing and sourcing strategies has been to create a complex global distributed manufacturing and supply chain environment requiring far more orchestration than before. The complexity is even amplified for those forward-looking companies espousing lean manufacturing techniques to improve customer responsiveness and working capital turnover. In the lean manufacturing environment where inventory buffers disappear and a superior logistics capability becomes a core requirement complete, on-time, zero defects products are expected from the supply base with each and every delivery. Logistics, heretofore a field not very high on the corporate radar screen, has suddenly moved to the forefront of desired core competencies.

Mike Eskew talks to some of the current failings of the existing worldwide logistics infrastructure:

“Sometimes overlooked is the stress rapid global trade growth is placing on the world’s infrastructure capabilities – ports, airports, roadways, rail – to handle the increased volume. Over the last three decades, world trade has grown at an annual rate three times higher than world GDP. Today, 68 percent of all goods are sourced internationally, frequently traveling over 8,000 miles from point of production to point of sale. Of course, developing economies like China and India are challenged to ramp up infrastructure capabilities, but so is the U.S., where we’ve shown complacency in relieving congested ports, airports and roadways, and in upgrading rail transportation capabilities.”

Because lean manufacturing is very time- and space-efficient large companies are asking their major first tier suppliers to take charge of managing many of the smaller first and second tier suppliers. In other words, the major tier one suppliers become bigger with responsibilities for quality and delivery (including sequencing) for many of the smaller suppliers which drop to the second tier. First tier suppliers who do not want to take on these new responsibilities run the real risk of being replaced. However, to the extent that first (or even second tier) suppliers seize the new opportunities they can benefit by the increased volume and future business. It is important to understand that in this new complex environment large companies are looking to their suppliers for solutions, not just parts. There is an increasing burden on tier one suppliers to increase their engineering contribution to support the customer. The days of simple “build to print” are over. The new paradigm is that of a substantial contribution of intellectual capital in the value proposition. If a supplier can provide an improved logistics and delivery process and a mistake-proofed zero-defects product, the doors of opportunity will open. Clearly, seizing these opportunities requires suppliers to be very close to customers and understanding their needs, including understanding in detail how their parts are delivered, received, moved, presented, and assembled in the customer’s assembly line.

Bob Moffat describes what is happening this way:

“Globalization or ‘global integration’ has two elements of equal importance. The first is about having deep local roots; and I don’t mean a superficial presence; setting up an office here and there and hiring some people. Deep local roots is having the experience or as I like to say the ‘scars’ of actually having run a business in different markets around the world. It’s having a local management team with leaders who understand the culture, the customs, the regulations and the local business conditions. It’s building deep relationships with governments, with suppliers, academia and being an integral part of the community, and then it’s leveraging that experience to drive growth.”

“However, serving clients locally does not mean doing everything, everywhere; the other aspect to being global is about creating truly global operations. That entails three things: first, gaining access to talent and skills everywhere they are in the world; and integrating them globally to develop new, distinctive capabilities to drive productivity and enable growth; second, it’s transforming business processes – componentizing, simplifying, standardizing and globalizing them, doing work where it is most effectively and efficiently done; and third, infusing technology; automating workflows to improve speed, eliminate latency and improve responsiveness to clients while dramatically lowering your cost structure.”

“Deep local roots and global operations, these are two elements of globalization. Skills in emerging markets like India and China are important, but they’re not the whole story. Being global is making efficient and effective use of global capabilities — all capabilities everywhere in the world.”

Service Companies

It is well known that the globalization occurring in manufacturing is also happening in Information Technology and Engineering services. Not everyone understands that globalization is spreading to service areas as well. Why? Because the delivery and administrative aspects of virtually every service can be “Internetized”, that is, digitized and totally reformatted to the Internet environment. While this sometimes takes a certain imagination and willingness to experiment after decades of success in a paper-based dis-integrated world, surprisingly many companies cannot make the jump to the new Internet environment. They just don’t “get it” even after their customers explain the technologies and their new requirements to them. These suppliers quickly become dinosaurs and go out of the supply chain. Any service company which has not reinvented itself on the Internet is headed for trouble.

Mike Eskew gives a view of the future competitive environment where globalization will create millions of new customers for service industries:

“A new paradigm will emerge. It will be one of 24 by 7 global collaboration. Industry-leading enterprises will be networks of interconnected, interlinked contributors from all parts of the globe. Innovation will spring from all players within the network. A catalyst to global innovation will be increasing access to information via emerging networking technologies that will make access to knowledge universal. That will give rise to legions of consumers in developing countries like China, India, Brazil and Russia. A billion new consumers will enter the global marketplace by 2015.”

Many people make the mistake of viewing off-shoring IT and engineering work as a zero-sum (“I win/you lose”) game. In fact, it can be a tremendous catalyst for growth. In today’s highly competitive world most companies have more work than budget for IT and Engineering. Take the XYZ Company that has 1,000 engineers in Europe and the United States but has a backlog of work for new product development and product adaptation for new markets for 1,600 people. How can they do all the work and still keep within budget? If routine work of 200 of the engineers in Europe and the US can be transferred to a low cost source in Asia, for example, 800 engineers (assuming they are properly trained and supervised) can be brought on board for the same cost. The math is compelling: 1,000-200+800=1,600 engineers, the number needed to keep the company competitive and growing. Outsourcing is not just about cost reduction or substitution; the engineering budget remains the same. It is about firepower, growth, and competitiveness. Similar arithmetic can be seen in most every service industry, from health care to finance. The ability to leverage the intellectual power of an organization is huge. A company simply cannot let the competition get a head start in doing it.

Keith Nosbusch talks about Rockwell Automation’s holistic view of transferring functions to Asia:

“…it is not just about resources, it is about bringing all business functions into Asia. We started in the region with sales and support and then manufacturing. But we soon realized that being successful there is not just about sales, support and manufacturing, it is about local business management, regional development resources, and the ability to be closer to the customer in all dimensions. In China and India, we are putting in resources across the breadth of the company to be close to the customer, to be able to hear the voice of the customer and to be able to quickly respond.”

Future CompetitionGlobalization is not all good news for large corporations. While many of them have benefited from access to new markets and low cost sources of supply, they are now witnessing the creation of new competitors from low cost countries that they never expected to see even in “their” domestic markets. As the developing countries increase in economic importance, this trend will only continue. The rise of new competitors will not be limited to competition for market share. New corporate giants from the developing world are now competing for funds in the world’s capital markets and even acquiring some of the large corporations of the major economies. This free movement of capital is now sometimes being challenged by governments, which sometimes engage in anti-globalization protectionism, even within their own trading bloc, to protect national corporate standard-bearers. The suppliers of large Western companies must get used to the fact that sooner or later they might become suppliers to a Chinese or an Indian conglomerate as a result of acquisition. They must be prepared to deal with this transition. Walking away is usually not an option. Scenario planning is.
Mike Eskew talks about what it will take to compete in this new world:
“Multi-national companies will also emerge from developing nations and across industries. It will be a worldwide race to the top, won by organizations through a commitment to collaboration, and by individuals through a commitment to education and life-long learning.”

Keith Nosbusch talks about Rockwell’s focus on employee and supplier development:
“Internally, we nurture employees’ skills and talents so they are prepared to work in a global marketplace. We offer employees international rotations that place them in a hands-on, immersed environment. They learn how to adapt their skills and style to our customers’ geographic markets, business practices and social customs. We hold Global Universities where colleagues and customers from other regions share perspectives and needs. Our GlobeSmart web tool, introduced in 2000, was cited in a recent Catalyst Member Benchmarking Report as a best practice for promoting global diversity. This website provides employees with information on cultures in more than 80 countries. One of its features, Peer Notes, provides employees access to experiences documented by their colleagues who’ve traveled on international assignments. During sourcing reviews both domestic and internationally, we pro-actively mentor and provide assistance to diverse suppliers so that all suppliers have equal access to purchasing opportunities.”

Supplier ReactionMoving overseas may seem relatively easy to do for the large global company; it is far more difficult for the domestic supply base, which is generally made up of much smaller companies with fewer financial and managerial resources, to follow their major suppliers to low cost countries where they have little experience. Sometimes larger customers will help the supplier make this transition, if they are critical to the production process. More often than not, suppliers should not count on this support and need to expand on their own.

Carmen Castillo, President of Superior Design International, a first tier supplier to several large corporations, talks about her experience with globalization:
“Globalization at my company (SDI) is the result of the need to serve our customers, and has had a major impact on my business as both a purchaser and seller of goods and services. My organization now has to manage programs and project initiatives in many countries around the world. This geographic expansion has lead to major changes in the way I monitor my organization’s operations in the areas of communications, currency exchange, governmental regulations (including taxes and tariffs), and global legal and insurance compliance.”

“SDI has experienced an expansion of our operations centers and service locations resulting in the need for the adoption of a 24-hour operational capability. Also, multilingual/cultural team building to service in-country programs has become essential, as has been a major technology effort to address local currency and infrastructure issues. In order to satisfy local requirements we have retained legal representation in each country of operation and built an insurance portfolio that protects us for new business risks in developing areas.”

Existing domestic suppliers should be aware, however, that if they decide not to follow their customers overseas, they risk not only losing the new foreign business with their existing customer, but also discovering a couple of years down the road a low-cost competitor serving their former customer with the same manufacturing/service quality standards as they currently have in their home market. Moving activities to a low cost source does not mean to a poor quality source. Generally the customer holds the new supplier to an even higher standard than that existing before the activity was out-sourced.

IBM recently took a major decision to relocate the headquarters of its global his procurement operations to China.

Bob Moffat describes the reasons for that decision:

“Moving the headquarters of our global procurement operations to Asia was a landmark event for IBM. It’s the first time we have located a corporate function outside the US. The motivation behind the decision stems from our commitment to becoming a globally integrated enterprise, where the imperative is to think, act, organize and optimize globally. This applies to every facet of the organization, but it is especially true for management. We will never be a truly global company if everything is managed centrally from the United States, if all our executive leadership is bottled up in one place.”

“Once this shift occurs it requires a focused and thoughtful approach to simultaneously transfer knowledge and build the management capabilities to lead the work. The Chief Procurement Office is in Asia to do just that; to expand and strengthen IBM’s internal procurement skills in the region; develop leaders and prepare them to take on global roles. The other reason he is there is to lead an effort to reshape our supply base in the region. Although IBM has been sourcing in Asia for more than 50 years, most of it has been in support of our hardware businesses. While that’s still important, the demand for software and services skills, across Asia and worldwide, is growing. To meet the demand, it will require developing relationships with new partners and suppliers and working with existing ones to help them build skills, processes and management practices to compete globally in the services market. IBM has procurement professionals in 60 countries in 400 cities worldwide and the competitive advantage procurement provides is to locate those skills close to our clients and suppliers around the world. That strategy does not change.”

What Should Suppliers Do?
If this is the way large corporations are behaving to cope with the global marketplace, how should their supply base react? The answer is simple: behave like they do, and more so. Specifically, that means:

What is interesting about these requirements is that there is little here that companies should not be already doing anyway for domestic customers. Globalization only makes these requirements more urgent.

Appendix
Biographies
Kent Brittan, former chair, United Technologies International Operations
Carmen Castillo, CEO, SDI
Michael Eskew, Chairman and CEO. UPS
Robert Moffat, Senior Vice President, Integrated Supply Chain, IBM
Keith Nosbusch, CEO, Rockwell Automation