Global Logistics and Supply Chain Strategies - May 2008 - (Page 48)

Emerging Economies: Cheaper Production —and More Headaches BY ROBERT J. BOWMAN Companies attracted by inexpensive labor in developing nations find themselves dealing with a whole series of logistical complexities as well. Diligence is the watchword. L ow-cost labor bears a hidden price tag. Companies that thought they were saving huge amounts of money by shifting production overseas take on a whole new level of risk within their supply chains. And when they venture into emerging economies, the problems compound. “What they’ve missed is all of the complexities associated with a longer lead time,” says Joe Fantasia, a director with Deloitte Consulting LLP. “The most critical is a lack of visibility into the supply chain. And with that comes a lack of information.” China has been the prime target for companies seeking cut-rate manufacturing in recent years. Now, however, there are signs of rising costs in that country, as it encounters higher prices for fuel and raw materials, as well as a growing middle class with new wage demands. In response, multinationals are moving into less-developed nations with even cheaper workforces. Apparel companies have a long history of doing business in emerging economies such as Vietnam, Cambodia and Malaysia. But other industries are now joining their ranks, opening plants or outsourcing to producers elsewhere in Asia, Latin America and Eastern Europe. With that decision comes the potential for additional delay in the supply chain, especially with regard to logistics processes. John Brockwell, vice president with JPMorgan Global Trade Services, illustrates the way in which additional hand-offs can erode customer responsiveness. Imagine that a retail store in the U.S. is supplied by a domestic factory, with a record of 95percent reliability. Door-to-door delivery time might be three days. Now place that factory overseas, with trucks at both ends, an ocean voyage of nearly three weeks in between, and the requisite extra clerks or document processors. Call it a total of five hand-offs, a conservative estimate for a globalized supply chain. (A real end-to-end supply chain could have as many as 20 participants, notes Neil Smith, chief executive officer of Savi Networks.) By itself, each of those legs offers the identical reliability record of 95 percent. But when the potential for failure at each stage is factored in, the result is an abysmal 77.4-percent performance level. Not to mention the extra days of transit that were built into the model, reducing a supplier’s ability to respond to changes in consumer demand. Companies will accept the longer lead time, stretching order cycles by as much as six months, without figuring out how to solve the problems that are likely to crop up, Fantasia says. One solution is to partner with a trusted logistics service provider (LSP) with a presence in the target country, and knowledge of the local culture. Another is to implement global trade management (GTM) software that supplies two essential functions: visibility of the order throughout its lifecycle, and critical data about each country’s rules on importing, 48 MAY 2008

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Global Logistics and Supply Chain Strategies - May 2008

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