Global Logistics and Supply Chain Strategies - May 2008 - (Page 50)

exporting and customs clearance. Even in the age of the internet, paper presents an obstacle. According to Brockwell, emerging countries often have byzantine rules for complying with customs requirements. What might take a day or less in the U.S. or other industrialized nations can stretch to nearly three weeks, with double the number of documents required. “One of the main causes of [supply chain] variability,” says Brockwell, “is people just not understanding how long it’s going to take to clear customs.” Reaping the Benefits Of course, the extra time and cost of global sourcing, even with the occasional disaster, won’t stop companies from seeking out new locations for low-cost labor—not when big retailers like Wal-Mart Stores demand endless concessions from suppliers in order to keep their own prices low. And many emerging nations are eager to attract foreign investment, offering substantial breaks on taxes, infrastructure and other costs of doing business locally. Manufacturers entering an emerging market often find suppliers that are ready and eager to work with them. Some have dormant capacity that was freed up when they were dumped by a previous original equipment manufacturer (OEM), mostly likely in the automotive sector, says Jeff Pratt, leader of the U.S. supply chain practice for PricewaterhouseCoopers (PwC). He cites the case of one maker of industrial products that hopes to work with Eastern European suppliers who had previously served customers in automotive and aerospace. A successful outsourcing strategy is about more than cost. A recent Deloitte survey of 448 companies found higher growth and better margins among those that sought to differentiate themselves through participation in emerging economies. They benefited, too, from proximity to new markets for their finished goods. Those “underserved and unserved” consumers represent a strong source of new business, if not at the level of those in developed countries, Fantasia says. In fact, some companies use global sourcing as a means of establishing a beachhead in future markets. Accenture has been working with a North American candy manufacturer that wants to expand into emerging countries through joint ven- tures, says Mike Engoian, who heads up the consultancy’s North American fulfillment practice. The company might export raw materials or use mixing facilities for items that the host country doesn’t make, then partner with local entities to make and sell finished goods. Making a connection with a strong local partner is one key to doing business in an emerging country, says Smith of Savi Networks. “There are so many cases where companies have tried to set up offshore operations and go solo,” he says. “But the success stories have largely been around where they’ve partnered.” That’s true even in China, Smith says, where foreign companies may be tempted to go it alone because the Chinese government has relaxed some of its restrictions on wholly owned ventures. Yet they might lack a local partner’s intimate knowledge of government agency requirements and customs procedures. Work done at the earliest stage of a product’s lifecycle is also finding its way overseas. According to Fantasia, about a third of companies surveyed by Deloitte were planning to locate research and development programs in emerging countries, leading to a better understanding of local cultures and allowing for the integration of business processes and infrastructure on a global basis. Things to Remember Still, companies setting foot on unfamiliar ground must take into account a number of factors beyond the obvious one of workers’ wages. Failure to do so will have serious implications for the extended supply chain, all the way to the customer’s door. Macro-issues need to be considered at the outset. Factors tied to the global economy, such as currency and foreignexchange trends, might be overlooked by a company whose ear is too close to the ground. For a company with production in China, whose cost of labor and raw materials might have risen anywhere from 10 to 30 percent last year, a 7.6-percent appreciation of the yuan against the dollar could be the last straw. Global supply chains must be able to withstand attacks on operating margins from many directions. Any single factor, says Brockwell, can “turn your decision [to outsource] unfavorable.” Other barriers reside within companies themselves. With the economic downturn reducing the amount of private equity avail- able to fuel acquisitions, businesses are turning to more traditional merger deals in order to grow. That can lead to a hodgepodge of information systems that inhibit the ability of companies to forge a coherent, global supply chain. “The result is a loss of visibility, inability to synchronize the supply chain, and failure to achieve synergies laid out at the time of acquisition,” says Brian Bilsback, director of operations effectiveness with PwC. Local infrastructure in the target country is a more visible challenge, one that most companies are likely to consider if not fully understand. When it comes to the quality of roads, rails, seaports and airports, China is the poster boy for both the best and the worst. In the industrialized provinces, no country offers more modern and efficient port operations. Shipments moving in and out of China used to be routed through Hong Kong by necessity, but new container ports springing up on the mainland have made that former British colony largely irrelevant to many importers and exporters. New highways, too, promise to speed cargo between Chinese factories and the waterfront. Further inland, it’s a different story. Chinese officials have sought to relieve the pressure on such highly industrialized areas as Guangdong province and the area around Shanghai, by siting production facilities in the rural central and western portions of the country. But those interior locations don’t have the same access to rapid rail and highway connections. On the carrier side, there’s no lack of providers in China. Making sure they can do the job well is another matter. “You can almost find an individual on every corner who’s got a truck and is ready to haul freight,” says Lonny Warner, vice president of operations for the high-tech and electronics industry with Menlo Worldwide Logistics. Menlo employs a rigorous methodology to sort out the best candidates. “The biggest concern is not in the four walls [of a distribution center],” Warner says. “It’s in the consolidation points, and getting freight to those points to achieve proper cycle time and information flow.” How FTAs Can Help Another commonly overlooked factor in the outsourcing decision—one that’s more positive in nature—is the explosion of free- 50 MAY 2008

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Global Logistics and Supply Chain Strategies - May 2008

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