We are currently moving into the third era of global supply chain transformation that has occurred within the last 100 years.

The first era of supply chain globalization was the era of vertical integration, best exemplified by The Ford Motor Company, which was perhaps the first and largest truly global industrial corporation. The way in which it organized its production and supply chain as a completely vertically integrated system in the early 1920s set the stage for many practices used by the modern corporation. It owned the entire production process: manufacturing/assembly plants in the United States, Japan, Ireland, Argentina and Denmark; lumber camps in Michigan, Brazil and Malaysia; intermodal transportation assets such as railroads, steamship lines and freighter vessels; and even airports to handle its own fleet of small planes delivering parts and administrative paperwork all over the U.S.

Ford engineered a total supply chain vertical integration strategy designed to ensure continuous availability and “the uninterrupted supply of raw materials of high quality free from market changes” and to overcome transaction costs.

The second era of supply chain globalization has been the era of virtualization. For the sake of a timeline, the quote that appeared in Electronics Today in 1993 serves as good milestone: “the virtual enterprise is your new model for success. Vertical integration is out. Today’s markets require a broad fabric of alliances for managing the entire value chain.”

Contrast Ford’s approach with the virtual supply chain model of companies like Sun Microsystems today. Sun never touches 90 per cent of the server computers it sells globally; rather, an outsourced Sun supplier base receives Sun customer order signals directly and ships orders to the global customer base via outsourced third-party logistics companies. Information technology and pervasive outsourcing have enabled the pooling of assets and capabilities into multi-enterprise virtual networks well beyond the formal/traditional boundaries of any single enterprise.

Starting in the mid-1990s, the networked business model was accelerated and enhanced by the development of the Web, the deployment of high-speed, high-bandwidth telecommunications networks, and breakthrough integrated enterprise software suites. These developments led to increasingly real-time collaboration across global extended enterprise ecosystems and a quickening of the pulse of end-to-end supply chain management activities.

Outsourcing also intensified. Serious survey research also found that the pace of outsourcing seemed to intensify during the millennial change. For example, among corporate respondents in a 2005 Deloitte survey, 65 per cent said that they had outsourced manufacturing, 60 per cent said that they had outsourced engineering services, and 60 per cent said that they had outsourced distribution/logistics functions (Deloitte 2005).  

We are approaching the end of this headlong plunge into supply chain virtualization and dispersion. While this business model has driven cost efficiencies and operational flexibility across global enterprises, it has also led to a heightened perception of eroded strategic command and control and a loss of network coherence at the level of the corporate senior executive suite.  

 

The third era of supply chain globalization--the era of revitalized command--is already upon us.

The emerging emphasis is on corporate risk management. Enterprises are re-calibrating their globalization strategies and strengthening the core of their organizations as the risks of the over-extended and over-outsourced enterprise have come into sharper focus. Executives today are struggling to internalize the lessons of the present era, an era characterized by the disruptions of Y2K, 9/11, severe acute respiratory syndrome (SARS), the Asian tsunami, Hurricane Katrina and soaring gas prices.

As we go forward into a third era of globalization—that of revitalized command—we are witnessing yet another metamorphosis in enterprise strategy and structure. The multinational enterprise is becoming more risk-averse and less likely to over-extend itself through alliances, and is showing an emerging bias toward more direct absorption and control over assets in its network. This bias is clearly demonstrated in the recent intensification in outward U.S. cross-border merger and acquisition activity as a preferred method of investment. It surged from US$16 billion in 2002 to US$29 billion in 2003 and nearly US $31 billion in 2004 (Deloitte 2005).  

Another key feature of this corporate search for heightened control in an era of rising transport costs and increased risks is an emerging tendency to locate higher value activities closer to home markets. In the U.S., Dell’s newly opened manufacturing center in North Carolina is an example of this trend; and in Japan the Japanese External Trade Organization has found that ‘many Japanese companies are focusing on adding to higher-end production capacity in the home market’.1 Thus we are witnessing the rise of Advanced Regionalization as an alternative to over-dispersion in supply chain structures and an attempt to maintain high end-customer service levels in a volatile global trading environment.

Structural change in the Asian region is fast producing a set of worthy local competitors to the OECD multinational corporations—competitors who face many of the same challenges and opportunities as their OECD counterparts. Mainland China’s emerging global enterprises already account for a third of developing country foreign direct investment outflow. At the same time, two-thirds of China’s growth has been driven by foreign direct investment, demonstrating the deepening two-way ties that bind the regional and world economies.

The new era of revitalized command is changing public sector supply chain decision-making.

Each era of enterprise transformation has provoked, and will continue to provoke, a specific set of policy responses, a regime of instruments, incentives and regulatory frameworks used by governments to extract value from or adapt to multinational corporations.  

Since we are only at the beginning of the third era of enterprise globalization, country policy regimes are still in flux. We can anticipate a lot more policy debate on increasingly interlaced cross-border supply chains, whose assets are so closely mingled and exchanged that national origins of corporate owners are becoming difficult to trace or tax. Perhaps we are witnessing the birth of an era where not only multinational corporations but also host country governments must seek revitalized command.  

One scenario consistent with this aim consists of individual countries asserting supply chain eminent domain, seeking to extract value from or regulate the operations of trans-national supply chains. One example is the Tianjin Development Area in China, where 13 square kilometers of ocean are being dredged to create a ‘Logistics City’ capable of helping China move beyond being a global manufacturing workshop to become a value-added global logistics services provider.  

Or perhaps we shall see the emergence of a different scenario, a more sophisticated approach, where there is an intensive cross-national effort to preserve and strengthen specific supply chains that extend across borders. For example, the Mexico and U.S. governments have worked hard to facilitate the cross-border supply chains of the U.S. automobile industry and to enable rapid customs clearance of parts and assemblies. These examples highlight the ways in which rapid globalization and a shifting strategic landscape with greater emerging economic, political and ecological risks will drive governments—individually or collectively—to seek ways to strengthen and revitalize command in this third era of supply chain globalization. wt

World Trade Reader Research: Global Supply Chain Management Style Depends on Company Size and Scale

Integrating a firm’s operations with its suppliers and customers by managing its supply chain has been touted for years as a means to reduce costs, increase efficiencies, and of course, boost profits.  

In this era of globalization, with suppliers and customers situated in far-flung locations around the world, achieving such integrated operations is no easy task. Failure to develop a supply chain management program that fully accomplishes such integrated operations may result in poorly engineered products, product recalls, excess inventory costs, stockouts, and diminishing levels of customer satisfaction.

Anecdotal evidence from recent media reports on product recalls from China suggests that there are, indeed, very real breakdowns in the global supply chain and China suppliers are being blamed.

But where does the blame really lie? Shouldn’t the major U.S. manufacturers be monitoring their overseas contractors, especially when their names go on the final products? Isn’t the management of suppliers supposed to be what supply chain management is all about?

In an effort to determine the extent of supply chain management in the global marketplace, World Trade Magazine, with the help of the University of Maryland, Robert H. Smith School’s Supply Chain Management Center, surveyed its readers to discover what practices global companies were using to manage their international supply chains.  

 

The study pool

Nearly 300 World Trade readers responded to the survey. The majority (68.7%) indicated that they work for manufacturing firms, either in-house manufacturers or contract manufacturers. The remaining respondents work for distributors, retailers, third party logistics providers (3PLs), and other types of firms. The respondents were middle-to-senior level executives at their firms, with about 90% holding titles of manager, director, vice president, or president. Almost all respondents (92%) indicated that corporate headquarters for their firms were located in the United States or Canada.   

The surveyed firms ranged from the very small to the very large. About 31% of the respondents indicated that the annual sales of their firms were under $10 million, while 22.7% indicated that annual sales were over $1 billion.  

In order to understand the complexity of respondents’ supply chain operations, the survey asked them about the number of supply chains managed by their firms. The results are presented in Figure 1. Just over 15% of respondents indicated that their firms managed only one distinct supply chain, while at the other end of the spectrum, 16.7% indicated that they manage over 25 supply chains. The firms of the other respondents fell in between.

Another indication of supply chain complexity is in the degree that a firm’s operations are international in scope. International operations imply dealing with customs, the monitoring of long-distance suppliers, long transit times, cultural differences, etc. Firms trade off these complexities against expectations of lower costs or larger markets.  

In this study, we wanted to understand the extent to which respondents have globalized their operations. Surprisingly, our survey participants reported, on average, that only 21.4 percent of their customer base was located outside the United States.  

We wanted to know the extent to which the operations of the firms in our sample are international. Respondents indicated that on average, 28 percent of their in-house manufacturing assets were located offshore. This compared to 27 percent of in-house distribution centers, 26 percent of suppliers, 22 percent of outsourced manufacturing assets and 12 percent of outsourced distribution centers. In general, the results indicated that the degree of international operations of the survey respondents was only moderate. Overseas assets still accounted for fewer than 30 percent of total assets.  

This is a different finding than Deloitte’s 2003 “Mastering Complexity” that found the whole world as a stage of operations with massive dispersion of assets abroad. In 2003, Deloitte noted, many companies had more assets in foreign countries than they did in their home markets.  

What contributes to this difference between our finding and Deloitte’s four years earlier? Beyond small sample differences, it is possible that firms represented in our World Trade study are in the beginning stages of globalization compared to the Deloitte sample. Or there is the more distinct possibility that an evolution in corporate thinking has occurred over the past four years, and a realization of the costs of long highly dispersed supply chains has begun to sink in, spurring a re-alignment.

While manufacturing cost savings are a substantial benefit driving many companies to Pacific Rim sourcing, going global means other supply chain issues take on added significance and complexity. Transportation time and costs are higher and subject to greater volatility and unpredictability. Boston Consulting Group says, “Western multinationals can expect logistics-related costs to comprise 20 percent of their Chinese operations, compared with 10 percent in the West.”

Long-distance supply chains inherently require more handoffs—from manufacturer dock door, to transport providers, through forwarders, customs, other transport providers, and so on. These hand-offs are information intensive transactions that are rarely seamless, even in the most sophisticated IT shops.  

In an effort to determine the level of technological expertise at the surveyed firms, respondents were asked about the use of various types of software often used as part of a supply chain management program. In general, the types of software programs most often cited are those that are used in single facilities (e.g., warehouse management) or by individual firms (e.g., demand forecasting). Software involving collaborative efforts among supply chain partners, most notably, collaborative planning and forecasting programs, were least used. The fact that survey participants still focus their technology efforts on internal operations as opposed to cross-supply chain management may be an indication of the lack of supply chain management efforts being undertaken by the survey respondents.  

Further to this point, respondents were directly asked about the level of integration between their firms and their customers and suppliers. The results on customer integration are presented in Table 2 and on supplier integration in Table 3. It should be noted that on not one of the items for either customers or suppliers was a mean rating of 3 (some integration) even attained. Thus, there is a pervasive feeling among respondents that the level of integration with customers and suppliers across the supply chain is quite low.

When looking at the individual items, Table 2 indicates that the highest ranked integration activity with customers is “share information on delivery frequencies” with a mean ranking of 2.7. This item is also the highest ranked on integration with suppliers at 2.8 (see Table 3). In both cases, sharing planning activities was the lowest ranked item. These results provide an indication that when there is integration, it is most often used at the most basic operational level rather than the strategic or tactical levels.

The greatest amount of collaboration with customers was in inventory management, followed by strategic product planning and demand forecasting. There was significantly less collaboration with respect to joint promotions and six sigma quality programs.   

With respect to suppliers, there was more coordination around strategic product planning, inventory management, and demand forecasting and less coordination with respect to vendor managed inventory and six sigma. The lack of coordination with respect to six sigma with both customers and suppliers may indicate that many companies do not have six sigma programs in place. Six sigma approaches are critical in assuring uniformity and quality of practices across multi-enterprise supply chains. Further questions revealed that firms have only moderate visibility into the operations of their first tier suppliers and their customers and significantly less visibility into the operations of second tier suppliers.

It was evident that the survey results reveal a fairly low level of collaborative supply chain management activities among the respondents. In order to see if this result was dependent on the size of the firm in the sample, we computed a number of cross tabulations. The results were fairly uniform showing that larger companies tended to have more sophisticated supply chain management programs.   

For example, Table 4 clearly demonstrates that the degree of collaboration on a number of important supply chain-related activities increases with company size. There was significantly more collaboration with respect to strategic product planning (3.6 out of 5) for companies with sales over $1 billion than with companies with sales less than $1 million (2.4 out of 5). Similar results can be seen with respect to integration with suppliers.  

In conclusion, our results indicate that the degree of supply chain cooperation between our respondents and both their customers and suppliers, is moderate at best. Coordination does tend to be higher for larger firms. Our results also show that most manufacturing and distribution activities of the firms in our sample are performed domestically. As the degree of internationalization increases, firms will have to develop stronger capabilities in order to manage the more complex international supply chains.

This survey reveals that supply chain capability is closely associated with the size of company revenues. The larger the revenue, the greater the investment and infrastructure to support advanced supply chain practices and technology.

In fact, we would argue that “elite” companies in terms of revenue and supply chain aspirations see the future differently. Elite companies put an increased emphasis on bringing production closer to end markets, regionalizing distribution within key markets to maintain and improve customer service and standardizing products and services across larger and larger markets to become efficiency leaders.

These elite firms are already entering the next era of supply chain globalization, going beyond strict regimes of vertical integration (Era 1) or virtualization/outsourcing (Era 2) to establish greater systems integration and control in the midst of a global environment characterized by soaring gasoline costs, inefficiencies/delays in ports/rails/roads and rising overall risk of disruption.

We do not yet live in a “flat world” or even a “flat playing field” when it comes to supply chain capabilities.  

For small- and medium-scale companies, the way forward to capture the benefits of supply chain management may be uphill. Both the 3PL industry and the supply chain software industry must address this growing gap with innovative services and products aimed at small and medium size businesses. Our study shows that the use of supply chain software is currently not high. Better, more reliable, less costly hosting of enterprise supply chain software over the Web is one example of an innovation in technology that is urgently needed to close this gap.  

Without an acceleration of such developments in the future, the concept of a flat world could remain a hollow promise for whole swathes of firms. wt