Companies’ supply chains should be strategic, analytical, total value systems that are focused on bottom-line profit. The days when supply chains were an operational activity to get a truck from point A to point B are long gone. The leverage that supply chains need to give companies and, by extension, customers is telling.
Nowadays, depending on where you live, some 70 to 90 percent of what we buy for regular consumption and use are not made in our local area. And supply chains are increasingly becoming more strategic; companies leveraged supply chains for 17 percent of their strategy in 2005 and now that number is 21 percent.
The expectation, however, is that 25 percent of a company’s strategy will be rooted in effectively leveraging supply chains by 2018. Meanwhile, these supply chains also need to become 43 percent more global in the next decade just to maintain their competitive edge. Companies which are not set up to strategically leverage supply chains globally risk falling behind the competition.
As a starting point for a company’s global supply chain assessment, the basic questions to ask are:
- How global is the industry?
- How global should your strategy be within the industry?
- How global should your company’s supply chains be?
How global should you be?
The ideal level of globalization falls among the middle 70 percent of the companies in an industry. Another way to look at it is to say that you don’t want to be among the 15 percent of companies that are almost purely domestically focused, and you don’t want to be among the companies that are among the top 15 percent most global (in effect too global for their industry). The reason why a company’s supply chains should not be too domestic or too global is rather straightforward.
Too much globalization, when the industry is not ripe for it, leads to the company potentially waste too many resources on educating the marketplace on the value of their products and services. This happened, for example, to FedEx which obtained market access to China long before they actually served the market. It was too difficult early on to “educate” the Chinese customers on why they needed a letter or packet a day or two faster than what the normal mail system was delivering.
Too much of a focus on the domestic home market could lead to potentially wasting market opportunities in that the needs and wants of customers are not addressed beyond the home market. Locally, this means that a company is not leveraging the global marketplace. Or worse, the company may ultimately end up losing their home market share to global companies getting into their turf.
Whether a company’s supply chains are domestic or global – or very likely somewhere in between – is ultimately captured by how domestic or global the core functions of the supply chain are: logistics, purchasing, operations, and market channels
Is inventory leveraged?
Logistics’ primary job is to strategically figure out inventory management and transportation. Based on my research, if we look at the largest 21,000 companies from 105 countries, we find that they have about 32 percent of their inventory in raw materials, 18 percent in work-in-process, and about 50 percent in finished goods ready to sell. Each industry and company is different. The question that has to be asked, why are you different and what strategic leverage does it give you? If you can’t answer, it’s not good!
How about alignment?
Purchasing, or sometimes referred to as sourcing, is strategically one of the most important aspects of supply chains. This is where we get input into the production process. What we find is that purchasing managers who are actually doing the sourcing buy far less globally than their bosses think they do and also what the bosses think they will do in the future. By 2023, company executives, on average, hope that 61 percent of their company’s purchasing activities will be global but the purchasing managers plan only for 18 percent to reach that level.
Beyond cost and production?
Over the last two decades, one of the most strategic decisions and, in many cases, front-page news items has been outsourcing. Operationally, a decision to outsource a portion or perhaps even all of a company’s production to another country is based on (1) cost and (2) production capacity. However, this leaves out control issues, quality, proprietary technology, supplier base, brand preferences, expertise, and myriad other items. The reality is that while cost and production capacity drive the decision, the success of an outsourced product often lies in other intangibles and not the transactional commodity-based thinking of cost and production capacity.
Where are you?
The last mile of the supply chain – sometimes referred to as market channels – is one of the toughest parts of supply chain to design and implement. Think about it. Let’s use FedEx again as an illustration. Where are you at 10:30am in the morning? Home to sign for the FedEx delivered packet? Unlikely. Then what happens? FedEx tries a couple of more times, or you have to pick up the packet at some central location. Basically, FedEx can be very efficient in their supply chain until they put the packet on the truck to be delivered to your house. Or, food distributors can work out an efficient chain to get food into grocery stores, but you or someone or some system has to get the groceries to your fridge. The last mile is a tough challenge for most companies in most industries. This is also where a lot of competitive advantage and leverage can be gained.
Solving the matrix
The best way to think about global supply chains, even just domestic supply chains, is to picture a matrix knowledge system. Companies have functions such as logistics, purchasing, operations, and market channels inside their company. They also participate as one of several companies in the “chain” portion of the supply chain – from raw material to work-in-process to finished goods. Given that very few companies can operate an efficient “global matrix” (cf. ABB), running a well-functioning set of global supply chains is not a tactical matter. These supply chains should be strategic, analytical, total value systems that are focused on the bottom-line profit of the company.