The Future of Network Planning

On the Verge of a New Cottage Industry?

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By Alan Kosansky and Ted Schaefer

As economic changes occur across the globe, in conjunction with "green" local movements and the volatility associated with long-distance transportation of goods, many companies are reassessing their supply chain network strategies. As a result, companies are increasing their local supply capabilities while reducing the costs and risks of highly centralized, offshore production and procurement strategies.

A New Landscape Emerges

In the past decade, global economic conditions have changed dramatically. Countries that were once cheap labor markets now have growing middle classes that have spawned "consumer economies," generating more local employment opportunities and driving up wages. Executives who have firsthand experience hiring and retaining talented employees in these markets know that the days of a stable, low-cost workforce are fast ending. Further, while the trend of offshoring to cheaper overseas labor markets may not be over, it is certainly reversing in some areas and slowing down in others. For example, the Wall Street Journal recently cited a number of multinationals exiting their offices in India to reduce costs.

A more significant impact of development in countries like China and India is the emergence of new companies with investment capital to compete in markets that were once dominated by the "Old World" countries. The new world order is likely to have more players competing in international markets, all on relatively equal footing. This dynamic is already evident as Chinese companies seek to lock in supplies of commodities to feed their growing home market and as Indian companies assert their presence in the high-tech industry.

In addition, the economic downturn has helped to rally support for "local movements" trying to protect local jobs. They are gaining in strength and political voice as the legislatures of many countries implement stimulus packages to revive their economies.

Another factor leading executives to rethink their supply chains is the price of oil. Although the downturn has depressed oil prices, supply and demand will drive prices higher as demand continues to increase much faster than supply. Couple this with news of foreign manufacturing risks that have generated consumer concern over product quality, as seen most dramatically in the toy and pharmaceutical markets, and the cost of offshore supply gets higher still.

Finally, although somewhat muted by the current economic downturn, "green" movements across the globe are pushing for a higher level of accountability when it comes to the carbon footprint of products. Long-distance shipments on vessels that burn high-sulfur fuel are clearly in the sights of supply chain professionals that are looking for ways to reduce their environmental impact.

Back to the Future

It is ironic that the current trends towards more local production and decentralization of the supply chain are a return to the "cottage industry look" of supply chain networks from decades ago. However, one critical difference allows the supply chains of today to function more efficiently than in the past: the availability and the sharing of almost unlimited information. While the supply chains of yesteryear were geographically dispersed and fragmented in their ability to coordinate decisions and activity, now supply chains are well integrated and share critical information seamlessly. Companies have centralized key planning functions to ensure consistent implementation of best practices across their organization. This significant change in data availability and information sharing means that while supply chain networks are becoming more geographically diverse — with more local production and shorter transportation legs — they are far less fragmented than in the past.

While there will always be critical manufacturing, transportation and distribution execution decisions to be made at the local facilities, much of the mid- to long-term planning can be coordinated centrally and critical decisions instantly communicated to the field. For example, many manufacturers have centralized their monthly planning and weekly scheduling functions for all their plants into a single business planner. Further, transportation service companies that operated in many cities relying on local expertise and knowledge to route vehicles once needed local dispatchers in each city to generate daily routes for their trucks. Today, improvements in mapping software and decision support systems have led to the centralization of dispatch into one or a few locations. This has shifted the emphasis from local geographic expertise to finding dispatchers with process expertise who may be working a thousand miles away from the actual deliveries.

Central coordination and planning of activities across a wide geographic area have more benefits than reducing personnel. They allow companies to consistently implement best practices across their organization. In the past, we would often see wide variation in performance and execution from location to location within a company. Sharing of best practices was uneven, and the skill of process decision-makers varied widely. Now companies can focus resources on recruiting and training the best decision-makers, locally or regionally, while using centralized information, processes and know-how.

So how do you know if you should be assessing a more local/regional approach and become one of the "new cottage industries"? Here are a few thoughts to seed the discussion.

Let's say your marketplace is crowded with competitors, particularly new competitors from offshore. However, you can differentiate yourself based on service, quality or customization, and you also have relatively low asset costs for manufacturing and/or the potential to produce with multiple, readily available technologies. Let's assume further that you are in the building materials sector and your products are heavy, or conversely, light and bulky, and that you already have many manufacturing and distribution locations close to your customers. In that scenario, the questions are: "How can I get even closer to my customers by allowing my local facilities to cater to their local customer needs?" and "How do I leverage best practices and information consistently across my many locations to lower my costs and deliver my products more quickly and with fewer errors than my competitors?"

Alternatively, if you took the leap and were an early adopter of offshoring to low-cost countries, now may be the time to take a second look. Labor costs are shifting almost as rapidly as energy costs, and the competitive landscape is changing quickly. Trading off among each of the major dimensions of your cost (factories, warehouses, labor, transportation, etc.) may lead to overall reductions in expenses.

However, to remain competitive in a fast-changing world, you must be able to quickly assess and reassess the structure of your supply chain network and how well it is functioning both today and in the many possible tomorrows. You might want to ask yourself, "What has to happen to the fixed and variable costs of my offshore supply network to make it attractive to shift production or procurement closer to my customers?" and "When is that likely to happen?"

The More Things Change, the More They Stay the Same

The era of domination by a few mega-corporations may not be over, but the entry of competitors from developing markets and the increasing costs to run centralized global networks certainly challenges their current business models. However, even the mega-corporations are more and more behaving like well-coordinated, smaller cottage industries. By leveraging the quantity of data and the speed at which information flows, they are able to gain the benefits of simultaneously being large and small. They understand the need to rely on regional teams and to respond to needs often dictated by local customs and cultures. They understand the benefits of leveraging local resources to their utmost. Moreover, they leverage the knowledge and expertise across their organization to ensure the best business practices are implemented consistently on a global basis.

We, too, can learn these lessons and implement them to our advantage by constantly reviewing the answers to the following questions:

  • What are my total delivered costs today and how are they likely to change in the next three, five or 10 years?
  • What is my order-to-delivery lead time as compared to my competition? What would it take to make a step change to respond more quickly?
  • How much cash do I have tied up in my supply chain today? What would I do if I had to cut it by 20 percent?

Global economic development is reshaping the world economy, and supply chain executives need to be prepared for a similar reshaping of supply chains. A return to the cottage industries of old may be the answer, but it will only be successful if supply chains are truly optimized to deliver at the lowest total cost and share critical information seamlessly.

About the Authors: Alan Kosansky is president and Ted Schaefer is the infrastructure planning practice leader of Profit Point, a company that specializes in helping businesses to optimize complex processes. For further information, visit www.profitpt.com or call 866 347-1130.