In Depth: Global Supply Chain  Mastering the Complexity Challenge in the Global Supply Chain

A variety of pressures are pushing enterprises across diverse sectors to extend their supply chains around the world. But while many companies are acting globally, they are still thinking locally.

A variety of pressures are pushing enterprises across diverse sectors to extend their supply chains around the world. But while many companies are acting globally, they are still thinking locally.

[From Supply & Demand Chain Executive, August/September 2004] How hard is it to manage a complex, global supply chain for optimal efficiency? Too hard for most companies, according to a study issued last year by consulting firm Deloitte Touche Tohmatsu.

In the study, "The Challenge of Complexity in Global Manufacturing: Critical Trends in Supply Chain Management," Deloitte reported that 57 percent of companies in a survey of 392 North American and European executives had moved production to lower-cost countries. Fifteen percent of the North American enterprises and 29 percent of European companies said they didn't even manufacture products in their home countries anymore.

The study pointed to various drivers behind this trend, with cost figuring prominently. "In a world where mega-retailers like Wal-Mart and Carrefour have amassed enormous buying power, cost pressures for manufacturers in most industries are immense," the study's authors wrote. Other reasons cited in the study included a desire to reduce taxes, duties and tariffs, or to take advantage of various investment incentives, by establishing a presence in a foreign market.

(Almost) All Optimization Is Local

But despite companies' international aspirations, Deloitte found that most manufacturers are not taking a more global approach to designing their supply chains and, therefore, most likely are missing out on the potential efficiencies of such an approach. "Manufacturers are spreading supply chain operations across the world," the consultants reported. "Yet, most still appear to be optimizing their supply chains on a 'local' basis  by product, function (say, production), facility, country or region. This means they are losing opportunities for large-scale efficiencies."

A more global approach to the supply chain, according to Deloitte, would involve configuring a company's operations  such as manufacturing, fulfillment, logistics and sales  with an eye toward maximizing the value of the network as a whole. But manufacturers in the consultants' survey ranked "supply chain network structure" at the bottom of their list of operational improvement initiatives, and only half of the companies had a senior executive with responsibility for the global supply chain. "Furthermore,' the study continued, "few survey respondents had instituted the process changes and technologies necessary to achieve substantial strategic and operational improvements ... despite saying that keeping a lid on supply chain costs was one of their most difficult challenges."

The answer to this dilemma, Deloitte argued in a subsequent report, "Mastering Complexity in Global Manufacturing: Powering Profits and Growth through Value Chain Synchronization," is not to try to simplify your company's supply chain but rather to master the art of designing and managing increasingly complex supply chains. This study revealed that substantial advantages can accrue to those few companies that are able to effectively manage complex, global supply chains. These "complexity masters," as Deloitte dubbed them, are seeing profit margins 73 percent greater than manufacturers with poor supply chain performance and less complex environments. Few companies are pursuing the course of complexity, however. In fact, based on a survey of 600 companies for the "Mastering Complexity" report, Deloitte found that just 7 percent of enterprises could rightly be called complexity masters.

Deloitte's report pointed to several factors differentiating the complexity masters from their competitors, including best practices touching the customer, products and technology. First, top performers collaborate with customers, rather than only with suppliers, and they undertake customer profiling, customer loyalty and customer segmentation initiatives. On the product side, leading companies increase performance by managing products and introducing new products, managing mass customization of parts, reducing cycle time and improving time to market. And as far as technology, the complexity masters are deploying such solutions as product lifecycle management and advanced planning systems that focus on long-term planning and forecasting, as well as more tactical technology, including warehousing management systems and transportation management systems.

Dealing with Complexity

Rick Moradian, vice president for consolidation and deconsolidation with APL Logistics, agrees that supply chains have become more complicated in recent years. "It has become far more complex," he says, pointing to the variety of potential events that can disrupt a supply chain that flows across borders. "Just one or two or three occurrences around the world  whether it's a political issue, a labor issue, a port strike issue, a fuel surcharge issue, a potential terrorist act  could completely alter not only the supply chain flow but also manufacturing or the final outcome of production."

In response, Moradian says that he is seeing companies change the way that they are sourcing products overseas, shifting from a purely "lowest-cost country" strategy to an emphasis on sourcing goods from more than one country "in order not to have all their eggs in one basket." And he says that frequently these days supply chain groups are working much more closely with other functions in the enterprise  inventory planners, sourcing and procurement staff  to ensure optimal product flow and cost minimization. "It's become a very unified and very much an integrated process," he says. "It's no longer siloed, at least for sophisticated organizations, where a buyer purchases, an inventory manager assesses the quantities and the logistics provider flows. We're seeing more and more integration between these entities."

That collaboration extends to external supply chain partners, too, particularly at the planning stages, according to Moradian. He explains: "We have a handful of very sophisticated customers who will sit in a room with us for one-, two- or three-day whiteboard sessions where we tear apart the entire supply chain, not just from a transportation or flow perspective, but from the original decision-making about where a product should be sourced and the logic behind that, including the first cost of that product, on down to the final consumption or requirements for that product from a destination perspective. We design the entire network based on analytical criteria."

A Hybrid Approach to the Global Supply Chain

Elsewhere, Greg Aimi, a research director with the supply chain practice at Boston-based technology consultancy AMR Research, says that some companies have responded to the challenges of an increasingly complex and increasingly global supply chain by bringing part of that supply chain home  or at least a little closer to home  to be better positioned to meet fluctuations in customer demands.

"Companies want to be able to minimize inventory of finished goods, so they want to be more nimble at producing just the right amount that is going to be consumed," Aimi says. "But when you move offshore, you introduce a fairly long lead time, and that certainly imposes a difficulty in trying to be nimble and flexible."

In response, Aimi says that AMR has seen a number of companies shifting the production of goods that have high-volatility demand or that put their entire supply chain at risk. For these goods, manufacturing is moving either "near-shore" or "onshore"  that is, either close to the target market (say, in Mexico or Canada for goods destined for U.S. consumers) or in the target market.

Weaving the Supply Chain Threads

Other companies have attempted to deal with the complexity of their newly global supply chains by bringing in third parties to handle particular aspects of their operations. Peachtree Fabrics, for example, has brought in UPS Supply Chain Solutions to manage the movement of the company's goods in its supply chain even as it has extended its operations to manufacture products abroad.

Founded in Atlanta in 1947, Peachtree currently offers fabrics to customers in the residential, contract/hospitality and marine industries, as well as furniture manufacturers. The company's product list runs to more than 10,000 items, and its client list includes manufacturers, furniture refurbishers and fabric store retailers in the United States, Canada, Mexico and the Far East. Over the years, Peachtree has shifted a large portion of its manufacturing overseas in order to remain competitive in the fabric market, and the company now manufactures fabrics in China, Italy, Belgium, Korea, Turkey and India.

Peachtree now is using UPS Supply Chain Solutions to handle such services as air, ocean, rail and road freight, customs brokerage, consolidation of multiple vendors from different locations, and package delivery. The company imports its fabric in 50-60 yard "rolls" into the United States primarily from two countries, China and Italy. From China, fabrics are transported via ocean containers from the port of Tianjin to the port of Long Beach. The goods are then transported via rail to a container yard in Atlanta, where they clear customs and are then trucked to Peachtree's distribution center (DC). From Italy, fabrics are consolidated from different vendors in the UPS Supply Chain Solutions facility in Milan and then transported via ocean freight to the port of Charleston, or the goods are transported via air freight from Italy to Atlanta and then trucked to Atlanta, where the fabrics clear customs in a UPS-bonded facility and then transported to the Peachtree DC.

Handing its inbound logistics over to UPS has had the effect of putting Peachtree in the driver's seat as far as controlling the movement of its goods. In the past, for instance, Peachtree's suppliers managed the shipping of their goods to the United States from China, leaving the fabric company with little control over the selection of shipping options that offered the best price and service levels. Now, says Tom Hall, vice president of finance for Peachtree, "With UPS Supply Chain Solutions we have more control over the shipments and, in fact, the overall situation." Elsewhere, UPS keeps Peachtree informed of shipment delays, which allows Peachtree Fabrics to be more responsive to their customers. For example, during the recent backup of the U.S. rail system, UPS' customer alerts helped Peachtree Fabrics plan accordingly and allowed the company to keep its customers better informed with up-to-date information.

The Future of Complexity

Deloitte concludes its "Mastering Complexity" study by emphasizing that, regardless of the challenges it entails, "value chain complexity is unavoidable for most manufacturers that want profits and growth." The drive to lower costs and open new markets will simply be too great for most companies.

As such, according to the consultancy, the imperative for executives seeking to keep their companies competitive will be to go beyond simply optimizing their enterprises' product development, supply chain and demand-generation processes. "The challenge for manufacturers the rest of this decade is a whole new one," the report states, "continuing to optimize those three areas but, more importantly, synchronizing across them at key moments in the profit cycle." That means increasing cross-functional and intra-enterprise collaboration, and applying more flexible and accelerated product development and production processes, among other measures that the consultancy recommends.

In the end, incorporating these and other practices to master complexity in the supply chain will be difficult, but, as Deloitte says, "as globalization of manufacturing and innovation continue to accelerate, we believe that it will no longer be an option but rather a requirement for survival and success."