For many supply and demand chain practitioners, globalization isn't a newfound political issue; it's a reality they've been contending with for years. As companies have sought to lower their costs and expand their markets by taking a more international approach to the way they source, build and sell their products, globalization is adding new challenges and bringing new opportunities to the supply and demand chain.
[From Supply & Demand Chain Executive, August/September 2004] Lance Throneberry doesn't have any illusions about the challenges involved in building a truly global supply chain. In fact, as Throneberry, who is director of strategic sourcing and eBusiness at Denver-based Newmont Mining Corp., ticks off many of the potential pitfalls one by one, you get the idea that he's been over this list more than once. "The challenges will be culture, language, dealing with local economies and currencies, local governments," he says, before adding time differences, geographic dispersion, country-specific processes, currency risks, technology hurdles, regulatory variations, and legal risks. "And the list goes on and on," he concludes with a chuckle.
Throneberry is heading up a project to link the $3.2 billion gold producer's own divisions and its supply base around the world in a unified global supply network. Like many supply and demand chain executives these days, he has found that globalization is adding new layers of complexity to the supply chain, along with considerable opportunities for achieving efficiencies and winning new markets, as barriers to commerce fall across the world. This article will look at how Newmont, communications equipment and software company Avaya, and footwear company Wolverine World Wide are tackling these issues in their efforts to build more global supply chains, while separate articles elsewhere in this special report will examine such aspects of the global supply and demand chain as the hidden costs of offshoring and the challenge of ensuring security of supply in the lean, global supply chain.
The Global Reality
The size, scope and growth of global trade are inescapable. In hard numbers, World Trade Organization (WTO) data show that between 1993 to 2003 world merchandise exports nearly doubled, rising from $3.67 trillion to $7.27 trillion. As a percentage of the total world economy, technology consultancy Aberdeen Group, in its July 2003 "Global Trade Management Benchmark Report," cited WTO statistics indicating that "nearly 30 percent of world gross domestic product (GDP) currently crosses borders." Furthermore, Deloitte Research reported in its recent study "Mastering Complexity in Global Manufacturing," based on a survey of nearly 600 U.S. and European executives, that 80 percent of manufacturers in those regions currently purchase, or plan to purchase in the next three years, components or goods produced outside their home countries.
Mark Vigoroso, a senior analyst with Aberdeen and author of the consultancy's benchmarking report, highlighted several drivers behind this boom in cross-border commerce, including new inter-governmental treaties that have reduced trade barriers, increased outsourcing as companies look to reduce costs by shedding non-core functions or by building relationships with suppliers in lower-cost countries, and intense competition in the domestic marketplace, which is forcing many corporations to look outside their home countries to win share in new, emerging markets. On the latter point, Deloitte's survey for its "Mastering Complexity" report found that just 63 percent of North American companies and 49 percent of Western European companies planned to expand sales in their home markets, while large percentages of companies in both regions were looking to foreign markets for new sales opportunities.
Leaving aside the debates over the impact of "offshoring" on the domestic employment market, "free trade" versus "fair trade," and the inevitability or desirability of globalization, the potential bottom-line benefits that can accrue when companies take a more global approach to their supply chain appear to be significant, both for those individual firms and for the economy as a whole. For example, respondents to a recent survey by the 400-member National Electrical Manufacturers Association revealed that the cost to source a product in China and get it shipped to its ultimate destination was 27 percent less than what it would cost to manufacture the same product in the United States. As Malcolm O'Hagan, NEMA president, put it in testimony before a congressional hearing on China's role in the global economy, "Having commodity products manufactured in China allows our companies to offer these products to consumers at attractive prices."
Indeed, Catherine Mann, a senior fellow at the Institute for International Economics, wrote last December in a policy brief entitled "Globalization of IT Services and White Collar Jobs: The Next Wave of Productivity Growth" that increasing use of global suppliers for components in the technology industry probably accounted for 10 to 30 percent of the significant drop in information technology (IT) hardware prices in the 1990s, leading to higher productivity growth and an additional $230 billion in GDP for the United States from 1995 to 2002. Not chump change by any means.
Mining Gold from the Global Supply Chain at Newmont
If any company is likely to strike gold by extracting value from its global supply chain, surely it is Lance Throneberry's employer. After all, Newmont Mining Corp., where Throneberry is director of strategic sourcing and eBusiness, positions itself these days as "The Gold Company," a justifiable claim considering that Newmont is the world's largest gold producer, accounting for about 9 percent of the global mine supply in 2003.
Founded in 1921 in New York but currently headquartered in Denver, Newmont certainly is a global company today, with 14,000 employees working on five continents around the world, including at mines in Peru, Indonesia, Uzbekistan, Australia and Nevada. According to Throneberry, the company has recently embarked on a multi-year initiative to drive consistency across its supply chain by applying a global strategy to the way that it works with its supply base, with the goals of not only reducing costs but also creating a global supply network that will link the gold producer's own divisions and its supply base around the world.
To lead the process, the company's executive management at the corporate and operating unit level formed a supply council that included the supply directors from each of the major units around the world. The council is not empowered with unilateral authority to make decisions regarding Newmont's supply chain, and sign-off remains with senior-level executives, but the council nevertheless acts as a governance body for the supply chain initiative and provides a global perspective that would otherwise not be possible if the project were led solely by the U.S. unit.
The key tool that Newmont is using to realize its global supply chain ambitions is e-business. In fact, when the company first conceived of the project, it began by setting up a project management office called just that, "e-Business," as a standalone technology group reporting neither to IT nor to supply chain within the company. However, that soon changed because the specific solutions that the group looked to implement, such as e-procurement and an e-marketplace, affected sourcing and other supply chain functions at the company. "We found that we were having a tremendous impact on supply chain," says Throneberry, who subsequently was brought into Newmont's supply chain group.
Processes and Technology
The roadmap that Newmont's e-Business group laid down for achieving its goal of creating a unified supply network included business process and technology components. The former comprised supplier enablement to connect the company electronically with its key suppliers; business process redesigns to ensure that the company avoided the pitfall of e-enabling inefficient processes; proven change management techniques; key performance indicators (KPIs), combined with milestones and monthly reports, to ensure the project stayed on track; and a monthly newsletter, eUpdate, to keep all the stakeholders informed of progress and highlight successes.
On the technology front, Newmont based its selection of solutions on the company's objective of digitizing and integrating all the key systems that touch the supply chain. The specific technologies selected included Quadrem, a mining industry-sponsored e-marketplace; and a buying, or e-procurement, application called Envoy from Mincom, the Australian provider of Newmont's Ellipse enterprise resource planning system. Additional supporting technologies included Quadrem's SupplyCentre, a hosted order-management application that lets suppliers connect with Newmont to exchange such electronic documents as requests for quote (RFQs), purchase orders, change orders, advanced shipping notices (ASNs), invoices and remittance advice notices. Mincom also built a middleware product, called Axis, that lets Newmont connect to Quadrem.
The advantages of using Quadrem to link with suppliers were several, according to Throneberry. First, Newmont had been involved with the e-marketplace, to one degree or another, essentially since Quadrem launched at the height of the B2B bubble in 2000. Second, Quadrem had significant experience integrating with an array of industry suppliers, so Newmont could lean on the e-marketplace to help integrate with the company's own target supply base. This alleviated Newmont of the need to create time-consuming, expensive one-to-one linkages with a multitude of suppliers, and, thanks to the SupplyCentre application, it allowed the company to connect even with suppliers in remote locations that lacked sophisticated back-end systems. And finally, the e-marketplace was willing to work with Newmont to develop functionality that the gold producer viewed as critical to its own supply chain initiative, such as a more flexible suite for managing procure-to-pay documents.
Bob Bush, Newmont's vice president of Administration and Human Resources serves as an executive sponsor for a multitude of Newmont improvement efforts, including e-business and supply chain. With over 30 years of supply chain management experience, Bush immediately recognized the efficiency provided by the e-business-related supply chain project and championed the initiative. "Use of Quadrem, coupled with the standardization of both our ERP and supply chain business practices is expected to drive operational value throughout the Newmont organization. We see such technology as a key to remaining competitive and a leader in mining."
Currently Newmont's 12 buying locations around the world are connected with more than 800 of the company's suppliers through Quadrem. Transaction volume running through the e-marketplace stands at about 60,000 electronic documents and $250 million to $300 million in electronic orders on an annual basis, figures that Newmont expects to rise as the company works to digitize 100 percent of its transactions.
Newmont's goals for the buying application, which to date has been implemented at the company's Nevada and Australian locations, are to allow users throughout the company, right down to the shop floor, to use an Amazon.com-like interface to navigate through suppliers' online catalogs and electronically purchase pre-approved items at agreed-upon prices through a "shopping cart" metaphor. This, the company believes, will help reduce stock, remove the cost of manual requisitioning and reconciliation processes for both Newmont and the suppliers, and provide the added benefit of ensuring that purchases are driven to preferred suppliers.
Finally, Newmont intends to capture and track its global spend data through a spend analytics initiative currently being implemented by Ketera. Under this initiative Newmont's global spend will be categorized to a UNSPCS 4 tiered classification schema, allowing for opportunity identification and eventually sustainability of the strategic sourcing process.
The End Game
The challenges in moving this initiative forward have included all those mentioned at the beginning of this article, ranging from culture and language to regulatory variations and legal risks. Throneberry says that the project has not presented insurmountable technical challenges, although Newmont has occasionally had to be creative in resolving IT issues. For example, it became clear that many of the company's smaller suppliers in more remote locations like the Peruvian Andes would have difficulty connecting to the Quadrem e-marketplace because they simply did not have Internet connections onsite. Newmont worked with Quadrem and local businesses to provide the suppliers with Web access through Internet cafes and kiosks.
Once the new technologies and processes are fully in place across the company's global supply chain, the data generated by the various systems will form the foundation for driving greater savings through a methodical strategic sourcing program. "We want to develop global strategies around significant areas of spend within Newmont," Throneberry explains. "We want to look at spend categories consistently and uniformly across the world. Not to say that execution will always be global because of supplier capability or lack thereof, execution could wind up being completely local but what is important is that the strategy be global, with consistent contracting, logistics, INCO terms of payment and so on. But it all begins with data and the ability to analyze our spend patterns." With the spend data flowing in from the new systems in place, Throneberry and his colleagues will methodically develop category-based strategies for each area of spend in goods and services around the globe.
In addition, they will provide a channel for sharing best practices throughout the organization. "One site might have a fantastic contract for explosives, in terms of conditions, price escalation, de-escalation, etc.," Throneberry says. "We want to identify all those best-in-class practices for each category and apply them across the world."
Ultimately, Newmont views the processes and technologies being put in place as a way of creating tighter integration both among the company's units internally and between the company and its suppliers. Throneberry uses the metaphor of an enterprise resource planning (ERP) system tying an enterprise's functions together by allowing everyone in an organization to talk with one another. The supply chain systems that Newmont is putting in place will have the same effect, only they will encompass the company's suppliers around the globe, too. "So now Newmont's suppliers become part of the Newmont system, and we can digitize and integrate pretty much all means of trading commercial information and data," Throneberry says. "That's our end game, because it benefits everybody."
Procurement with a Global Perspective at Avaya
Onye Uzoukwu would seem like a natural choice to lead a global supply chain initiative at any major enterprise, and not so much because he is a native of Nigeria who was born in Scotland, but because Uzoukwu has more than 15 years of leadership experience building global commodity strategies for such technology sector stalwarts as Hewlett Packard, Solectron and his current employer, communications networks company Avaya.
In his position as vice president in Avaya's global procurement organization, Uzoukwu leads worldwide procurement at the company, with management responsibility for $2.5 billion in indirect and direct purchasing. His purview also includes Avaya's efforts to globalize its procurement, partly with an eye toward reducing costs, but also, importantly, as a way of positioning the company for growth in markets outside North America.
Based in Basking Ridge, N.J., Avaya has ridden the ups and downs of the telecommunications industry of recent years but remains a $4 billion company. In years past, Avaya did almost all its own manufacturing in the United States, but as the company realigned itself to weather the latest downturn in its industry, it outsourced most of that manufacturing to Celestica, the electronics manufacturing services (EMS) provider headquartered in Toronto. While most of that manufacturing remained domestic for a time, in the past 18 months that production has started to transition into Mexico and Asia.
Cost is clearly a factor in this transition, and the move to medium-cost geographies like Latin America and low-cost geographies like Asia is one strategy that Avaya, along with many other North American and European manufacturers, is pursuing in order to keep its products competitive with customers who themselves are continuously looking to reduce their costs. However, Uzoukwu says that the company's procurement strategy also aligns with Avaya's broader business objectives of building its customer base outside North America and Europe. "Part of the company's vision is to grow market share significantly in the international markets," Uzoukwu explains. "Asia is one of the market areas that has been less developed than, say, Europe. Consequently, we saw value in moving production and taking advantage of both the low-cost manufacturing opportunities present in Asia as well as the opportunity to take our manufacturing closer to the markets that we're trying to penetrate." By doing so, he says, Avaya can have a presence in the market as a company not only trying to sell product into those countries but also contributing to the region's economy.
Ensuring Consistency in Customer Service
Uzoukwu and his team are also working to take a more global approach to Avaya's indirect spend. In the past, Uzoukwu says, the company's indirect spending was very disaggregated across its various divisions, including North America, EMEA (Europe, Middle East and Africa), Latin America and Asia-Pacific. An Ariba e-procurement platform deployed in North America did provide a common purchasing platform for that region, but outside the United States and Canada the company did not have a consolidated view of its spend. To remedy that, over the past 12 to 15 months, Avaya has extended its Ariba deployment globally to its units across the world. "We have brought the world into our warm embrace, in a manner of speaking," Uzoukwu says. "That is enabling us now to get better insight and visibility into, and manage more effectively, the spend on the indirect side."
In addition, Avaya has engaged with King of Prussia, Pa.-based ICG Commerce for procurement business process outsourcing (BPO) services. ICG Commerce is providing Avaya with supplier enablement, transaction processing and content management services to address the full range of the company's indirect purchasing commodities. Furthermore, ICG Commerce is providing strategic sourcing, category management and contract management for a majority of Avaya's indirect buying categories. The advantage of working with a provider like ICG Commerce, Uzoukwu says, is that it alleviates Avaya of the need to build internal capacity and competency to procure a variety of commodity areas primarily on the indirect side and allows Avaya's current procurement staff to focus on more strategic activities.
Here, again, the company's motivation goes beyond just potential cost benefits. Yes, by consolidating its spend globally through Ariba or ICG Commerce Avaya can better leverage its size and work with suppliers to drive down its indirect expenses. But, as Uzoukwu explains, the company's procurement organization also believes that it can improve satisfaction among both internal users and, more importantly, external customers by bringing consistency to its global spend. "The customer experience for a client in New York should be the same whether we're installing [equipment] in their offices in Asia, in Shanghai or Kuala Lumpur, or in Kansas City," Uzoukwu says.
Building Global Relationships
Change management has been a significant component of the process of moving toward more global procurement at Avaya. The U.S.-based procurement team and procurement staff in other countries have had to adjust to thinking in more global terms than they had been accustomed to in the past, but the change process has not simply been a matter of corporate strategy dictating uniform policies across the enterprise, according to Uzoukwu. "You have folks [at Avaya offices around the world] that are accustomed to making buying decisions without reference to a corporate strategy, and so there is a little bit of tension as you start to bring them into the fold and to think in terms of a corporate strategy," he says. "But at the same time, the folks devising the corporate strategies must be sufficiently knowledgeable about the issues and challenges that exist [at those offices]."
Culture has played a role in the change management process, too, as Avaya staff have had to learn to deal with different cultures and different languages. One step that the company has taken to address the culture issue is to invest significantly in creating a more international organizational population. "We have gone out of our way to recruit people from different nationalities and make them part of the organization, so that at least in the hallways and the cafeterias and in the phone conversations, people start to get a little bit more exposed to different nationalities and cultures than may have been the case historically," Uzoukwu says. In addition, the company has invested in having its employees traveling back and forth to visit the different country units around the globe as a way of building bonds between staff on different continents. "Because you can do the systems very easily," Uzoukwu continues. "You can put in an Ariba and deploy it very easily, but at the end of the day it's human relationships that lubricate the systems. So we have gone out of our way to make sure that there are rich enough, deep enough human relationships permeating the entire organization that some of the things that we're trying to do, and the systems that we're trying to install, are well lubricated."
Streamlining Global Financial Transactions at Wolverine
Three years ago, footwear company Wolverine World Wide decided that it was time for the letter of credit (LC) to go. But how could a company that was sourcing 28 million pairs of shoes around the world kiss the LC goodbye?
Wolverine, founded in 1883, is based in Rockford, Mich. Last year the company had $889 million in revenues. Wolverine sources about 25 million pairs of shoes in the Far East each year, along with 3 million pairs elsewhere, and it imports about half the total, or 14 million pairs annually, into the United States. Notably, the company handles all its own logistics for all its imports, including ocean and consolidation/deconsolidation, in addition to handling all its customs brokerage in-house. The responsibility for keeping all those shoes moving falls to Philip V. Roy, director of international administration with Wolverine. Roy covers not only the company's logistics and customs operations, but also vendor payments and administration of Wolverine's handful of global offices.
About three years ago, as the company was examining its business processes for opportunities to gain new efficiencies, Wolverine realized that the letter of credit had perhaps outlived its usefulness as a tool for dealing with the company's suppliers in the Far East. After all, some 90 to 95 percent of the shoes coming in from that region were produced by just 20 vendors. "Quite frankly," Roy explains, "we had developed long-term relationships with these vendors that made the LC obsolete, except for post-export financing on the part of the vendor when they need that. For us, the LC did not serve any real business purpose." Moreover, the LC's were costly because of the substantial amount of manual processing necessary to prepare the documents and because of the bank fees, at times running to hundreds of thousands of dollars annually, associated with the letters of credit.
Playing the Trade Card
With all that in mind, Roy went looking for a way to streamline Wolverine's payment process and shift its primary trading relations to open account terms. A local representative of Comerica Bank introduced Wolverine to TradeCard, which offers solutions to automate trade transactions from procurement through payment. In short order, after some customization work on TradeCard's part to meet Wolverine's interface and process requirements, the footwear company began a two-month pilot of the solution with its largest Far East trading partner, which accounted for about 20 percent of the shoes that Wolverine sourced.
Under the pilot, 15 days before the shoes left the factory, Wolverine uploaded purchase order details from its ERP system into TradeCard's online system using an EDI 850 document. The factory, having already confirmed the order previously, would come online to reconfirm the details of the purchase order, and then both parties sat tight until the shipment was made. At that time, the factory would come online again, file a commercial invoice and a summarized packing slip through the system. Then Wolverine's consolidation outfit, Maersk Logistics, would come online and file an electronic forwarders' certificate of receipt. Wolverine's own inspectors in the Far East would access the online system and give the shipment a pass/fail. The TradeCard system also would check for compliance and spit out any discrepancies. (Wolverine has since graduated to a buyer-approved payment process, whereby Wolverine performs the compliance check and uses TradeCard to generate the wire transfers to the vendors via J.P. Morgan.)
After the two-month pilot, Wolverine concluded that the TradeCard system was, indeed, a substantial improvement over the LCs, and the company opted to deploy the solution out to its 19 remaining suppliers in the Far East. Supplier adoption was not a major issue, says Roy, who personally traveled to Asia to conduct seminars to demonstrate the benefits of the system for the suppliers. "LCs are very, very expensive from both sides of the equation, for the buyer and the seller," Roy says. "And so the sell to the vendor was fairly easy in terms of the lower cost." In addition, TradeCard formed alliances with the suppliers' banks, which agreed to lend the suppliers money on a post-export finance basis as long as credit insurance was purchased, at the time through Coface. And finally, the solution is Web-based, so the suppliers and other stakeholders need only a PC with an Internet connection to access the system.
Currently, Wolverine is putting more than $300 million through the TradeCard system, covering, according to Roy's estimate, about 22.5 million pairs of shoes. The company's savings have been both hard trading a triple-digit LC fee for a double-digit transaction fee through TradeCard, handling increased business while not having to add staff to process the greater number of financial transactions and soft, with Wolverine finding that its trade finance processes simply run more smoothly now.
With as much as 95 percent of the company's business already running through TradeCard, Roy says that Wolverine is not likely to bring the remaining 75 or so suppliers that make up the remainder of its business onto the TradeCard system because they are niche producers, agents or factories in countries, such as Brazil, where for various reasons Wolverine prefers to continue operating under the letter of credit.
Overall, Roy says that using the online system not only has helped Wolverine grow its business while holding the line on administrative costs but also made the company more agile. "It's allowed us to be a little savvier in terms of doing business in today's environment, quicker, more efficient," he concludes.