In the modern economy, every company, no matter how large or small, must be prepared to deal with customers, suppliers, and service providers from across the globe. As a result, every company has an increasingly lengthy supply chain exposed to significant pressures and potential risks. While some supply chains may be more complex than others, all are vulnerable to disruption. To manage these risks, companies adopt a number of risk mitigation strategies. I’d like to focus on one of these strategies: distributed networks, the act of structuring the network and operations on a global basis.
Evaluating supply chain risks
To understand the need for distributed networks, we need to identify and evaluate all aspects of supply chain risk. This includes looking at risks through various lenses: the probability of occurrence, its impact on the business, and whether this risk is controllable or not. For example, the risk of a natural disaster on a sole source supplier location can have a high impact, but is not controllable. Because it is always a possibility, contingency plans are necessary. This might mean splitting the supply between two different locations, which in effect distributes the supply network, with trade-offs of reduced economies of scale and bargaining power of pricing.
The business case for distributed networks
Distributed networks are an extension of a global business network and infrastructure, something companies consider on a regular basis, but the real value demands a longer-range and more comprehensive perspective. Today, when companies decide whether to establish a new supplier or set up a facility in a new location, they typically evaluate only a few factors: the cost of supply delivery, set-up, labor and operations, and delivery costs to the target markets.
Unfortunately this “traditional” approach does not address the changing, volatile and increasingly risky realities of the environment. Total delivered cost is now equalizing across geographies. Wages are rising in previously low-cost locations, freight costs are increasing as fuel prices rise and carriers consolidate, costs of trade regulations are greater, and changes to product and schedule are now being recognized as a significant aspect of total cost. Combined, these factors are closing the gap in total delivered costs (shipping, storing, delivery and fulfillment), regardless of the supply location. Unit cost no longer tells the whole story.
Rather than asking how the supply chain network can be “optimized” for cost and distance to customer, companies should focus on how the network can increase their global effectiveness and economic sustainability. Companies must minimize total cost structure by reducing global taxes, the costs of trade barriers and regulations, and the expenses for expedited fulfillment. They should also look to reduce time and costs to recovery in the event of supply chain disruption. For all of these, distributed networks are an integral part of the solution.
Global Companies Become Local Citizens
On a daily basis, distributed networks enhance the ability to operate successfully in, and sell to, many markets. This is especially critical for companies looking to operate in countries with strict trade rules and regulations, as well as high trade tariffs. Companies with local sources of supply, manufacturing, configuration, postponement and distribution are able to get the product to their customers faster, more efficiently, and with lower fulfillment costs.
Distributed networks can also provide a business with a local presence, which in my opinion, is an incredible opportunity to become good corporate citizens in the markets that they serve. Such a presence allows a company to provide a local, customized customer experience; to address increasingly important issues of local employment, content laws and in-country buying preferences; and permits a rapid response to customer needs, while minimizing the impacts of local taxes, trade barriers, laws and tariffs.
A local presence should always include development of and adherence to serious Corporate Social Responsibility initiatives. This is a great risk mitigation strategy because it can increase brand affinity and loyalty as well as help the company to anticipate local issues not readily apparent at a global level.
As your company begins to assess its global supply chain and network strategy, I strongly recommend the following considerations:
- Understand first and foremost that this will be a truly transformational process, not just a series of small initiatives.
- Make sure to involve Corporate Tax, Finance and Global Trade in the process, and take a broad view of what constitutes the network, including postponement and configuration facilities, multi-echelon distribution networks, supply locations and service logistics centers.
- Conduct a thoughtful mapping exercise to identify the value-added operations, locations, customer concentrations, product flows, total costs and times involved.
- Identify “monument” locations and operations, which must be maintained for government, tax, political or customer necessity.
- Outline and assess the risks involved – from geo-political and trade risks to supply risks – for impact and likelihood.
Once this has all been completed, start scenario planning and “what-if” analyses to develop different options and contingency plans for the global supply chain network, minimize supply disruption, costs and time to recovery, total delivered costs, and maximize customer response and the stability of geographical operations. While this is a tall order, modeling tools can assist in the process, and it is not necessary to address everything in one sitting. It can be done in manageable “chunks” by product line, business unit, geography, supply line, etc. The trade-offs, naturally, are inventory and operations redundancy, which need to be balanced, in a measured fashion, against the risks and long and short-term benefits.
Distributed networks require an increased sophistication in terms of planning, execution, tracking, visibility and data management processes. Equally important are the decisions on what processes should be global or centralized, and what should be local. There is also the need to up skill and build a local team; this should be part of a measured effort, not done ad hoc.
Technology is a key enabler in all of this, although not a solution in itself. IT involvement should be business-driven, with end-to-end data management, visibility, tracking, customer and order management, predictive analytics, planning, execution, warehousing and global trade management software and, critically, collaboration with partners and channels. A well-implemented ERP system provides a strong backbone to manage this. Competitively, IT can also help the business anticipate risks across the distributed network by leveraging internal supply chain and external data, market intelligence, predictive analysis, and scenario planning.
In today’s increasingly risky and volatile environment, distributed networks will be a critical differentiator for companies. Companies that adopt this strategy will have a better overall cost structure and local customer satisfaction compared to the competition, and will be better equipped to withstand new risks that may emerge.
Chris Gopal is Lead Partner, Supply Chain Management, Transformation Practice, Enterprise Solution at Tata Consultancy Services. He is an expert in global supply chain strategies, manufacturing and outsourcing, demand and supply planning and management, operations execution, process transformation and improvement. He is the co-author of three books, including Supercharging Supply Chains: Creating Shareholder Value through Operations Excellence, and has been recognized as a global thought leader on topics related to supply chain and operations management.