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PRTM Study: Five Key Supply Chain Challenges – Challenges 2 & 3

In this ongoing series about the five key supply chain challenges as reported by PRTM a few weeks ago, I am going to look at Challenges 2 and 3. If you missed the earlier posts in the series, here they are: PRTM Study: Five Key Supply Chain Challenges – Challenge 1 and PRTM study highlights five key supply chain challenges.

Challenge 2: Securing growth requires truly global customer and supplier networks

Most survey participants expect that future business growth will come primarily from new international customers and products that are customized to meet their needs. As a result, more than 85% of companies expect the complexity of their supply chains to grow significantly by 2012.

This I don’t understand – where are the respondents coming from? If business growth is going to come primarily from new international customers, what does that mean other than the fact that overseas growth is going to be met largely by overseas means of production. In that case, the complexity in the supply chain decreases not increases. The control of the supply chain from overseers stateside is going to be more difficult but why must it be controlled from far away?

Nearly 30% of respondents expect the number of manufacturing facilities to decline until 2012, which reflects the expectation that their companies will increase outsourcing to external partners. Similarly, a nearly 30% decline in the number of strategic suppliers indicates that many companies expect to further consolidate their supplier bases. In general, companies in North America and Europe will consolidate their manufacturing and distribution footprint, while companies in Asia will further expand their entire supply chain network.

I don’t really understand this challenge at all. In fact, it is an observation that the trend of offshoring and outsourcing is going to continue, perhaps, even increase. The first stage of outsourcing and offshoring was primarily driven by the need to improve profit margins vis a vis the consumer in the developed world (who was for quite a period on a debt fueled binge). Today, that consumer in the developed world is all but tapped out – well, the answer to that is the consumer overseas whose consumption habits have yet to be tapped to the fullest potential.

Challenge 3: Market dynamics demand regional, cost-optimized supply chain configurations

Survey respondents seem confident that they will be able to deliver substantial gross margin improvements over the next two years. As was the case during the downturn, gains will not come from price increases, but from further reductions of end-to-end supply chain costs.

Unfortunately, few firms will confess that this is not a strategy of their choosing but one of the times imposed on them i.e. there is very little by way of pricing power to be had and therefore it is time to resort to the strong arm tactics of squeezing out your suppliers.

What I found interesting here is the comment from a VP of supply chain of a leading industrial electronics company. He recounts:

“Unit costs are easy to measure. When we move to a ‘less expensive’ supplier, we can see the improvement right away. But a lot of costs are hidden—costs associated with things like quality, site visits, and the loss of flexibility. We often spend more expediting parts from a ‘less expensive’ supplier than we save on the material cost.”

Well, methinks that he has it quite backwards – Unit costs are impossible to measure (especially after the fact let alone before the fact) whereas hidden and unexpected costs can be easily determined (after the fact). This GM-Sloan mentality of calculating, nay, obsessing about unit costs is downright silly simply because it is a fiction cooked up by accountants at the behest of managers who want to be seen doing addition and subtraction.

And on top of that, he has bought into the idea of a free lunch.

The odd thing about these two challenges is that they are seemingly at odds with each other. The modern supply chain is not as regional as it is global. Perhaps, the implication is that it is directed at emerging markets rather than developed ones, the growth in the supply chain has regional constraints on its mind rather than global ones. That does leave the global supply chains originating state side in a nice pickle. No?

In conclusion, there is one observation here and one challenge.

The observation (emanating from Challenge 2) is that offshoring and outsourcing are set to continue for different reasons and possibly at an increased pace. In fact, I would think that this is the decade when a number of corporations are going to become transnational.

The challenge for the supply chain is that it is going to become decentralized in a big way – regional markets, regional supply chains.

I’ve frequently said on this blog that these global supply chains don’t have to exist and it looks like that this prediction is beginning to come to pass. Do you know where you supply chain passport is?

About me

I am Chris Jacob Abraham and I live, work and blog from Newburgh, New York. I work for IBM as a Senior consultant in the Fab PowerOps group that works around the issue of detailed Fab (semiconductor fab) level scheduling on a continual basis. My erstwhile company ILOG was recently acquired by IBM and I've joined the Industry Solutions Group there.

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