Supply Chain Management in Emerging Markets

Supply Chain Management in Emerging Markets Emerging markets are nations with social or business activity in the process of rapid growth and industrialization. Facing pressures to cut costs, especially labor and materials, companies have been turning to emerging markets for facility locations. As a result, the supply chains have become increasingly global and complex, creating risk at every level of product development, manufacturing, and distribution. The problem lies not with capacity, but with protection of intellectual property rights, maintaining component quality and compliance with international trade regulations. Emerging markets can bring a company closer to suppliers and raw materials, cutting transit time but breaking into new markets in countries with little experience of manufacturing the components required is the ultimate challenge for a supply chain manager. The International Financial Corporation coined the emerging market term (more specifically: Emerging Financial Markets) in 1981, to describe certain countries. The term has expanded in meaning to reflect business opportunities in countries with social or business activity in the process of: Rapid growth Industrialization In pursuit of new opportunities and lower cost operations, companies are creating complex global networks. Impact on supply chain planning and management has been significant. Increased volatility and uncertainty of supply chains require: Greater flexibility and forecasting capability Sophisticated understanding of emerging markets Ability to assess and manage both risks and opportunities A number of universities and business schools have undertaken research to study and understand various aspects of Emerging Markets. It is difficult to make a list of emerging, developing and developed markets; the best guides tend to be investment information like The Economist or market index makers (such as Morgan Stanley Capital International). FTSE Group, a provider of economic and financial data, distinguishes between various markets on the basis of their national income and the development of their market infrastructure and assigns the market status of countries on the basis of their economic size, wealth, quality of markets, depth of markets and breadth of markets. Many companies want to benefit from emerging markets sourcing but often neglect to build integrated business processes to manage the added complexity in the supply chain, and fail to connect various corporate functions in managing both short-term and long-term business needs. Integrated Supply Chain Planning Coordinating product development, supply chain and sales and marketing activities that are oceans and time zones apart has become more difficult as supply chain operations become more fragmented with continued globalization. An integrated approach to supply chain management will go a long way in overcoming the difficulties. Integrated Supply Chain Planning is the coordinated planning of activities that occur over time in order to forecast, procure, manufacture and distribute goods across the extended supply chain, from supplier to consumer. Figure 1 shows various elements of integrated supply chain planning at strategy, tactical and execution levels. Figure 1 Source: Conference Board Webcast The Endless Search for Advantage: Supply Chain in Emerging Markets, October/November 2010 Management Challenges in Emerging Markets Supply chain management in emerging markets presents a number of management challenges generally not faced in domestic markets. Table 1 lists various management challenges faced in emerging markets. These challenges have been categorized as communication, cultural, safety security, corruption, delivery, financial and quality. Category Management Challenges Communication Language differences and understanding Expertise differences and nomenclature Systems compatibility Time zone differences Cultural Timing of Holidays and needing to conduct business Understanding of cultural nuances; Level of urgency Infrastructure(roads, ports, telecom, energy availability) Safety Security Government requirements, Port safety Personal safety Personnel safety; Criminal element Fire safety and response Raw Materials Safety Corruption Patent and IP protection Bribery, insidious inside activity Law enforcement issues; Legal ramifications Suppliers who become competitors Delivery Vendor compliance; reliability vs. culture Manufacturing, transport lead-times and reliability Amount of embedded transit time Financial Foreign exchange effect on Supply Chain Mobility of plant assets Supplier stability Quality Product testing Table 1 Source: Conference Board Webcast The Endless Search for Advantage: Supply Chain in Emerging Markets, October/November 2010 Among US companies over $1 billion, 73% experienced supply chain disruptions in the last 5 years (2009 Center for Supply Chain Research). Key Risks in Managing Supply Chains in Emerging Markets Global operations, while helping to achieve cost savings and market penetration, undoubtedly are accompanied by risk. Supply chains in emerging markets, where a whole series of risks are present, are specially challenged to plan, design and implement sophisticated strategies to manage and mitigate risk. Supply chain risk is a complex equation of risks that a business encounters between raw material extraction and final product delivery. From supplier selection, to paying customs charges, to hiring or firing, supply chain managers should consider all aspects of risk while considering emerging markets. Risk is defined from a practitioners standpoint as having specific financial impact. There often exists a distinct boundary between supply chain risk and financial risk in decision making processes, yet the two will naturally impact one another. Key supply chain management risks include: Trade Risk Trade risks include regulatory compliance, specifically dealing with the export and import of goods. Trade risk factors include customs valuation, trade regulations, anti-dumping, free trade agreements and export licensing. Political Risk Political risks include political instability, religious tensions, bureaucracy and inter-state conflict. Economic Risk Inflation can adversely affect the supply chain in many ways; rising prices in fuel incur higher transportation costs, rising food prices cause labor prices to rise, and both can compound to erode the financial health of operations in emerging markets. Operational Risk Operational risks occur in the day to day execution of the business, including labor, intellectual property, supply disruptions, commodity price volatility, internal product failures, and energy costs. Geophysical Risk Supply chains are exposed to several kinds of risks. Poor infrastructure and high levels of congestion can impede distribution and natural disasters can result in significant disruptions in sourcing operations. Risk Management Considerations There are many risk management considerations when entering emerging markets. The ability to effectively manage these risks directly impacts success of supply chain strategy implementation. Some of these considerations are: Social compliance and responsibility Intellectual property management Management of multi-cultures and multinationals Internal stakeholders/clients engagement skills On schedule quality delivery Disaster recovery plans Alternative manufacturing sites Table 2 shows potential mitigation options for various risk areas. Risk Area Potential Mitigation Options Limited infrastructure, creating potential delays in moving materials / products in and out of a market. Create partnerships with Logistics providers who understand the local marketplace. Appropriate inventory investments to compensate delays. Reduced (loss) of inventory visibility to in-transit raw materials and / or finished product. Create an integrated Supply Chain management strategy that aligns partners to create inventory visibility. Invest in technology to create the required visibility. Create incentives for suppliers to meet your expectations. Significant fluctuations in demand Use technology to create baseline forecasts and adjust to local market knowledge. Appropriate inventory investments to protect against significant delays in product arriving in market. Aggressive response to market entry by your competitors. Expect a response Game potential competitive response to your entry. Take appropriate action. Understand your vulnerabilities and take require actions to mitigate. Table 2 Source: Conference Board Webcast The Endless Search for Advantage: Supply Chain in Emerging Markets, October/November 2010 Global Logistics for Strategic Advantage in Emerging Markets To leverage opportunities in emerging markets, companies must transition or expand from managing logistics in a limited number of local geographies to managing them in emerging market geographies worldwide in a very efficient, agile manner that supports the responsiveness and flexibility associated with an on-demand Business. Companies can leverage specific approaches to transforming their global logistics capabilities and better support the business goals of lower cost sourcing or fulfillment by taking advantage of emerging market jurisdictions. In transforming logistics operations, companies have gained performance benefits from a strategic focus on logistics. The capabilities developed during transformation effort enables them to realize benefits with emerging market operations. In order to address the challenges of leveraging emerging markets as a cost reducing, and eventually, a profit-boosting strategy, companies are finding that they need to develop a strategy for managing logistics that can support multiple service-level requirements. As one element of such a logistics strategy, companies need to determine how, where and to what extent the services of logistics suppliers should be engaged. There are several logistics management options to consider before entering a new or emerging market. One end of the spectrum involves developing extensive multifunction logistics talent within the company, and then managing specific tactical activities and numerous contracts with logistics suppliers that provide narrowly defined services within a specific region or country. Pitfalls include the time it takes to develop or recruit the necessary level of logistics talent and leadership and the administrative cost of managing dozens, if not hundreds, of logistics suppliers. The key to managing global logistics is to enable the companys supply chain with the capability to efficiently unplug from one location or operating scenario, and enter a new or emerging market location. This capability will be both a strategic requirement and a competitive advantage, as long as worldwide business, economic and socio-political variables remain dynamic. Enabling this strategic capability requires cross-function process design, technology integration, and subject matter expertise ranging from network optimization, logistics contract and operations management to global trade and compliance management. This level of orchestration and collaboration is very scalable when merged seamlessly with a global governance model and strategically oriented leadership. Competitive advantage can be realized as the logistic transformation can prevent rising costs and complexities from eroding the benefits of global sourcing strategy. The advantages of a strategic approach to logistics are broad and can result in a significant increase in shareholder value. In fact, managing logistics costs, service-level lead times and overall supply chain security is critical to marketplace competitiveness. Greening the Supply Chain in Emerging Markets The term Greening the Supply Chain has emerged to describe a wide variety of actions that companies are taking to achieve greater performance rigor and operational control over extended supply chains. Greening the Supply Chain initiatives in emerging markets are part of a process for implementing a sustainable development plan aimed at achieving improved environmental performance; increasing efficiencies in the use of energy, water, other natural resources or raw materials; reducing the environmental and societal impact of business operations upon local communities and globally; and expanding economic and quality of life enhancing opportunities that result from the business activities. To maximize effectiveness, Greening the Supply Chain initiatives should not exist separate from the mainstream activities of the business. Rather, they should be fully integrated with and reflect the core value proposition of the business strategy. They should yield measurable results that are part of an integrated business-sustainability plan. The business value propositions for seeking to achieve a greener supply chain in emerging markets include the following: Mitigation of business risks Reducing risks to the business from current environmental factors or responding to expectations of future controls on carbon emissions or other substances can both advance learning and increase the operational integrity of business processes across the supply chain to create business value. Reduction in costs At a time of rising costs from energy consumption and other resource and raw material inputs, companies have more direct incentives to improve the efficiencies of a variety of operating processes. Motivation of suppliers Implementation of sustainability initiatives creates an opportunity to further focus and rationalize supply chains by eliminating low performers and focusing on a fewer number of suppliers that can meet more rigorous sustainability performance criteria while meeting the needs of the marketplace. Preservation of business continuity Green supply chain initiatives that focus on energy efficiency and other aspects of sustainability can buffer business processes from such disruption while contributing to emission reductions. Market access enhancement Companies seeking to manage their demand for resources e.g. water, food supply etc. while reconciling the needs of society will obtain greater long-term control over their business strategy by combining business process innovation with solutions to societal problems. Success Factors Supply Chain Management in Emerging Markets For managing supply chains in emerging markets successfully, it is imperative that the approach taken be made an integral part of the overall corporate strategy. An opportunistic, price driven approach will capture low-hanging fruits but a structured approach will deliver results on a sustained basis. Here is a list of factors to succeed in managing supply chains in emerging markets: Developing business processes to integrate the needs of an integrated supply chain Developing a strategy to protect intellectual property and meeting the needs and expectations of customers Performing extensive due diligence while choosing suppliers Considering total cost of ownership and not just material cost Developing a business continuity plan Making logistics management in emerging markets a strategic component of the business strategy Selecting leading logistics service providers who can effectively integrate functions, processes, and business partners As companies look to mitigate supply chain risk, they should incorporate both non-economic and economic factors into their decisions. Assessing the risk, attaching a financial impact to potential disruptions, and establishing a clear strategy that addresses supply chain risk will set the parameters for selecting a location in an emerging market. Country analysis should be an ongoing process, using both up-to-date statistics and historical trends. Emerging markets sourcing aimed at cost-cutting alone is a thing of the past. Quality, efficiency and effectiveness of global sourcing operations now differentiate competitors. But, profitability is being squeezed by unprecedented cost pressures from customers with their own capabilities and suppliers facing higher costs. To succeed in emerging markets sourcing, it is imperative that the approach taken be made a core part of the overall corporate strategy. To achieve the best overall supply chain performance and success in competitive global marketplace, companies need to address capabilities of people, processes and technology areas and integrate all elements of the extended supply chain. About This Report The material in this report is based on discussions and presentations from a meeting of The Conference Board Asia-Pacific Supply Chain Council that took place in Shanghai in May 2010 and The Conference Board Webcast on The Endless Search for Advantage: Supply Chain in Emerging Markets which took place in October and November 2010. About The Author Vipin Suri is program director for The Conference Board Supply Chain Council and The Conference Board Functional Excellence and Shared Business Services Council in the Asia-Pacific region. As a management consultant in shared services for the past nine years, he has assisted several companies in Asia-Pacific and North America in reviewing the effectiveness of their business support functions and implementing shared services. Prior to becoming a management consultant in 2002, Suri was Vice president, shared business services for BHP Billiton in Australia. Prior to that he had held several senior positions in MA, customer service, network services and asset management, and shared services during his 26 years at Ontario Hydro in Canada. Suri is a doctoral degree candidate in shared services at the University of Twente in the Netherlands. About The Conference Board The Conference Board is a global, independent business membership and research association working in the public interest. Our mission is unique: to provide the worlds leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board creates and disseminates knowledge about management and the marketplace, conducts research, convenes conferences, makes forecasts, assesses trends, publishes information and analysis, and brings executives together to learn from one another. The Conference Board is a not-for-profit organization holding 501 (c) (3) tax-exempt status in the United States.