Have Your Cake and Eat It Too

The big challenge and opportunity is to build cost savings into your supply chain operation at the same time you're making it more responsive.

By Hau L. Lee -- Supply Chain Management Review, 4/1/2007

Globalization is both a huge challenge and a great opportunity facing supply chain professionals. Companies increasingly find their supply chains spreading all over the world, with design, sourcing, core manufacturing, final assembly, distribution and markets all in different locations. Whether these are your own sites or those of outsourced partners, the result is increased complexity and uncertainty. The challenge is not just confined to cultural, language, and organizational barriers, although they are not to be underestimated. The real daunting part is the inherently more complex information flows, physical flows, and financial flows.

Adding to the challenge is that many of these locations are in emerging economies. That brings additional difficulties of less mature infrastructures, transportation inefficiencies, government regulations and trade laws, and a high degree of risks through unexpected disruptions or political instabilities. At the same time, these emerging economies are undergoing tremendous changes. Some countries that used to be primarily low-cost manufacturing sites are acquiring design and innovation skills, and some have seen their middle class growing fast, rendering them as viable markets.

Take China as an example. The first generation of offshoring in the eighties was primarily about companies moving to take advantage of low-cost manufacturing in that country. The second generation, in the nineties, was driven by the exodus of the supply network—that is, your suppliers and the suppliers’ suppliers have relocated to China, making it critical that you also have some manufacturing capacity there. In what could be called the latest generation, some companies are taking advantage of the deep manufacturing know-how in China to generate product and process innovation ideas. The engineering design expertise in China is emerging just as China is becoming a market for goods and services.

These challenges are, of course, opportunities. The flattening of the global economy provides new supply chain opportunities, if you are able to capitalize on them. Let me give you an example. For years, Eastern Europe offered a low-cost alternative to manufacturing in Western Europe. But that advantage has been eroded as Asian manufacturing became much less expensive. Companies that have already invested in Eastern Europe have to create new solutions. Some now use Asia as the manufacturing site of their core engines, while the factories in Eastern Europe serve as their postponement centers where the products are customized or localized for the European market. In this manner, the companies enjoy both low-cost manufacturing and responsiveness to the markets.

What does this mean to supply chain professionals? First, we have to be well aware of the developments of competencies and limitations of the global supply chain landscape. Second, as a supply chain becomes more global and distributed, we need to learn how to make use of advances in information technologies to better coordinate that supply chain. Third, we have to learn to be adaptive. Today’s supply chain structure may be optimal for you today. But as dynamics changes, we need to adapt accordingly. Fourth, we need to recognize that risk management is increasingly important.

Finally, we need to learn how to create mixed models of supply chains. Hence, the question may not be whether you go to China or not, but how to make use of both your domestic factory and the overseas low-cost factory so that you can get both efficiency and responsiveness. Taking the example I offered above, the question is not whether or not to move your factory from Budapest to China, but to use a mixed model so that you get the cost savings from China and the responsiveness from the postponement center in Budapest. It’s great to have your cake and eat it too!