Supply chain trends span the globe

By Patrick M. Byrne -- Logistics Management, 3/1/2006

Organizations of many sizes and shapes have come to view global sourcing and manufacturing as a competitive necessity. As a result, many low-cost "source" countries, such as China, India, Mexico, and Brazil, have been able to build up their consumer economies. The net effect is a new world of sellers and buyers, and a huge opportunity for companies that have truly global footprints.

But how ready are companies to operate in an environment of worldwide sourcing and market making? Do they have what it takes to successfully source, manufacture, and ship from low-cost countries, and to efficiently address the world's new but often idiosyncratic marketplaces?

To find out, Accenture recently launched a research project on global sourcing and selling trends. This month and next, we'll discuss the results of that research.

Our research team conducted interviews in June 2005 with 305 senior executives. About half of the respondents are were supply chain executives and the rest were responsible for sales and/or marketing. Nearly 90 percent are from companies with annual revenues exceeding $1 billion, and more than 40 percent reported revenues of more than $10 billion. Manufacturing, telecom, and retail were the most frequently represented industries.

The survey confirmed that prospects for sourcing materials, parts, and finished products from low-cost countries continue to improve, and that a large consumer class is emerging in many of those countries. The result is a confluence of opportunities: Companies can develop capabilities that combine worldwide sourcing, manufacturing, and logistics proficiencies with an ability to support growth in rapidly expanding markets.

More than 90 percent of respondents indicated that the ability to operate globally is central to their companies' business strategies. It's easy to see why. As shown in the graphic, sales revenues generated outside of respondents' home markets increased dramatically in the last three years and are expected to increase almost as rapidly within the next three years. The percentage of respondents' supply bases located outside of their home markets is growing similarly. In both cases the increase over six years exceeds 50 percent. Executives also noted strong growth in the share of their offshore spend that is dedicated to raw materials, semi-finished goods, and finished goods. For all three of those categories, the increases from three years ago to three years from now total about 50 percent.

Predictably, respondents said that China was their most important emerging market, followed by India and Eastern Europe. For European executives, Eastern Europe was the most coveted emerging market, while China and India predominated among U.S.-based respondents. For some European markets, the importance of Turkey and North Africa also is growing, although mostly as sources of supply. For North American companies, Mexico's importance will continue to grow, particularly for segments that are sensitive to service and time-to-market issues.

These trends underscore the importance of supply chain strategies that address new markets and access to new sources of supply. To tap emerging markets, supply chain strategies relating to product portfolio, channel management, make-or-buy considerations, contract logistics, and corporate and tax compliance are especially vital. To effectively source from low-cost countries, companies need a streamlined, end-to-end supply chain that provides cost savings, satisfies quality objectives, minimizes in-transit inventory, and meets service criteria and new-product time-to-market objectives.

The bottom line is that tomorrow's supply chains must be more global and more flexible than ever before. The latter requirement is particularly key, since many of today's best supply sources could quickly cease to be low-cost as their markets expand—superseded by other countries whose consumer markets are less mature. Given these realities, we believe that the following best practices can help companies achieve effective global operations and ultimately improve their performance:

• Clearly articulate customer requirements for product, channel, and services.
• Understand and specify landed-cost targets that incorporate cost of goods sold, logistics requirements, quality management, obsolescence, lost sales due to poor service, and time-to-market considerations. This means understanding true total cost of ownership when making global sourcing and manufacturing decisions.
• Develop global operations that integrate product development, sourcing, manufacturing, transportation, storage, sales and operations planning, and the provision of after-sale services and networks.
• Design information flows to help ensure accurate, real-time visibility across the supply chain.
• Create organizational models that foster a global operational culture.
• Ensure a financial management capability to track operational effectiveness.
• Identify and manage risks and uncertainty.
• Build sourcing, manufacturing, and distribution capabilities that can react rapidly to changing customer demographics and characteristics.

In the next issue, we'll look closely at how companies are preparing for a "brave new world" of low-cost sourcing and high-impact market development.