Global supply chain operations: A new reality

By Patrick M. Byrne -- Logistics Management, 3/1/2007

The consensus of 300 supply chain executives across North America, Europe, and Asia Pacific is that global sourcing will jump by 17 percent within three years. Global manufacturing will increase by 37 percent during the same time period. And by late 2009, one out of every three companies will have half or more of their supply bases outside their home markets.

That’s not all. Accenture’s second annual study on global operations also confirms that over a six-year period (from three years ago to three years from now) most North American and European companies will have increased sales volumes outside their home markets by at least 40 percent.

The primary inference is simple: More global sourcing + more global sales = more need than ever for companies to operate effectively on a global scale. The vastly more complicated question is: What does it take to achieve high performance in global operations? You could say that high performance in global operations is “the integrated designing, sourcing, manufacturing, distributing, selling, marketing and supporting of products and services globally.” It’s a good definition, but not very helpful from a practical standpoint.

A better approach might be to think about which capabilities are implied by effective global operations, which is what Accenture did in its recent survey. We asked respondents how important certain capabilities are to achieving global profitability targets, as well as how effective their companies have been at implementing them. Responses were revealing, discouraging, and not particularly surprising: As shown in the graphic, most companies are not up to target when it comes to implementing the very capabilities they deem extremely or very important.

Despite big challenges and slow progress, it’s clear that companies are committed to making global operations work. In fact, 86 percent of survey respondents report that a formal global operations strategy is part of their companies’ corporate business strategy. Last year, the figure was 93 percent. However, that survey did not query Asia Pacific companies, many of which have a different take on what “going global” means. We should be very encouraged if these responses accurately reflect how companies’ operations strategies are integrated with their overall business strategies.

To uncover the initiatives that comprise companies’ global strategies, we asked respondents to identify which of the following strategies their companies are employing to increase the scale of their global operations. These eight choices were offered, and recipients were instructed to cite all that apply:

• Invest in new plants and equipment (cited by 71 percent)
• Optimize the manufacturing network (71 percent)
• Optimize the distribution network (59 percent)
• Restructure the supplier base (56 percent)
• Launch new mergers and acquisitions (47 percent)
• Increase the use of contract logistics (41 percent)
• Restructure the global R&D network (36 percent)
• Increase contract manufacturing (29 percent).

What is most interesting about their responses is the clear preferences for strategies that focus on manufacturing. This is consistent with other studies showing that identifying and growing global markets has become a higher priority than enhancing or extending sourcing/procurement capabilities and venues.

Basically, respondents most want to 1) get closer to the non-domestic markets they are seeking to nurture, and 2) ensure that they can produce the highest-quality products and tailor them to the needs and wants of local communities.

It also is interesting to note variations across continents. The preference for global manufacturing and distribution strategies is even more widespread in Europe than in North America or the Asia Pacific region. Europeans seem particularly keen to optimize the manufacturing network (80 percent versus 66 percent for North America and Asia Pacific) and invest in new plants and equipment (79 percent versus an average of 67 percent for North America and Asia Pacific).

So what does this all mean? Our take is that global operational excellence can no longer be defined as effective, low-cost country sourcing or superior international market-making. The new reality is that global operations simply are what any company must do well to remain competitive—that is, effective global operations are now the entry ticket for being successful in a “world is flat” arena. For most, that means honing all of the capabilities noted earlier and using them to build a differentiating strategy, buoyed by C-level buy-in and commitment.

Next month, we’ll discuss an increasingly vital part of any company’s global operations strategy: the quantification and mitigation of risk.