Wednesday, September 24, 2014

Global supply chain: Boon or a recipe for disaster?

As the world turns flatter and the cost of technology goes down, companies are trying to take full advantage of this “globalisation” phenomenon. Increasingly, a majority of companies are now contemplating over a variety of questions such as:

1-Should we make it or should we buy it from someone else?
2-If someone else is going to make it for us, will it be outsourced, off shored or both?
3-How many suppliers should we have for each of the parts and where should they be located?

These strategic decisions involve more than just the “cost factor”. Factors like tax evasion and proximity of a supplier: the closer a supplier is, the less inventory you’ll have; taking advantage of just-in-time and faster deliveries to customer are also important factors in supply chain decisions. For example: Schulman Inc., a plastics manufacturer is adding manufacturing plants in China because its German customers are opening facilities in China; an instance of next-shoring. The less dependent you are on other sources for supply/services, the less complex your supply chain is. There are quite a few benefits of the same: You have a lot of control on your operations since the network is less complex. Hence you can get access to a larger piece of information which is probably more accurate than from a more complex network. This way, it is relatively easier to quantify and mitigate risks faster. But this is rarely the case with big companies in today’s era. There are a lot more entities involved in the supply network. Sometimes there might be a situation where you have only a few specialised supplier who is also supplying your competitor. This makes it difficult to have accurate information flowing faster through the network. This in turn makes it all the more difficult to execute a “Plan B” in case of unforeseen circumstances.

For example: An overview of some key information from Apple’s supply chain:

Lack of adequate and skilled labor, manufacturing expertise, cost of manufacturing, tax benefits and inventory management are few of the factors leading to Apple’s supply chain network decisions.

A global supply chain also brings along with it quite a few risks:

In case of natural disasters like the ones in Japan and Thailand, if you have suppliers concentrated in those regions, your supply chain can take a huge hit. This is what happened in the hard-disk drive industry due to the floods in Thailand. Because most of the suppliers of large companies were concentrated in Thailand, the supply got squeezed and prices shot up. In such situations, you need to need to have alternate suppliers to undertake risk-mitigating actions quickly. For that, you need accurate and real-time data which can guide you in the right direction.

Manufacturing processes have become increasingly complex: Manufacturers assemble products from parts which might require sub-assembly from another set of suppliers. Over to that, there is the logistics part involved-does your manufacturer deliver the products to your warehouses, increasing your inventory or does it deliver the products to your customers’ doorsteps, like in the case of Apple. Apple’s manufacturers deliver assembled products directly to its customers, which reduces inventory costs. In this logistics part of Apple’s supply chain, no Apple employee comes in contact with a customer’s product at any of the steps in the delivery process!

Increased competition: This global scale supply chain also brings with itself opportunities for competitors. To gain strategic and competitive advantage, there is no limit to the opportunities companies can grab. Companies like Apple reduce the number of suppliers and increase competition amongst its suppliers to get the best quality and most cost effective parts. But it also brings along a sense of skepticism with it: will the supplier be able to provide the volume required or change the volume according to the demand? will the supplier be able to incorporate and adapt to necessary changes in the process quickly? will there be a synergy in the supply chain? will there be a traceable and accurate and faster flow of data through the supply chain?

Hence, in this era of extremely complex supply chain networks, finding the right balance and mix of stakeholders who can help mitigate risks is extremely necessary. I think, in the end, how much control an organisation has over its supply chain and how much aligned its suppliers' goals are with its own goals will determine the trajectory of that organisation.


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