PANEL 2B Logistics and Integration into Global Supply Networks.

PANEL 2B

Logistics and Integration into Global Supply Networks

Knowledge Economy Forum IV

Logistics and Integration into Global Supply Networks

Global Industrial Context

Prof. M.J. Gregory

Institute for Manufacturing

Overview

• Industrial ideas

• Global context

• Emerging capabilities

• Working in networks

• Implications

Industrial Ideas

• Products – ARM – Microcircuit design

• Production – Zara – Fashionable clothes

• Distribution – Dell – Personal computers

• Services – Rolls-Royce – Aero-engines

• ARM designs used in 75%of

mobile phones

• Close to global customers and

OEMs

• ‘Fabless’ business model

• Substantial process

knowledge

ARM – microchipsmarketing>design>production>distribution>service

Zara - clothesmarketing>design>production>distribution>service

• Spanish clothes maker Zara

owns all production capability

• Products in own shops change

every 2 weeks

• Production can be flexed to

respond to demand

• Competitors can’t follow!

Dell – personal computers marketing>design>production>distribution>service

• Dell pioneered large scale direct selling.

• Their model allows on-line customisation of products

• Production and delivery status can be tracked by the customer

• On-line diagnostics and after sales service minimise support costs

Rolls-Royce – Aeroenginesmarketing>design>production>distribution>service

• Responding to customer needs

• Rapid growth in market share

• ‘Totalcare’ service model ~60%

of revenues

• Implications for design and

production

Innovation, Value Chain & Business Models

Innovation can occur within and between each

stage along the value chain

Marketing>Design>Production>Distribution>Service

but the stages often have different ‘owners’ and the

interfaces and interdependencies between them are

often poorly understood.

…and the context is changing rapidly

• Global demand for products is rising

• ‘Disintegration’ of stages in some value chains

• Value-adding opportunities at each stage

BUT

• Globalisation is changing industry configurations

• Industrial capabilities are evolving rapidly

USA – they say…

• Growing economy

• Strong in research and

some production

• Emphasis on education

BUT

• Falling share of

production

• Economic imbalances

Europe – they say…

• Increasingly ‘high-tech’

• Spectrum of large and

small businesses

• Good global connections

BUT

• Some countries thought

to be inflexible

• Intense competition

Japan – they say…

• Continuing strength in

production

• Capable global networks

• New investments in

local production

BUT

• Ageing population

• Rigid structures

India – they say…

• Growing capability in

software

• Highly educated population

• Growing interest in

manufacturing

BUT

• Infrastructure limited

• Production has not been a

priority

China – they say…

• Growing production

scale and capability

• Dominant position in

some products

• Growing R&D

• BUT

• Imbalance between

production and services

• Shortages of energy

Globalisation – the case of China

• China is emerging as an industrial powerhouse

• It has received massive inward investment

• Industrial development has been systematic

• ‘High-tech’ capabilities are increasing rapidly

• Growth impacts global industrial structures

Growth

0

2000

4000

6000

8000

10000

12000

14000

1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002

Average annual growth rate was morethan 10% between 1980 and 2004

Source: Chinese National Statistics Annual Report (2005)

Foreign Direct Investment

0

10

20

30

40

50

60

70

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Total FDI

Source: http://www.china.org.cn

Bill

ion

US

Dol

lars

New Workshop of the World- Pearl River Delta

• 70% of the world’s photocopiers

• 60% of the world’s microwaves

• 160,000 people in single factory for running shoes

New Workshop of the World - Yangtse River Delta

• 30% of the world’s ties

• 70% of the world’s lighters

• fastest growing car production location

Domestic appliances - Galanz

• Largest microwave

oven production base

in the world

• Annual production

capacity of 15 million

units 11,000 employees.

• Turnover $700m

• 70% of China market,

• 40% of global market.

Clothing - Meters/Bonwe

• Virtual company in Garment Industry

• Grown dramatically from a shop into a regional brand and into the leading national brand

• Over 1000 retail outlets in China

• Sales of US$250 million in 2003.

So how do they do it?

• Cheap labour

• Foreign Direct Investment

• Natural resources

But also

• Systematic development of infrastructure

• Strategic development of industries

• Increasing focus on innovation and service!

So what are the underlying patterns?

• Attraction of ‘service-oriented’ business models

• Networks a source of innovation*

• Competition increasingly between networks rather

than firms

• Increasing role of ‘contract’ production!*

...all of which require new skills and capabilities

Networked Innovation – P&G

• Entrepreneur spotted a

rotating sweet!!

• Healthcare professionals

designed the product

• Production outsourced

• Leading P&G brand Crest

distributes.

Contract Production - Hon-Hai marketing>design>production>distribution>service

• Global electronics production

capability

• Developed strongly from

component production

• Value capture through economies

of scale and flexibility

• Moving to design and service

..and is extending its scope

For example Hon-Hai’s strategy reads:

• ‘Focus on global logistic capabilities …’

• ‘Expand production capacity …’

• ‘Achieve further vertical integration …’

• ‘Maintain technologically advanced and flexible production

capabilities…’

‘… will leverage off its manufacturing expertise and

continue to move tirelessly into new areas of related

business’

and as for brand…

• We have no brand

• but, our quality is the

“brand”

• our technology is the

“brand”

• our people are the

“brand”

..and then the ODMs…

Original Design and Manufacturing businesses

• Execute the whole manufacturing cycle

• Ask you (the brand owner) if you would like some

• Sell the surplus under their own brand and

• Develop proprietary design, product and process

technologies!

QCI - Quanta computer Inc.

Established - May 1988

Market Cap - US$7B

Revenue (04) - US$ 10.14B

Employees - 25,000

Strong and diverse customer base

Modern manufacturing involves

“The full cycle from understanding markets

through R&D, product design, production, supply

and services within an economic and social

context”

and is increasingly

Global, Connected, Multi- partner, Multi-business

B&Q China

• B&Q is the leading DIY chain in

China

• It commissions designs,

outsources production,

distributes, sells and services

• These activities are orchestrated

from the UK

Implications for emerging economies

Need to

• Understand the ‘maps’, capabilities and

trajectories of key industries

• Identify points of entry – potentially via major

multinational businesses

• Anticipate local demand and changing global

context

which needs need a better understanding of

• Value creation and appropriation – which requires

knowing what it is and how it can be captured

• Partner identification and evaluation - which

requires sophisticated ‘due-diligence’

• Production ramp-up - which requires sophisticated

technical capabilities

• Management of dynamic relationships - while making

sure they don’t eat your lunch!

Conclusions

• The structures and dynamics of global industries

are changing rapidly

• Product supply chains rapidly evolving to

networks of knowledge and services

• Many opportunities to access global networks

BUT

• Visibility of capabilities & trajectories essential

• Product-service systems an emerging theme

Enterprise Logistics & Integration into Global Supply Networks

Nimish JhaveriConsultant

CARANA Corporation

World Bank Knowledge Economy Forum VIApril 2007

Overview

• The Relevance of Transport & Logistics

• Challenges

• Successes

• Considerations

Trade liberalization creates new opportunities for exporters

Industrial Country Average Import Tariffs Before and After the Uruguay Round

Source: Marcelo Paiva Abreu (2004), "Trade in manufactures: the outcome of the Uruguay Round and developing country interests"

0 . 0 % 1 0 . 0 % 2 0 . 0 % 3 0 . 0 % 4 0 . 0 % 5 0 . 0 % 6 0 . 0 % 7 0 . 0 % 8 0 . 0 %

A l l i n d u s t r i a l p r o d u c t s ( e x c l . p e t r o l e u m )

T e x t i l e s a n d c l o t h i n g

M i n e r a l p r o d u c t s

T r a n s p o r t e q u i p m e n t

F i s h a n d f i s h p r o d u c t s

L e a t h e r , r u b b e r , f o o t w e a r , t r a v e l g o o d s

C h e m i c a l s a n d p h o t o g r a p h i c s u p p l i e s

E l e c t r i c a l m a c h i n e r y

O t h e r m a n u f a c t u r e d a r t i c l e s

W o o d , p u l p , p a p e r , a n d f u r n i t u r e

N o n e l e c t r i c a l m a c h i n e r y

M e t a l s

Transportation and logistics efficiency plays a critical role in export competitiveness

Freight Costs as % of Import Value

Source: UNCTAD, “Review of Maritime Transport, 2005,” Chapter 4, based on data supplied by the IMF.

3.9%

9.1%

11.9%

9.8%

8.6%9.1%

12.3%

5.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Develo

ped

coun

tries

Develo

ping

coun

tries

Africa

Latin

Am

erica

Asia

Europ

e

Ocean

ia

Wor

ld Ave

rage

Example: Nicaraguan CoffeeManagua to Miami via Puerto Cortes

Drive Time (18%)

Border Crossing (3%)

Load & Discharge (2%)

SecurityCurfew (50%)

Productive Time (23%)

Idle Time (27%)

• Planning and scheduling inefficiencies

• Documentation errors cause delays at the border

• Lack of fleet management technologies

• Regional border customs not consistent

TRANSPORTATION UTILIZATION

0% 20% 40% 60% 80%

Banana

Cheese

Coffee (A)

Coffee (B)

Coffee (C)

Coffee (D)

Hard Cheese (A)

Beans (A)

Hard Cheese (B)

Beans (B)

Apparel (A)

Sweet Onion

Apparel (B)

Result: Logistics costs for Nicaraguan exports are competitive regionally, but not internationally

INTERNATIONAL MARKETS

REGIONAL MARKETS

Logistics Costs as Percentage Of Market Value

International averages for developed and developing countries

Impact: Curtailed access to higher value markets

Fertilizer

Bags

Smallholders

Wet Mill

ExporterImporter/Broker

Distributor

Local/MicroRoasting Company

Office Coffee Service

Consumer

Regional/National Roasting Company

Large Producer& Wet Mill

International Trader

Dry Mill Restaurant/Café’s

Retailer/SupermarketFertilizer

Bags

SmallholdersSmallholders

Wet MillWet Mill

ExporterImporter/Broker

Distributor

Local/MicroRoasting Company

Office Coffee Service

Consumer

Regional/National Roasting CompanyRegional/National Roasting Company

Large Producer& Wet Mill

International TraderInternational Trader

Dry MillDry Mill Restaurant/Café’s

Retailer/Supermarket

REGIONAL GLOBAL

Ad hoc transactions with intermediaries

Compete on price, labor

Independent operators

Long term relationships with end-customers, transportation providers and value chain partners

Compete on higher service and value

Efficient supply chain

Transport costs are just one element of logistics efficiency…

100 156

69

62

1510 Administrative

Order Processing

Inventory Carrying

Warehousing

TRANSPORT COSTS

OTHERCOSTS

MANAGE TIME, INFORMATION & PROCESS

MANAGE MOVE

… and logistics efficiency has a direct impact on trade

A 10% reduction in…

Shipping costs

Trade related processing costs

Trade related processing time

Variation in processing time

Results in a…

14.2% increase in trade




Adapted from Study of 80 countries by Hausman, Lee and Subramanian, World Bank and Stanford University, 2005

• Transportation Network Efficiency

• Logistics Infrastructure Availability

• Customs and Border Requirements

• Banking & Financial Services

• Logistics Service Intermediaries

The constraints imposed by the logistics environment varies widely by country and industry

Argentina

Kenya Brazil

Poland

Romania

BelarusUkraine

Belgium

Australia

Canada

Japan

SingaporeUnited States

Lo

gis

tics

Co

sts/

GN

P

SUPPLIER

CUSTOMER

• Efficient Transportation Networks

• Logistics Infrastructure

• Customs and Border Requirements

• Banking & Financial Services

• Logistics Service Intermediaries

Moving up the value chain requires business innovation

• Supply chain excellence

• Higher service levels

• Smaller, just in time shipments

• Shorter delivery lead times

• Global competitors with lower costs

Limitations of logistics environment

More demanding business environment

Case Study: Bulgarian Apparel Manufacturers

ASIAN PRODUCERSVOLUME ORDERS

HIGHER EFFICIENCYLOWER CAPITAL COSTS

LOWER WAGES

LOW COST PRODUCTION HIGHER VALUE DIFFERENTIATORS

SUPPLIERS

INTERNATIONAL CUSTOMER

INFRASTRUCTURE & FACILITIES

CUSTOMS & BORDER CROSSING PROCEDURES

ACCESS TO FINANCING, INSURANCE

AVAILABILITY OF TRANSPORTATION & WAREHOUSING

CAPABILITY AND CAPACITY OF INTERMEDIARIES

GOVERNMENT REGULATIONS & POLICY

BARRIERS

<Process Name>

International MoveOrder International Move Pre-shipment Domestic MovePre-Shipment Domestic Move

Containers Loaded unto

ship

Container/Truck/Van Stuffed

Equipment repositioned

Supplier produces inputs (fabric, components)

Procurement/Scheduling of T&L Services

Buyer, Buyer’s Agent of Producer

order inputs

Preparation of documentation

Buyer and Producer

Maker Deal

Inland Transport to International

Gateway

Ocean Transit

If by Sea:

Preparation of documentation for

inland move

Producer Manufactures

goods

Equipment repositioned

Delivery to Producer’s

Factory

Goods De-consolidated and consolidated at

warehouse

Container Unloaded

Customs/Inspection

at port

International Inland Transit

Border Stop #1(EU/Regional)

Border Stop #2(Regional/Bulg)

Domestic Inland Transit

If LCL:

Preparation of documentation for domestic inland

move

Customs/Inspection

Inland Transit to Producers Regional

Customs Office

Customs/Inspection at regional customs

office

If F

CL

Procurement/Scheduling of T&L Services


Container/Truck/Van

Stuffed

If LCL:

Inland Transit to Warehouse

Goods De-consolidated and consolidated at

warehouse

Customs clearance/inspection


IF F

CL

Inland Transport to International

Gateway

If by Land, or Land/Sea via Regional Port

Border Stop #1(Bulg./Regional)

Border Stop #2(Regional/EU)

Containers Loaded unto

ship or airplane

If Sea via Bulg. Port, or Air


International Inland Transit

If Land/Sea via Reg. Port


Containers Loaded unto ship

International Air or Ocean Transit


Container Unloaded at Destination

If by Land, or Land/Sea via Regional Port

Inland distribution to buyer’s warehouse or

retail outlet


Arrival at Destination

Export of Finished GoodsImport of Inputs

• 50+ Steps (lead participant)

• 20 – 40% of value of delivered product

• Up to 50% local/regional origin

• Few long term contracts

• Efficiency & price before service

• Low visibility to total costs

Bulgarian Apparel Manufacturers:Transport & Logistics Process

Bulgarian Apparel Manufacturers:Logistics innovation captures greater value

SUBCONTRACT CUT MAKE TRIM FULL PACKAGEBRAND

MANAGEMENT

None

None

QC, Packaging

Subcontractors

Buyer

QC, PackagingConsolidation

Customs

SubcontractorsDomestic suppliers

Buyer International supplier

QC, PackagingConsolidationWarehousing

Customs

SubcontractorsDomestic suppliers

International suppliersDistribution centers

International retailers

QC, PackagingConsolidationWarehousing

CustomsDistribution

DOMESTIC TRANSPORT

INTER-NATIONAL

TRANSPORT

SERVICES

Increasing Importance of Logistics

Bulgarian Apparel Manufacturers:Exporters increase value through better logistics

Transferring Knowledge and Technology for ChangeEnterprise Level Challenges

• Enterprise culture– High dependence on few senior managers– Tactical, conservative mindset– Confident, entrepreneurial

• Available Resources– Limited investment in plant, equipment, IT– Human resources

• “Don’t know what you don’t know”– Limited exposure to leading management solutions– Limited demand for new knowledge

Transferring Knowledge and Technology for ChangeApproaches we have successfully applied

Awareness Building

Publications

1-day, industry specific seminars

Seminars for educators

Case for Change

Supply chain benchmarking

Operations modeling & simulations

Value chain analysis

Education & Engagement

Supply Chain Leadership Programs for executives

Guided implementation of change projects

Practitioner network

Industry Resources

Customer partnershipsLogistics intermediaries

Supplier integrationIT vendors

Funding

EU FundsPPP

Venture Capital

Local Proof Points

Industry specific success stories

Quantification of benefits

Local “champions”

• Lost sales, obsolescence, discounts

• High Inventories & cash requirements

184

112

0

50

100

150

200

TIME CASHTIME CASH

Case: Bulgarian exporter of industrial equipmentValue Chain Improvement

SUPPLIERSSUB

ASSEMBLYASSEMBLY DISTRIBUTION CUSTOMERS

Value Chain

• € 25 million in 49 countries

• Seasonal products, 1000’s models

Case: Bulgarian exporter of industrial equipmentValue Chain Improvement

SUPPLIERSSUB

ASSEMBLYASSEMBLY DISTRIBUTION CUSTOMERS

NEW PARTNER

Reduced inventory by 2% of sales

Increased sales by 4%

• Manufacturing- Outsourced low tech- Increased capacity- VMI & delayed assembly

• Product Design & Engineering

Actions

• Procurement- Reduced suppliers- Collaborative planning, QC

184

112

140

40

0

50

100

150

200

TIME CASHTIME CASH

Reduced cash requirements

Case: Argentinean fruit producers Logistics Cooperative

SITUATION

• 1997 – fruit producers in Rio Negro Valley need to lower prices, increase delivered quality

• Transportation infrastructure not adequate – both in terms of cold chain, and land transport services

IMPLICATION / CHALLENGES

• Individual producers not able to negotiate on volume

• High loss rates in produce during land transport (16yr fleet age avg.)

• Unable to meet increasingly rigorous quality demands by market

SOLUTION SELECTED

• 24 producers (75% of Exports) - Logistics Management Company

• 65% ownership of Port Terminal with Port Operator Partner

• Joint negotiations on land and maritime transport costs, rigorous infrastructure improvement

RESULTS

• Price negotiations with trucking companies – profitable service, reduced damage

• Consolidated shipping freight rates• Efficient T&L costs, compete on

supply and quality, traceability

Final Thoughts

• Existing logistics infrastructure impacts the competitiveness of every export product

• Export competitiveness can be improved by reducing logistics cost, time, and uncertainty

• Assess logistics infrastructure challenges and identify ways to enhance

• Knowledge & know-how

• Supply chain partnerships

• Laws & Regulations

• Customs & border crossings

• Industry structure

• Physical Infrastructure

• Access to capital

• Trade procedures

Questions?

Judge Business School

Creating World-Class Supply ChainsCreating World-Class Supply Chains

Matthias Holweg Ph.D.Judge Business School

University of Cambridge

Email: [email protected]

World Bank - Knowledge Economy Forum VI

Cambridge, April 17 2007

Outline

Supply chain mangement Why is it important? Features of high-performing supply chains The role of technology

The automotive industry Global trends The case of Slovakia

Conclusions Policy recommendations

Why do we talk about it?Traditional thinking: competition is driven by the 4P’s

Today: supply chain capabilities determine competitiveness!

Wal-Mart versus K-Mart

Compaq/HP versus Dell

A final product is not the sole achievement of the OEM

Customer experience is determined by supply chain: quality, cost, delivery

Significant proportion of value sourced from suppliers!

Supply chains are connected systems:

Competitiveness of one tier is a function of the supply and distribution functions, i.e.

surrounding tiers.

“Value Chains compete, not individual companies!”

(Christopher 1992)

“Islands of Excellence” or Optimal Supply Chain?

0

50

100

Raw

Mat

eria

l

Bo

ug

ht-

in P

arts

In-h

ou

se P

arts

Pre

-Ass

emb

ly W

IP

Ass

emb

ly W

IP

Fin

ish

ed P

arts

Inb

ou

nd

Tra

nsi

t

On

-sit

e P

arts

Ass

emb

ly W

IP

Dis

pat

ch

Ou

tbo

un

d T

ran

sit

Dis

trib

uti

on

Cu

sto

mer

Da

ys

of

Inv

en

tory

Max

Average

Min

Source: Holweg and Pil, “The Second Century”, MIT Press 2004

Raw Materials and components

21%

Raw Materials and components

21%

AssemblyPlant6%

AssemblyPlant6%

Distribution

73%

Distribution

73%

Features of High-performing Supply Chains

1. Long-term collaborative relationships

Trust and commitment, respect of the right of mutual existence

2. Single or dual sourcing

Component volume is adjusted according to performance Constant positive pressure by dual sourcing

3. Improvement

Collaboration with suppliers on operational improvement; example: Toyota’s Supplier Support Center (TSSC) in Kentucky

Annual cost reductions are realised in collaboration, not isolation

4. Operations and logistics

Level production schedules to avoid spikes in the supply chain Milk-round delivery systems that can handle mixed-load, small-lot

deliveries Disciplined system of JIT delivery windows at the plant; suppliers deliver

only what is needed, even if this compromises load efficiency in transport

The Role of Technology

The ‘Holy Grail’ in curing supply chain ills?

Example: ‘Bullwhip problem’

Demand visibility is key: RFID / AutoID, EDI, EDIFACT, EPOS, CPFR

…yet they only work if the planning systems use this information!

Example: transaction costs in automotive

COVISINT (est. 2000) and the B2B/e-commerce revolution

Predicted savings of $1,000 per vehicle in transaction costs!

The Role of Technology

Technology alone is not a sufficient, it can assist problem solving

If the underlying processes are not capable, technology will fail

It is a means to an end, not an end in itself!

Outline




Production by Region 1975-2005

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

197

5

198

1

198

3

198

5

198

7

198

9

199

1

199

3

199

5

199

7

199

9

200

1

200

3

200

5

Ann

ual

Ca

r P

rodu

ctio

n in

Uni

ts

North America Latin America W Europe E Europe

Russia Japan S Korea China

India Rest of Asia S Africa Other

Auto Industry: Major Trends

1. Overall global growth by 1.85% CAGR since 1975

2. Substitution of production with adjacent low-cost regions

3. Major growth of production in China (2000-05: x5.2), and India (2000-05: x1.7), - 4% in Western Europe

Auto industry is regionalising, not globalising!

What does this mean for the dynamics of competition?

Competing in a global, distributed industry: Future competition on cost is a futile battle.. Rely on quality? Brand? Design? Proximity to customer?

Continuous Window of Opportunity

Time

ProductFeatures

Established Player

MarketDemand

New Entrant

Source: adapted from Christensen (1997)

Any labour cost advantage is temporary!Any labour cost advantage is temporary!

The Auto Industry in Emerging Countries

Automotive industry very attractive Job multiplier of 5-7 for every assembly job Technology transfer

Many subsidies, but questions of long-term viability!

The case of Slovakia’s auto industry VW Bratislava, PSA Trnava, Kia Zilina, growing cluster CZ, PL, HU 5m inhabitants, c.900k production, domestic sales of <80k units

Challenges Logistics: lead-time to customer, reliability of supply Labour shortage, migration and rising compensation

Migration further east is inevitable Domestic demand in Russia, growing labour cost differential

Outline




Conclusion: Supply Chain ‘Enemies’

Common logic behind all SCM initiatives!

Inventory & delays

Time worsens ‘swing’ of amplification

Decision delays require stock

Safety stock decisions send false signals

Unreliability or uncertainty

Any kind of uncertainty needs to be covered with inventory

Unreliable processes cause unreliable delivery

Hand-offs or decision points

Every hand-off or tier in the system bears danger of distortion!

‘Inventory is a substitute for information’

Policy Recommendations

Infrastructure is a always a concern..

…but uncertainty is a sure killer of any location decision!

Customs clearance

Currency

Regulation (labour, traffic, taxation)

Crime & bribes

Supply chains are connected systems:

Labour cost differential is only a short-term advantage

Strong need to attract suppliers, not just manufacturers!

Need to build local competencies, rather than “screw-driver factories”

Domestic demand is not essential if logistics systems work

Judge Business SchoolCentre for Competitiveness and Innovation,Judge Business School, Univ. of Cambridge http://www-innovation.jbs.cam.ac.uk

International Motor Vehicle ProgramMassachusetts Institute of Technologyhttp://imvp.mit.edu


Centre for Competitiveness and Innovation,Judge Business School, Univ. of Cambridge http://www-innovation.jbs.cam.ac.uk

International Motor Vehicle ProgramMassachusetts Institute of Technologyhttp://imvp.mit.edu


PANEL 2B Logistics and Integration into Global Supply Networks.

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Transcript of PANEL 2B Logistics and Integration into Global Supply Networks.