Integration: The Key to Global Success
Senior executives know they must view their global operations in a new light, according to research from Accenture. But their actions do not always match their awareness. Few have implemented the integrated global operations needed to penetrate emerging markets, beat new competitors in home markets, and boost productivity and top-line growth. The insights offered here can get them moving in the right direction.
By Jaume Ferrer, Johan Karlberg, and Jamie Hintlian -- Supply Chain Management Review, 3/1/2007
The headlines spoke volumes: “Chiron vaccine in doubt for 2005.” “Dole sees sharply lower earnings.” “PlayStation 3 shortages predicted, Sony stock sinks.”
Chiron's write-off of $90 million worth of flu vaccine inventory created havoc for the U.S. health-care system in 2005. Dole's loss of 40,000 acres of plantations to hurricane damage—about 25 percent of its global banana production—brought down its revenue that year. And expectations of major component shortages recently cut into projections for Sony's sales of its PlayStation 3 game console, punishing its stock by several percent.
All three cases demonstrate the consequences of failing to mitigate supply chain risk. And all three hint at global corporations' persistent difficulties with developing and managing operating models that can help balance the rewards of doing business globally with the risks of doing so.
Recent research by Accenture (see “About the Research” sidebar on page 30) shows that few corporations in the mature economies of North America, the European Union, and Japan have implemented integrated global-operations strategies and capabilities. Yet they say they need these strategies and capabilities in order to penetrate emerging markets, fend off new competitors, and boost productivity and top-line growth while taking advantage of low-cost sourcing and manufacturing opportunities.
Most companies recognize the importance of effective global operations—which Accenture defines as the sourcing, manufacturing, distributing, and supporting of products and services globally. In fact, nearly 90 percent of survey respondents say that their companies have experienced some impact in the past year because of poorly designed or executed global operations. Nearly half of the executives surveyed blame a poorly designed or executed global operations strategy for their companies' failure to grow share in important new markets, meet time-to-market objectives for new products, and use emerging markets for cost reduction.
To make today's global supply chains successful, companies will need to take a holistic approach to a global operations model—one that brings together the worlds of product, market growth, and operations strategy. It is not a simple approach. But it is a rewarding and necessary one where, for many, survival may be at stake.
Global Operations Then and Now
Until recently, the prevailing view of global operations has been that it is synonymous with international trade. This view is rooted in the traditional transaction-oriented world of imports and exports. In fact, there really have been two views. The supply-side view has focused on factors such as cost data on the cheapest suppliers and the proficiency in outsourcing to such suppliers. On the demand side, global operations have generally implied multinational corporate structures—regional offices across the world, often selling the same products in foreign markets. The two views have rarely converged. In fact some have confronted the complexities of managing a multinational enterprise by giving even greater autonomy to regional offices as opposed to taking a more integrated approach to supply and demand management.
Today, global operations are about the two views being brought together in a holistic way at regular intervals. The global operations discipline—and it should be thought of as a discipline—covers a range of capabilities that must be optimized globally. The capabilities include the manufacturing and distribution networks, sales and operations planning (S&OP) processes, the after-sales operations, new product and market introductions, global trade and finance activities, risk-mitigation functions, operational-excellence development, and more.
Accenture has observed that a subset of global players—true high-performance businesses—have laid down many of the foundations for global operations mastery.¹ They are concurrently developing and implementing new supply chain strategies to address new markets and tap into new sources of supply. For example, to effectively source materials and/or finished goods from low-cost countries, high performers adopt streamlined, end-to-end supply chains. These supply chains provide cost savings while satisfying quality objectives, minimizing in-transit inventory, and meeting service criteria and new product time-to-market goals in mature markets. To tap emerging markets, these high-performance businesses recognize the value of supply chain strategies that relate to product portfolio, channel management, make-or-buy considerations, contract logistics, and corporate and tax compliance.
The Implementation Gap
The characteristics of the top performers are not lost on executives at most other global companies. Nor are those business leaders blind to the cost and revenue drivers behind the trend toward increased globalization. On the demand side, they are aware of the increasingly attractive markets in emerging economies. On the supply side, they understand the continuing opportunities to profit from the low cost of labor and materials in some parts of the world.
That awareness is evident in executives' responses to Accenture's recent global operations survey. The percentage of revenue their companies generated from outside of their home markets increased from 27 percent three years ago to 34 percent today, and it is expected to grow to 38 percent within three years. Similarly, these companies reported record increases in the volumes of raw, semi-finished, and finished goods they are sourcing from outside of their home markets—from 33 percent in 2003 to an anticipated 46 percent by 2009.
Executives were unequivocal about the global operations imperative. The Accenture survey found that more than 85 percent of respondents view global operations as critical, and everyone indicated, to a greater or lesser degree, that global operations would be central to their companies' business strategies in 2009. (Fully 56 percent declared that such operations would be “extremely likely” to be at the heart of those strategies.)
Yet few say they are on target to develop the capabilities that all respondents admit are critical. Just one in nine executives in the Americas and a mere 3 percent of European business leaders said that they were on target. There are significant structural reasons why so few companies are achieving satisfactory results. The research confirms what we've been seeing across all industries and around the world: For most companies, establishing a global footprint has meant working through functional or regional silos rather than taking an integrated, global approach that balances highly efficient supply networks (vendors, plants, distribution centers, and optimal product flows) with market-making capabilities such as new product development, sales and operations planning, and product lifecycle management. Most organizations are still hobbling along with fragmented operations that lack sufficient sourcing and sales leverage across markets.
Understanding Risks and Consequences
Imagine that a company decides to manufacture in China. The CEO assigns the task to a manufacturing vice president, and within two years, the company has a plant up and running in Guangdong. But our hypothetical company has no overall end-to-end supply chain capability to account for the fact that its lead times have increased by four weeks. This, in turn, has an impact on how the company sells its products, takes orders, plans distribution, sizes warehousing, and manages inbound and outbound logistics throughout the global markets being served by the Chinese plant.
In short, although the company has lowered its product costs, it has increased its supply chain risk and possibly raised its total cost of ownership—taking into account the impact on lost sales. Indeed, Accenture research confirms that managing risk is now at the top of the agenda for CEOs. (See Exhibit 1.)
Accenture places risk in global operations into three buckets: uncontrollable (such as geopolitical instability or natural disasters), somewhat controllable (volatility of fuel prices, for example), and controllable (for instance, forecasting accuracy or the performance of supply chain partners). The alarming finding is that the more controllable factors constitute the greatest sources of disruption. Up to 35 percent of respondents report being impacted by natural disasters, and 20 percent by geopolitical turmoil. But 38 percent indicate they have felt the effects of their supply chain partners' poor performance, and 33 percent have been hurt by logistics complexity, for instance. (See Exhibit 2.)
The consequences of failing to manage those risks are costly indeed. Supply chain disruptions create companywide financial whiplash. On average, operating income dropped by 107 percent when supply chains were interrupted. At the same time, return on sales fell 114 percent, and return on assets sagged by 93 percent, according to a leading academic study.² Sales growth came in 7 percent lower, while overall costs grew by 11 percent and inventories swelled by 14 percent.
Although few companies have mastered the management of risk in global operations, many are trying. For example, more than 60 percent of the executives polled in Accenture's recent global operations survey indicated that their organizations are manufacturing locally and globally and that they are using contingent suppliers and/or logistics providers. Half said they are intentionally establishing a geographically distributed supply base, and more than half cited increases in inventories and safety stock. Furthermore, 49 percent claimed to have a formal supply chain risk management program in place already.
The Importance of an Integrated Model
Companies that run a collection of international businesses cannot hope to achieve high performance today without a well-designed, integrated operating model. This operating model should tie together research and development (R&D) and time-to-market activities, sales and operations planning, order management, global logistics, sourcing and procurement, and manufacturing. This does not necessarily mean that the global leaders have centralized those functions. It simply means that they have thought them out carefully in terms of supporting the business objectives associated with each product line. Subsequently, they also have assigned roles and responsibilities to the global, regional, and local levels.
Many companies take a country-based approach to assigning responsibility for sourcing, manufacturing, and selling. But creating a well-oiled global operating model with adequate degrees of responsibility and capability at all levels—global and regional as well as country—might require country or regional managers to surrender specific responsibilities to a higher level. This often entails change-management challenges.
Defining the operations model requires careful consideration of trade-offs. One trade-off analysis might determine that a heavy emphasis on cost cutting would jeopardize other objectives. A different trade-off analysis might weigh R&D concerns against new product introduction issues. For instance, will a centralized R&D model be capable of delivering innovative products to markets as diverse as China, India, and Brazil? Obviously, new markets require differentiated and often original product and channel strategies. In this context, R&D networks offer the possibility of market focus and global leverage.
The Value of Adaptability
Accenture has found that at leading companies business models constantly evolve to adapt to ever-shifting market needs. Leading companies know that if they cannot adapt, they will be eclipsed by competitors who can. They also understand that they cannot think in monolithic terms about operating models. Multiple models can exist concurrently within an industry and even within a company. Exhibit 3 shows different operating models arrayed against the demand/supply complexity axis.
The adaptability point is an important one. The right blend of operating models is a function of the degrees of demand complexity and supply complexity. Among the criteria for defining demand complexity are the levels of product differentiation and assortment, the lifecycle or risk of obsolescence of the product portfolio, and the degree of required customization. The criteria for defining supply complexity include factors such as production lead times, intricacy of bill-of-materials, average lot sizes or production runs, and relevant cost drivers—for example, scale, labor requirements and skill levels, and enabling technology.
In fashion, for example, many products involve wide product ranges, short lifecycles, demand that is hard to predict, and complex, multi-tiered supply chains. In response, some branded apparel manufacturers set up customer-responsive supply chains that not only minimize stockouts and markdowns but also capture labor savings by sourcing from near-shore (versus offshore), low-cost countries. Conversely, some other fashion products (as well as many electronics and industrial products) have long runs and relatively stable and predictable demand that enable makers to source sophisticated components from places like China, where costs are low. (See the sidebar “Zara Shows How.”)
One of the world's leading leather furniture makers, for its part, has blended two key operating models to suit its customer segmentation. During the 1990s, the company recognized the importance of developing offshore manufacturing capabilities to support its most cost-competitive markets. It established new factories in China, South America, and Eastern Europe. Those sites make the company's mid-range products, while its facilities in southern Italy build the high-end furniture with its “Made in Italy” label. In that way, the furniture maker has been able to maintain leading positions in its markets, fending off strong competition from China and coping with euro/dollar currency fluctuations. The furniture maker understood that China and other emerging countries not only provide opportunities for low-cost manufacturing but also represent huge new markets. In China, where the “Made in Italy” label appeals to well-off consumers, it has opened several shops selling its prestige brand.
Another example of adaptability can be found in industries that serve mature or highly customized market segments, which are often sensitive to shortages in technical and specialized expertise. The solution to this problem may involve creating supply clusters that minimize uncertainty by pooling R&D and production talent. This approach has been particularly successful in Europe (for example, machine-tool and design-sensitive production clusters in Italy, Spain, and Northern Europe). Some companies have combined this sophistication (onshore industry clusters) with economical labor approaches (offshore sourcing of labor-intensive components), thus obtaining the best of both worlds. Examples include the use of Balkan countries by Italian manufacturers, Morocco by Spanish manufacturers, and the Baltic states by Nordic manufacturers. We are also seeing the emergence of similar capability clusters in China.
Nokia is a good case in point. It sells to highly customized market segments with short lifecycles. And it relies on frequent and rapid product introductions supported by a global supply chain that gets high marks for flexibility and efficiency.
The mobile phone manufacturer competes in an especially dynamic market. Its overall market base is growing in volume. The pace of new product introductions is accelerating, and the market continues to segment as new subscribers emerge in developing countries and as existing users replace their phones. Yet cost pressures are increasing.
The company implemented a global supply web in which an information hub links suppliers and plants, supporting vendor-managed inventory and collaborative planning. It deploys rapid-response manufacturing; its nine plants can switch among product lines in as little as 10 minutes. Those factories tend to be grouped in clusters serving one of three global regions—Europe, the Americas, and Asia—semi-independently. The company also leverages quick-ship logistics, often exceeding customer expectations regarding quantities and delivery schedules.
The company benefits from aggressive inventory controls with minimal material stocks and from handset production that is well matched to demand. It also is a worldwide cost leader, as its costs are in line with those of emerging Chinese producers. The operating model has helped Nokia maintain its reputation as a strong brand with robust operating margins.
Hallmarks of High Performers
So in aggregate, how do companies such as Nokia and Zara achieve mastery in their global supply chain operations? Accenture has observed that they adhere tightly to the following eight disciplines:
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Clearly articulate customer requirements for product, channel, and services.
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Understand and specify landed-cost targets that incorporate cost of goods sold, logistics requirements, quality management issues, obsolescence, lost sales due to poor service, and time-to-market considerations.
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Develop global operations footprints that incorporate product development; sourcing; manufacturing; transportation; storage; sales and operations planning; and the provision of after-sale services, networks, and capabilities.
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Design information flows to help ensure accurate, real-time visibility across the supply chain.
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Create organizational models that foster a global operational culture with aligned metrics, skills, and behaviors across geographic boundaries and organizations.
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Ensure a financial management capability to track and challenge operational effectiveness.
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Identify and manage risks and uncertainty across increasingly complex supply chains.
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Build sourcing, manufacturing, and distribution capabilities that can react rapidly to changing customer demographics and characteristics.
Clearly, each of those disciplines could form the basis of a series of articles and conference reports. On the face of it, the sheer complexity of the challenge is a deterrent to the action required to become a global operations leader. But Accenture's recent survey uncovered good news: Executives are already prioritizing the capabilities required. (See Exhibit 4.) They place the highest importance on tight links with customers (and suppliers) to obtain supply (and demand) visibility. Nearly 70 percent of respondents identified those links as crucial—and cited integration of processes with low-cost-country suppliers as their least critical issue.
Respondents also had a good sense of which capabilities are most difficult to achieve. More than 45 percent agreed that it is extremely tough to build a global supply chain network that achieves simultaneous objectives for quality, cost, and time-to-market. Further, 42 percent cited the challenge of protecting intellectual property in emerging markets. Establishing tight links with customers and suppliers to obtain supply and demand visibility came close behind. The capabilities that executives felt they could handle more easily: logistics partnerships that deliver a global footprint as well as effective supplier recruitment, certification, and alignment programs.
Several of those core capabilities are heavily reliant on effective tools and methodologies. For example, pipeline visibility is necessary for creating meaningful links with suppliers and customers and for creating rigorous processes such as S&OP. This visibility depends largely on good decision-support technology. Without those technology tools, supply chain optimization becomes guesswork, not management.
Accenture thinks of the enabling technology in terms of the three core functions that it addresses:
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Product-flow visibility, which calls for real-time information, information presented based on user need, and an ability to re-plan and re-direct product flow.
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Event management, requiring forecast events, real-time information on actual events, proactive notification of failures, and information that goes to those who need it.
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Performance management, which demands quantitative performance data (current and forecast), performance accountability, and continuous performance-improvement opportunities.
Action Needs to Follow Awareness
Globalization really has made the world “flat”³—and global leaders such as Nokia and Zara have made global operations excellence a “C-suite” priority. They are under no illusions that their efforts have a finite end point; they know that global operations excellence is a journey. They also understand that there is no one-size-fits-all approach; adopting a global operations strategy will always be driven by the product's supply and demand complexity.
But the Nokias and Zaras of the world have far less to worry about than most global companies. The companies that are in for a rough time are those attempting to penetrate new markets without redesigning their product portfolio and without rethinking channel approaches, make-or-buy strategies, and back-office capabilities. So too are the organizations that unwittingly jeopardize time-to-market goals and customer-service effectiveness when they focus too tightly on taking advantage of production in low-cost countries.
At the very least, global organizations should be working to identify and manage their controllable risks. At best, they should have active and advanced plans for bringing together market growth and operations strategies in a single end-to-end exercise. We hope that this article has helped raise awareness on the dimensions of a global operating model. But awareness is only a start. The companies that move quickly and with determination will be those that make the best of both worlds—existing and emerging markets—and do so before their competitors do.
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