The Supply Chain in 2008
Sean Murphy, Associate Editor -- Supply Chain Management Review, 1/2/2008 12:14:00 PM
Supply chain managers had big challenges in 2007, and there’s no sign of that letting up next year. Topping the list is global sourcing. The mandate here will be to find not just the lowest-cost producer, but the source that makes most sense for the overall business strategy.Technology will bring its own set of challenges next year as well. Supply chain managers will have to learn how to leverage the emerging Software as a Service and no matter where their plants are located, they will be looking to cut costs ever further, which will lead to more outsourcing of data management and less in-house software management.
The RFID trend will continue to gain momentum, too, as the technology finally makes it into warehouses, albeit in limited fashion.
The global trend of “going green,” or working to minimize the impact of industrialization on the environment, will also be picking up speed. Companies are going to feel pressure to not only focus more on their impact on Mother Earth, but also to prove their commitment to a cleaner operation.
Here’s a closer look at each of those key trends and their potential implications for supply chain professionals.
Shifting Sourcing Strategy
The state of the economy worldwide—likely influenced by higher oil prices and the bursting of the housing bubble—will be a major factor in many supply chain-related decisions in 2008. For one thing, a looming economic crisis may strongly affect a company’s sourcing philosophy, according to Robert M. Monczka, a professor at the W. P. Carey School of Business at Arizona State University.
Right now there is a “tug of war” between two camps representing two schools of thought. First, a company can opt for a traditional approach, simply demanding the best price from a supplier or seeking another supplier. The other approach is more collaborative. Instead of cutting a poorly-performing supplier loose, many companies choose to work with the supplier, sometimes even on the design level, to make the relationship work more smoothly and efficiently.
If the global economy deteriorates, Monczka says, the corporate world will become an increasingly polarized place, with companies being forced into one of the two camps. “If you’re having a recession, then companies will have to make a choice,” he says, and that choice “is going to tell a lot about the firms to their suppliers.”
Private equity firms may play a role in that decision, too. Any firm that owns a controlling interest in a company may strongly influence that company to adopt a strict, low-cost sourcing approach.
Regardless of the economy, one trend that will not change is the attraction of outsourcing to low-cost countries (Exhibit 1 shows how much companies have spent globally, and projects how much they will be spending by 2010.) China will remain a predominant sourcing location in the world, says Monczka, but they will no longer be alone at the top. Countries like India and Vietnam, along with certain regions like South America and possibly parts of Africa will slowly gain ground. “More firms are looking for sourcing options in countries other than China,” Monczka says.
No matter what country is under consideration, the process of global sourcing will increase in complexity. Gone are the days when all a supply chain manager needed to worry about was the cost of labor, says Monczka.
Now, companies need to be thinking about factors such as taxes, import/export fees, currency exchange rates, and overall “quality issues” such as product safety and contamination. The recent pet food and toy recalls plaguing China are a stark reminder that the “little things” that usually weren’t even on a supply chain manager’s radar are becoming too important to ignore.
Supply chain managers also have to pay more attention to sustainability. Leaders in many low-cost countries are now voicing concerns about the impact of outside investments on their country. Everything from economic development to adverse environmental impact will be on the front burner now, according to Craig Carter, an associate professor in the managerial sciences department at the University of Nevada at Reno.
Most of the popular destinations for outsourcing, including China, India, and many southeast Asian countries, are setting regulations to protect their interests. In fact, a number have chosen to become members of the World Trade Organization in order to give teeth to their demands. “They’re putting pressure on those companies to make sure their first or even second-tier suppliers are performing well or appropriately,” Carter says.
This has put on alert companies looking for native third-party sourcing services in foreign countries, requiring them to place more importance on independent audits of those service providers. Supply chain managers want to make sure their companies are not inadvertently financing a sweat shop.
But the audit process can get expensive and redundant. According to Carter, if 10 companies are using the same service provider in, say, India, there’s no need to perform 10 separate independent audits on that one provider that will all produce the same results.
This reality will be the basis of collaborative efforts to share audit reports between corporations to save money and time. Carter says such efforts are already beginning in Europe with the Business Social Compliance Initiative. A product of the Brussels-based Foreign Trade Association, the initiative’s goal is “The improvement of social compliance in all supplier countries and for all consumer goods,” according to the group’s Web site.
Carter says that the corporate community should expect to see more collaborative groups like this emerging in 2008 and beyond, as the number of companies outsourcing to foreign countries grows.
Emerging Technologies
When asked about the latest trend in supply chain technology in 2008, experts have four words: Software as a Service. The idea of a company hosting its data, and the applications to process that data, on a third-party’s server for a fee, instead of configuring and maintaining it in-house, has lead to a blossoming industry that is expected to become even more popular (Exhibit 2 shows Software as a Service revenue growth rates, both current and projected, compared to other revenue sources.)
Corporations of all sizes can benefit from using software as a service, according to John Fontanella, research vice president at AMR Research. Even larger companies that can afford servers and IT personnel to run things in-house are looking to third-party hosting. More and more corporations now view the hiring of technicians with limited skills to do little more than maintain a system in-house as a poor investment, Fontanella says.
Software as a service will also gain acceptance in global markets, says Jane Barrett, research director of AMR’s value chain strategies team. As the competition globally heats up and the benefits of software hosting become clearer, supply chain managers are starting to get over their fears of giving up their sensitive data to an outside source. “As companies struggle to find IT resources, it’s a nice alternative,” Barrett says.
Another growing trend will be the use of software tools for simulations and “what if” analysis. More comprehensive software, Barrett says, will allow companies to do more than just guess what results critical decisions will bring. Until recently, simulation and analysis software could only go over older data supplied by the company, forcing a hindsighted, Monday-morning-quarterback approach to supply chain analysis.
Now, Barrett says, analysis software can seamlessly scan data from a company’s current system, in real time, making for more accurate results. The current generation of most software, she says, can even do multiple “what if” analyses at once. The programs are, in Barrett’s words, “almost like supercharged spreadsheets that are sitting on disparate systems.”
On the hardware side, RFID will continue to grow in popularity, with potential for item-level tagging in some industries. “You’ll see a slow, steady acceptance of RFID in the warehouse,” AMR’s Fontanella says, adding that warehouse managers will most likely use the tags for automating certain processes, as well as to track totes and other containers.
There will be tagging on the item level in the shoe and apparel industry, Fontanella says, but beyond that item-level tagging is only likely on larger or more expensive items, such as those found in the aerospace and biotech industries, Fontanella says.
So don’t look for RFID tags on candy bars. Right now, conventional wisdom dictates that tags are still more expensive than bar codes on small, cheap consumer items, and Fontanella says that won’t change anytime soon. “It’s tough for something that costs a quarter or 50 cents to justify the use of a five-cent tag,” he says.
Going Green
The “Green” movement, which has gained momentum in the past year, will continue to affect supply chains worldwide in 2008. In particular, companies will be paying attention to the impact of their operations on the environment, and how that will influence their bottom line. Technology and certification programs will help supply chain managers find new ways to be more eco-friendly.
Companies outsourcing to foreign countries will want to pay particular attention to how green their supply chain is during the coming year, according to Andrea Larson, associate professor at the Darden Graduate School of Business Administration in Charlottesville, Va. The pet food and toy recalls issued on products from China in 2007 prove that developing countries have a long way to go toward providing safe products. Larson says the recalls also show that supply chain managers for the companies outsourcing to those foreign countries need to better monitor the manufacturing process as well.
Companies are going to have to start looking at what goes into their products, from raw materials like wood, fiber and alloys to adhesives, plastic additives, and other chemicals — details that supply chain managers have often glossed over. “That’s not going to be optional much longer,” Larson says.
Already, Larson says, companies in Europe have been denied permission to import certain products because some of the components did not comply with the European Union’s Directive on the Restriction of certain Hazardous Substances, otherwise known as RoHS. Similar laws are expected to be enacted in other parts of the world soon. If companies don’t pay more attention, there will be clashes with authorities over regulations.
The food and toy industries will clearly be focusing on carcinogens and other contaminants in 2008. Reducing the levels of toxic elements will not only make products safer, but also prevent another embarrassing and costly wave of recalls. “Having no toxicity is probably unrealistic. It’s an ideal you strive toward,” Larson says.
On the technology side, firms that build network design and supply chain analysis software will be making environmental sustainability a key part of their offerings. “It really starts at the supply chain network design stage,” says Adrian Gonzalez, Logistics Executive Council Director for ARC Advisory Group.
Expected new software features will include analysis of a company’s carbon footprint, or how much greenhouse gas the company produces annually. Logistics service providers and consultants will also consider carbon footprints more, Gonzalez says. This may put more emphasis on the need to have more universal and detailed standards for measuring a carbon footprint. Right now, according to Gonzalez, such standards don’t really exist.
Companies are going to get more serious about transportation next year, too. Even if global warming wasn’t an issue, companies will be looking for more efficient trucking with oil prices flirting with $100 a barrel. “The fact that you’re optimizing your transportation network means you’ll have fewer trucks and fewer ships traveling fewer miles and putting out fewer emissions,” says Gonzalez.
Companies will also turn more and more to government-funded and nonprofit green certification programs, Gonzalez says. The U. S. Green Building Council, for example, is a nonprofit group that offers a Leadership in Energy and Environmental Design (LEED) certification to warehouses and stores that use everything from solar panel-driven power supplies to fluorescent lighting to save energy. While certification is entirely voluntary, many corporations are revamping existing buildings to get that certification.
In addition, motor carriers are signing up for Smartway, a program created by the U. S. Environmental Protection Agency which requires trucking companies to become more eco-friendly, using biofuel or even adopting entirely new fleets of more aerodynamic trucks. “Looking at the price of fuel, some of these things make a lot of sense,” Gonzalez says.
Companies have a variety of reasons for getting on the green bandwagon. Some really do want to be more earth-friendly, while others are using the programs to find ways to cut costs. Still others are doing it in order to market themselves to new clients as being environmentally conscious. Whatever the reason, Gonzalez says “going green” is a trend that will continue.
Looking Ahead
Supply chain managers seeking success in 2008 will likely be expanding their outsourcing operations next year, but choosing how to do that, however, is going to become much more complicated. The days of just looking for the cheapest sources to build the widgets of the month are over.
Now, supply chain managers have to take off the blinders and look at everything their companies are doing in foreign countries. What sort of working conditions are there? What components are going into those widgets? Are toxins involved? If so, how can they be reduced?
If supply chain managers don’t get used to addressing these questions, new laws both at home and abroad will start answering the questions for them, and the solutions mandated by those laws may not be in a company’s best interests.
And when thinking about how to move products to and from those foreign countries, companies that haven’t given much thought to the environment will have to get serious about getting green.
Technology can help with these first two challenges. Software as a service and RFID, for example, can be effectively employed to meet the globalization and green challenges. But before they can be put to work, supply chain managers need to understand what this technology can and cannot do. That’s part of the supply chain education assignment for the coming year.
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