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 – microchips

marketing>design> production>distribution >service

•

ARM designs used in 75%of mobile phones

•

Close to global customers and OEMs

•

‘Fabless’ business model

•

Substantial process knowledge

Zara - clothes

marketing>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 – Aeroengines

marketing>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

Average annual growth rate was more than 10% between 1980 and 2004 14000 12000 10000 8000 6000 4000 2000 0 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002

Source: Chinese National Statistics Annual Report (2005)

Foreign Direct Investment

70 60 50 40 30 Total FDI 20 10 0 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Source:

http://www.china.org.cn

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 Jhaveri Consultant CARANA Corporation

World Bank Knowledge Economy Forum VI April 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

Metals Nonelectrical machinery Wood, pulp, paper, and furniture Other manufactured articles Electrical machinery Chemicals and photographic supplies Leather, rubber, footwear, travel goods Fish and fish products Transport equipment Mineral products Textiles and clothing All industrial products (excl. petroleum) 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 0.0%

Source

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

Transportation and logistics efficiency plays a critical role in export competitiveness Freight Costs as % of Import Value

14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 3.9% 9.1% 2.0% 0.0% 11.9% 9.8% 8.6% 9.1% 12.3% 5.4%

Source

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

Example: Nicaraguan Coffee Managua to Miami via Puerto Cortes

Idle Time (27%) Security TRANSPORTATION Curfew (50%) UTILIZATION Productive Time (23%) • • • • Planning and scheduling inefficiencies Documentation errors cause delays at the border Lack of fleet management technologies Regional border customs not consistent Load & Discharge (2%) Border Crossing (3%) Drive Time (18%)

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

Logistics Costs as Percentage Of Market Value Apparel (B) Sweet Onion Apparel (A) Beans (B) Hard Cheese (B) Beans (A) Hard Cheese (A) Coffee (D) Coffee (C) Coffee (B) Coffee (A) Cheese Banana 0% 20% International averages for developed and developing countries 40% 60% 80% REGIONAL MARKETS INTERNATIONAL MARKETS

Impact: Curtailed access to higher value markets

REGIONAL Ad hoc transactions with intermediaries Compete on price, labor Independent operators Regional/National Roasting Company GLOBAL 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… 69

Warehousing

100

TRANSPORT COSTS

156

OTHER COSTS

MANAGE MOVE 62 15 10

Inventory Carrying Order Processing Administrative

MANAGE TIME, INFORMATION & PROCESS

… 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 2.5% increase in trade 1.4% increase in trade 3.1% increase in trade Adapted from Study of 80 countries by Hausman, Lee and Subramanian, World Bank and Stanford University, 2005

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

Argentina Poland Kenya Brazil Romania Belarus Ukraine Belgium • Transportation Network Efficiency • Logistics Infrastructure Availability • Customs and Border Requirements • Banking & Financial Services • Logistics Service Intermediaries Australia Canada Japan United States Singapore

Moving up the value chain requires business innovation SUPPLIER Limitations of logistics environment

• Efficient Transportation Networks • Logistics Infrastructure • Customs and Border Requirements • Banking & Financial Services • Logistics Service Intermediaries

More demanding business environment

• Supply chain excellence • Higher service levels • Smaller, just in time shipments • Shorter delivery lead times • Global competitors with lower costs

CUSTOMER

Case Study: Bulgarian Apparel Manufacturers SUPPLIERS

VOLUME ORDERS HIGHER EFFICIENCY LOWER CAPITAL COSTS LOWER WAGES

ASIAN PRODUCERS BARRIERS

INFRASTRUCTURE & FACILITIES CUSTOMS & BORDER CROSSING PROCEDURES ACCESS TO FINANCING, INSURANCE AVAILABILITY OF TRANSPORTATION & WAREHOUSING CAPABILITY AND CAPACITY OF INTERMEDIARIES GOVERNMENT REGULATIONS & POLICY

INTERNATIONAL CUSTOMER LOW COST PRODUCTION



HIGHER VALUE DIFFERENTIATORS

Bulgarian Apparel Manufacturers: Transport & Logistics Process

Import of Inputs Export of Finished Goods

Pre-Shipment International Move Domestic Move Domestic Move International Move Order Pre-shipment

If by Sea:

Buyer and Producer Maker Deal Preparation of documentation Ocean Transit Domestic Inland Transit Producer Manufactures goods Inland Transport to International Gateway

If by Land, or Land/Sea via Regional Port

International Inland Transit Buyer, Buyer’s Agent of Producer order inputs • 20 – 40% of value of delivered product Supplier produces inputs (fabric, Container/Truck/ Van Stuffed Customs/ Inspection at port Preparation of documentation for domestic inland move Equipment repositioned components) • Up to 50% local/regional origin Procurement/ Inland Transport to Container Unloaded Customs/ Scheduling of Inspection International Gateway T&L Services

If by Land, or Land/Sea

Containers Loaded unto ship Preparation of documentation for inland move

via Regional Port

International Inland Transit Inland Transit to Warehouse Inland Transit to Producers Regional Customs Office Goods De • Few long term contracts warehouse Border Stop #1 (EU/Regional) Border Stop #2 (Regional/Bulg)

If LCL:

Goods De consolidated and consolidated at warehouse Procurement/ Scheduling of T&L Services Preparation of documentation Container/ Truck/Van Stuffed

If LCL: If Sea via Bulg. Port, or Air

Customs clearance/ inspection Containers Loaded unto ship or airplane Border Stop #1 (Bulg./Regional) Border Stop #2 (Regional/EU)

If Land/Sea via Reg. Port

Customs clearance/ inspection Containers Loaded unto ship International Air or Ocean Transit Preparation of documentation Arrival at Destination Customs/ • Efficiency & price before service customs office Preparation of documentation Customs clearance/ inspection • Low visibility to total costs Factory Customs clearance/ inspection Container Unloaded at Destination Inland distribution to buyer’s warehouse or retail outlet

Bulgarian Apparel Manufacturers: Logistics innovation captures greater value

Increasing Importance of Logistics

SUBCONTRACT DOMESTIC TRANSPORT INTER NATIONAL TRANSPORT SERVICES

None None QC, Packaging

CUT MAKE TRIM

Subcontractors Buyer QC, Packaging Consolidation Customs

FULL PACKAGE

Subcontractors Domestic suppliers Buyer International supplier QC, Packaging Consolidation Warehousing Customs

BRAND MANAGEMENT

Subcontractors Domestic suppliers International suppliers Distribution centers International retailers QC, Packaging Consolidation Warehousing Customs Distribution

Bulgarian Apparel Manufacturers: Exporters increase value through better logistics

Transferring Knowledge and Technology for Change Enterprise 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 Change Approaches we have successfully applied Awareness Building Publications 1-day, industry specific seminars Seminars for educators Industry Resources Customer partnerships Logistics intermediaries Supplier integration IT vendors Case for Change Supply chain benchmarking Operations modeling & simulations Value chain analysis Funding EU Funds PPP Venture Capital Education & Engagement Supply Chain Leadership Programs for executives Guided implementation of change projects Practitioner network Local Proof Points Industry specific success stories Quantification of benefits Local “champions”

Case: Bulgarian exporter of industrial equipment Value Chain Improvement

SUPPLIERS SUB ASSEMBLY ASSEMBLY DISTRIBUTION CUSTOMERS

Value Chain

•

€ 25 million in 49 countries

•

Seasonal products, 1000’s models

•

Lost sales, obsolescence, discounts

•

High Inventories & cash requirements

200 150 100 50 0 184 TIME TIME 112 CASH CASH

Case: Bulgarian exporter of industrial equipment Value Chain Improvement

SUPPLIERS SUB ASSEMBLY ASSEMBLY DISTRIBUTION CUSTOMERS NEW PARTNER

Actions

•

Procurement

-

Reduced suppliers

-

Collaborative planning, QC

•

Manufacturing

-

Outsourced low tech

-

Increased capacity VMI & delayed assembly

•

Product Design & Engineering

200

Reduced cash requirements

184 150 140 100 112 50 40 0 TIME TIME CASH CASH

Reduced inventory by 2% of sales Increased sales by 4%

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 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 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 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 • Industry structure • Physical Infrastructure • Access to capital • Trade procedures • Knowledge & know-how • Supply chain partnerships • Laws & Regulations • Customs & border crossings

Questions?

Judge Business School

Creating 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

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?

100 Max 50 Average Raw Materials Min and components 21% Assembly Plant 6% Distribution 73% 0 Source: Holweg and Pil, “The Second Century”, MIT Press 2004

Features of High-performing Supply Chains

Long-term collaborative relationships  Trust and commitment, respect of the right of mutual existence Single or dual sourcing   Component volume is adjusted according to performance Constant positive pressure by dual sourcing 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 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

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

Production by Region 1975-2005

50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0 North America Russia India Latin America Japan Rest of Asia W Europe S Korea S Africa E Europe China Other

Auto Industry: Major Trends

Overall global growth by 1.85% CAGR since 1975 Substitution of production with adjacent low-cost regions Major growth of production in China (2000-05:

x5.2

), India (2000-05:

x1.7

), - 4% in Western Europe and 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

Established Player Product Features Market Demand New Entrant Time

Any labour cost advantage is temporary!

Source: adapted from Christensen (1997)

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

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

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 School

Judge Business School, Univ. of Cambridge http://www-innovation.jbs.cam.ac.uk

International Motor Vehicle Program Massachusetts Institute of Technology http://imvp.mit.edu Email: [email protected]