This action might not be possible to undo. Are you sure you want to continue?
operations. Expansion into low-cost countries brings within the fold of an extended enterprise a coalition of suppliers, buyers and logistics companies who can be more productive when they work in concert. IPOs forge a network, whose members are initially tenuously tied to each other by their transactions, into an interconnected global procurement network joined together by long-term relationships. The several poles of decision-making local to a department, business unit or geography are merged into a synchronized management process that spans the global procurement network. The whole of a global procurement network is more valuable than the sum of its individual constituents. Global procurement networks are more valuable when multiple redundancies are eliminated, real time decisions become possible with greater visibility and communication between partners is bridged to ensure that unanticipated costs are not incurred. IPOs reap these latent efficiencies in a global supply chain. The business gains increase progressively as IPOs extend their initiatives from specific departments to businesses across borders and finally to the whole of the supply chain. IPOs steer partners to integrate technology, processes and communication systems so that the constituent enterprises, groups and departments work as an intertwined extended enterprise. Their expertise in change management, performance management and compliance enables seamless integration of the supply chain network. Recent research by Accenture confirms a high rate of success achieved by IPOs; 70% of the companies who have set them up report that they have met or exceeded their expectations1. The difference that IPOs make is illustrated by the example of management of risks in an integrated procurement network. When partners exist as silos, McKinsey found in a survey of a sample of enterprises that two-thirds of them reported increased risks to their supply chains over the last five years. More than eighty-percent of them are barely prepared to mitigate supply chain risks2. Experts agree that no individual enterprise has the incentive to mitigate supply chain risks and they all have a tendency to “pass the buck” 3. This is despite the fact that many of them have installed enabling technologies to gain visibility into global supply chain networks. IPOs step in such a situation and make it clear that the “buck stops with them” and ensure that action is taken to contain the damage from adverse events. EVOLUTION OF IPOS Enterprises, looking to benefit from international procurement, initially test the waters by outsourcing commodity components that are not a part of their core business. The primary motivation for outsourcing, at this stage, is labor arbitrage. Gains from lower labor costs are partially offset by higher transaction costs of procurement from more distant sources and more so when several departments deal directly with suppliers. IPOs become the single conduit for all transactions, consolidate information and processes internally and negotiate with suppliers to keep procurement costs under control. These objectives can be achieved with a virtual office with low overheads. Arm’s length transactional relationships with suppliers are adequate for commodity procurement. As they interact with suppliers overseas, IPOs learn more about their competencies. In time, they realize that larger gains are possible from strategic sourcing including the core business of their clients. Entire assemblies and products are outsourced. As business flows between partners, spread across the globe,
“Global Sourcing and Logistics: A roadmap for high performance”, Accenture. “Disaster-proofing the supply chain” by Andrew K Reese, Supply and Demand Chain, August 6, 2007 3 As above in footnote no 2.
increase in volume so does the need for them to work in tandem. IPOs see a role in providing an array of services to improve communication and collaboration among the members of the international procurement network. Processes and technologies linking partners are streamlined for greater efficiencies. This is best accomplished by a separate office with a charter and a steward to manage the international procurement operations and a local office. The goal of IPOs is to reduce costs of all kinds---response time, cost of risk and inventory costs. Eventually, enterprises see an advantage in locating overseas closer to their suppliers as the locus of manufacturing activity is centered overseas. Proximity brings with it informational gains such as a better understanding of suppliers’ capabilities, risks and opportunities in the local business environment as well as knowledge of local business practices. IPOs are incorporated as domestic companies to take advantage of tax benefits, subsidies and other promotional programs available to local companies. Buying companies have greater confidence in the ability of their suppliers and they decide to outsource entire product life cycles. The local arm of the IPO becomes a recognized member of the local business community through sustained networking in the community.
Emerging IPO Strategy Goals Global Purchasing Reduce spend
Strategic Service Center Strategic Sourcing Reduce Total Costs
Local control center Operational Excellence Leverage local presence 1. Physical location in supplying countries. Incorporated as a domestic company. 2. Recognized in local business community. 3. Relationships leverage local competencies.
1.Virtual Office 2. Centralized decisions. 3.Rudimentary knowledge of trade 4.Arm's length relationships Lower Spend Limited visibility internally.
1.An independent office 2.Decisions coordinated with local control offices. 3.In-depth knowledge of trade 4. Strategic partnerships Lower opportunity costs
1. Visibility into spend data. 2. Aggregating internal data. 3.Single interface with suppliers Price and cost based metrics for assessing performance of suppliers. Use catalogue for buying
Performance Management Compliance
Domicile gains. 1.Internal communication across locations. Control over global supply 2. Control of local chain subsidiary and business climate. 1. Automation of Product life cycle processes and management systems and information across processes the supply chain. 2. Close-looped processes 3. Vendor Managed Inventory Service Level Agreements: Financial performance of quantitative and qualitative the local subsidiary. metrics. Compliance to corporate Compliance to global policy and product life cycle processes. guidelines.
Price paid for procurement and overhead costs incurred on procurement are reduced.
1.Demand and supply matches 2.Resilient supply chain 3.Lower response time
1. Fiscal and other benefits for local companies. 2. Management of local risks. 3. Leverage local skills
EMERGING IPO Strategy An emerging IPO seeks to lower the expenditure incurred, as operating costs or purchase price, on procurement. Challenges In the absence of a single international procurement operations office, individual departments procure directly from suppliers overseas. When a company has several departments, each of them separately procures goods from their preferred suppliers. procurement The following are the consequences of this method of
The aggregate amount spent on international procurement is hard to estimate because information is scattered in individual departments. Multiple redundancies exist as the processes in individual departments, regions, IT systems, types of products, etc are implemented without a common design and contribute to the complexity of managing the supply chain4.
• high. Solutions
Individual departments place smaller size orders instead of bulk orders. The negotiating power of buyers is weakened when they act independently. It is not possible to compare the performance of suppliers when they place orders individually.
Altogether, the buyers don’t receive the most competitive prices and the operating costs of procurement are
Internal issues of managing information and processes take priority when buyers are purchasing commodities from overseas suppliers. The following initiatives are representative of the solutions to expect.
Change Management: Information: A single catalogue5, with an approved list of suppliers and verified prices, is made available to buyers. IPOs consolidate spend data available with all departments. They use spend data to negotiate deals with their suppliers. Processes: are automated and a single platform is used for managing them internally; a common B-to-B interface is created for interaction with suppliers.
Performance Management: cost and price based metrics are used to measure performance. The availability of consolidated data as well as the catalogue helps to prepare benchmarks for assessing performance.
Compliance: IPOs ensure that each department chooses suppliers from the recommended list in the catalogue and pays prices suggested there.
The level of spend is reduced as lower prices are negotiated with the suppliers, savings in operating costs are realized as a single procurement office does all the buying and bulk orders are placed. Productivity gains and cost reduction is possible when processes linking partners are streamlined and automated. Use of common processes and standardization can lower costs considerably. Air Products, for example, realized 20% cost reduction in this way6. SERVICE CENTER Strategy IPOs shift their focus from cost reduction to superior service across the global procurement network at this stage. The services of IPOs are meant to ensure that all partners act in concert. A single global platform is implemented for linking all partners. IPOs build bridges between partners to ensure communication and collaboration between them. Long-term relationships of trust with suppliers underpin collaboration with the buyers. The expected benefit at this stage is reduction of total costs including inventory costs, delivery time delays and costs of disruptions in the global procurement network. Challenges The sprawling global supply chain needs to work harmoniously to maximize the benefit from its extension into low-cost counties. As supply chains lengthen, the risk of a mismatch between demand and supply, time delays and slippages in execution increase. IPOs have to drive suppliers to implement processes and technologies that integrate the global supply chain. They have to reign in total costs by coordinating the activities of partners across all businesses. The specific challenges of total cost reduction are
Matching demand and supply:
The risk of excess inventory in the supply chain are high as each partner in the supply chain exaggerates demand to ensure adequate inventory for their individual needs.
As the number of tiers in the supply chain increase, so does the number of partners who exaggerate their demand. The mismatch between demand and supply grows and the cost of holding unwanted inventory increases7.
When companies lower their inventories, they often find their costs from stockouts are higher. Rapid change in the levels and patterns in demand on the one hand and pervasive congestion in the ports and roads of emerging economies on the other aggravate the problem of matching demand and supply. Recent research confirms that the unanticipated costs incurred by non-integrated and semiintegrated supply chains offset any gains from labor cost savings and only
“Effective Global Sourcing and Supply for Superior Results” by Robert M Monczka, Robert J Trent and Kenneth J Petersen, CAPS Research, 2006.
integrated supply chains are able to benefit from globalization8. This is because integrated supply chains are better able to respond to contingencies.
Reducing response time: Lags in responses to market signals and events increase
total costs. Enterprises need data in real time to respond to market changes and events. At a time when as many as 89% of companies9 see new product and services launches as the most important factor for increasing revenues, higher lead times can be expensive. When manual processes pervade an enterprise, the responses are slow.
Risk management: A holistic view of the status of execution is required to spot any
deviations from expected performance. This is contingent on close-loop processes. For example, suppliers have to send back confirmations, within an agreed period of time, when an order is placed and make specific commitments for delivery. The information needs to be visible to all partners such as by posting it on a dashboard. Solutions The internal consolidation of information and processes is extended externally to all the partners in the supply chain. IPOs provide a range of services that transform the global procurement network from a labyrinth of discrete business units into a continuous supply chain. A common global platform for all partners in the supply chain is the bedrock of an integrated supply chain network. Growing costs of unanticipated delays, higher inventories or stock-outs and disruptions10 can be lowered with synchronization of activity across the global supply chain network.
Change Management: IPOs provide the leadership to shepherd partners into working within a common framework to achieve the goals of the global procurement network. The role and status of the IPOs is transformed by Vesting greater authority to IPOs who become part of the senior management team. Assigning a mandate to IPOs to manage global processes. Delegating stewardship of the supply chain to the Chief Procurement Officer with a charter to control global processes. A survey of Deloitte Research found that the masters of the management of complex supply chains are 50% more likely to have one person oversee a supply chain network than their peers11.
Building a local presence for IPOs. They improve their understanding of local business laws and taxes, trade rules and business practices. They also join local business associations to blend in with the local community.
IPOs elicit co-operation from suppliers by •
Building long-term relationships with partners
“The China Rip Tide: Threat or Opportunity? Profiting from the Growing Supply-Chain Bottleneck”, by George Stalk Jr. and Kevin Waddell, June 2006. 9 “The challenge of complexity”, Deloitte, 10 “Effective Global Sourcing and Supply for Superior Results”, by Robert M Monczka and Robert J Trent and Kenneth J Peterson, CAPS Research, 2006. 11 “Unlocking the Value of Globalization”, Deloitte.
Defining common goals for constituent partners
Information: All partners in the network share information which is aggregated. The processes of gathering and centralizing information are automated to make it available in real time. Data on demand and supply and status of execution is made visible by displaying it on a dashboard. A holistic view of the status of activity in the network provides actionable intelligence which partners in the network can use to match demand and supply, respond rapidly to mitigate risks and complete tasks concurrently to lower response times. Processes: the processes linking partners are rationalized and automated to reduce cycle time and productivity. All partners operate on a single platform.
Performance Management: service level management with quantitative and non-
quantitative measures of performance. This ensures that cost reduction, for example, does not lower customer satisfaction as stock-outs increase.
Compliance: suppliers adhere to the processes governing the global supply chain
Benefits: The implementation of global processes helps to reduce cycle time as information flows rapidly between partners. According to a study conducted by A T Kearney, the processing of purchase orders and requisitions, before they are sent to suppliers, alone account for 50% of the cycle time12. The processing time can be reduced from as much as 30 days to less than a day 13 with streamlining and automation of processes. The aggregation of information across the supply chain and its display electronically helps to respond rapidly to adverse events. An example of how visibility enables companies to respond in real time to changes in their business environment and gain long-term competitive advantage is the case of Nokia on the occasion of the launch of a new generation of cell phones in March of 200014. The source of its chips was a plant of Phillips NV located in Albuquerque, New Mexico which caught fire a few days before the delivery of the order. Nokia’s managers sensed a delay when they looked at their computer screens. It was only after the executives scrutinized the problem that they realized that the damage to the plant would delay shipments far longer than anticipated. Other suppliers were not in a position to supply some of the critical components. Nokia’s executives scoured over data on other Phillips’ factories and found other plants where the critical components could be manufactured. They conferred with Phillip’s executives to press them to produce the components in their other factories and were able to launch the new model of their cell phone in time. On the other hand, Ericsson, who also procured its chips from the burned down plant, did not recognize the magnitude of the problem; it lost market share for an extended period of time while Nokia gained. LOCAL CONTROL CENTERS Strategy A local presence of IPOs in close proximity of sourcing countries becomes a compelling need at this stage. The needs of a large number of suppliers clustered in sourcing countries are then better served. Their numbers increase as entire product life cycles are outsourced. Depending on the size of the operations, the local IPO could manage suppliers in a country or in an entire region such as South Asia.
http://www.scmr.com/article/CA6406208.html http://www.scmr.com/article/CA6406208.html 14 The description of the event was extracted from http://scm.ncsu.edu/public/risk/risk3.html
Synergy in the workflows of partners, who constitute a supply chain network, sets the stage for effective management of the supply chain from one end to another internally and externally. IPOs use their knowledge of the region to increase efficiencies. Opportunities in one country can be leveraged not only by the local unit but also globally. When threats arise, they are managed not only locally but all along the supply chain. As the business landscape of emerging countries is transformed by deregulation, IPOs have to find opportunities for business growth locally and to keep track of risks inherent in the dynamic environment of emerging economies. THE CHALLENGES Balancing the need for centralized strategic management and local autonomy becomes a major challenge. Internal communications gets harder as the local subsidiary acquires a distinct character with its own language and culture, business practices and time zone15. The constituent partners have to find a common language for communications. Optimization of supply chain from one end to another requires standardization of processes that are dissimilar across countries. Sourcing countries have their own process management traditions, IT systems, etc. Seamless integration of these systems involves substantial investment of effort. Nestle, for example had to reduce the number of its data centers around the world from 100 to 416. Global processes are required so that local opportunities and competencies can be leveraged for all units within the company. One example of this is the case of Adidas which responded to the excitement over Greece’s victory in a European championship by rapidly supplying its blue-and-white jersey to fans all over Europe17. It was able to do so because it had the ability to synchronize production from its many contract manufacturers. When product life cycles are managed across borders, change happens at several levels and the chances of clients and their suppliers adapting to change at a disparate pace are higher. This could mean, for example, that client companies and their suppliers are using different versions of software and work at cross-purposes. Recently, Airbus had to delay the launch of its state-of-art plane, the A380 super jumbo, by two years and incurred losses in billions of dollars after errors occurred as a result of the use of different versions of the CAD software in Germany and France.18 SOLUTIONS Local considerations19 are of paramount importance in supply chain management at this stage. For example, the IPO would have to find a way to adapt to the telecommunication infrastructure that may not be sophisticated enough to build a network for real time communications. IPOs provide more services to manage the gamut of product life cycle activities outsourced overseas; they invest greater effort in selecting and developing more competent suppliers capable of offering higher value services, ensure that global standards of quality are achieved and adapt to unique aspects of local production methods. More knowledge of local business environment helps in due diligence of suppliers, risk assessment and anticipating opportunities and threats.
http://www.logisticsmgmt.com/article/CA6416244.html http://www.scmr.com/article/CA6444369.html 17 http://www.scmr.com/article/CA6444369.html 18 “PLM: Boeing’s Dream, Airbus’ Nightmare”, by Mel Duvall and Doug Bartholomew, Baseline, Feb 5th 2007. 19 http://www.oliverwyman.com/ow/pdf_files/MOTL-DifferencesGlobalSourcing.pdf
The presence of IPOs locally helps to communicate the goals that the global strategy of the buying company seeks to achieve. IPOs learn about the issues that would have to be addressed in order to implement global processes. The local presence of an IPO and their networking within the community helps to gain knowledge of reliable sources of supply, the pitfalls of the choices they make and the support they can find to solve problems.
• Change Management:
Information: data on the status of progress at each stage of the product life cycle is aggregated at one point. Processes: for ensuring that the activity at each stage of the product life cycle is synchronized. When improvements are made in the processes, IPOs ensure that they are consistent across all partners. IPOs help to ensure that processes across the extended enterprise change consistently. Boeing, for example, updates software concurrently for all its suppliers four times a year. Suppliers are offered incentives to make the changes in conjunction with the others 20. Consequently, the Dreamliner, Boeing’s answer to the Airbus’ A380, has gained an edge in the airline market.
• Performance Management: the performance of the local IPO assessed by ROI metrics. • Compliance:
BENEFITS IPOs located in the sourcing countries take advantage of tax benefits, government incentives and lower pricing available to domestic companies. Closer relationships with suppliers help to evaluate their competencies accurately and to take advantage of their unique skills. As emerging markets grow, it is also possible to leverage the global supply chain to meet local needs. An example of the impact a local organization can have in managing the risks of outsourcing is illustrated by the experience of The Limited and Warner Bros after a currency crisis struck Asia in 1997 and disrupted supplies. Exporters were unable to pay for imported materials when their currencies were unexpectedly devalued. However, the supplies to The Limited and Warner Bros were not interrupted because they had contracted with Li and Fung, a company that specializes in the management of supply chains in the East Asian region. Li and Fung, with a supplier base of 4,000, have an agile enough supply chain to find alternative sources of supply21 within the region when the need arises. When entire product life cycles are managed offshore, the gains are higher not only in terms of lower costs but also lower risk. Typically, each supplier absorbs the operating risk by incurring the non-recurring costs associated with the assemblies they design and manufacture. Client companies can then afford to launch more products. Enabling Technology The technology that underpins the solutions is a multi-enterprise platform for integrating the information flows and processes across departments and enterprises. Business processes and information management are automated from one end of supply chain to another. adherence to guidelines for product life cycle management.
See footnote 8. “Robust Strategies for mitigating supply chain disruptions” by Christopher S Tang in International Journal of Logistics Research and Applications, 6th August 6, 2007, Taylor and Francis.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.