Integrating China Into Your Global Supply Chain Lessons ...


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Integrating China Into Your Global Supply Chain Lessons ...

  1. 1. Perspective Christoph Bliss Ronald Haddock Integrating China Into Your Global Supply Chain Lessons Learned from Global Supply Chain Integrators
  2. 2. Booz & Company is a leading global management consulting firm, helping the world’s top businesses, governments, and organizations. Our founder, Edwin Booz, defined the profession when he established the first management consulting firm in 1914. Today, with more than 3,300 people in 58 offices around the world, we bring foresight and knowledge, deep functional expertise, and a practical approach to building capabilities and delivering real impact. We work closely with our clients to create and deliver essential advantage. For our management magazine strategy+business, visit Visit to learn more about Booz & Company. CONTACT INFORMATION Ronald Haddock is a partner at Booz & Company in Zurich. He has been with Booz & Company since 1994 serving multinational corporations in the automotive and industrials sectors. He can be reached at +41-43-268-2132 or Dr. Christoph Alexander Bliss passed away prior to the final publication of this article. Booz & Company recognizes with gratitude his numerous and significant contributions to the advancement of the topics of operations strategy and globalization. Ken Zhong and Raymond Yeung also contributed to this article.
  3. 3. INTEGRATING For too long, many companies to companies that want to follow in have exhibited tunnel vision in their footsteps. CHINA INTO their approach to doing business in YOUR GLOBAL emerging markets, such as China, The Players on the Field India, Brazil, and Russia. Some Many multinational companies SUPPLY CHAIN have seen them purely as venues (MNCs) pursue sourcing and for low-cost sourcing; others have market growth opportunities Lessons Learned considered them rapidly expand- in China separately, without from Global Supply ing pools of customers who are integrating them; alternatively, Chain Integrators attracted to imported goods. But they do not see the full potential in a new breed of company that we China, and therefore suboptimize call global supply chain integrators around narrow objectives. (GSCIs) has recognized that these markets are more than just low- While driving their “China sourc- cost source markets or the mega- ing” programs, for example, growth markets of our age: At a procurement managers are usu- minimum, they are both. ally well aligned with the objec- tives of manufacturing, logistics, The predominant example, of and quality assurance. However, course, is China, with its established in many companies they all too manufacturing base and a huge frequently fail to work with sales population that is steadily grow- and marketing to consider how best ing more affluent. However, the to evaluate the total benefits that number of companies that have a China presence could offer their truly integrated their supply chains companies. On the other side of the to take advantage of this opportu- coin, marketing and sales managers nity is still small. Few companies are often blinded by the promise have truly both understood and of selling to potentially hundreds implemented strategies that leverage of millions of customers, without the game-changing nature of China considering how major sales success in the global economy. But those in China could impact the global that have are already reaping the sourcing practices and manufactur- benefits, and can offer key lessons ing operations of their companies Booz & Company 1
  4. 4. through the additional volume that Exhibit 1 Companies’ Strategic Roles in China this would provide. Based on Booz & Company’s work 31% B D Global Supply 25% Sourcing-Centric with hundreds of companies in Chain Integrators China over the past dozen years, Established Has a well-established Both China sourcing/ China as Low-Cost Country we have seen four types of multi- China supply and manufacturing and sales manufacturing base, markets are integrated, national companies that are either but for export only mutually optimized, and globally leveraged operating in China or have the potential to do so (see Exhibit 1). A1 Laggards C Sales-Centric • Type A: Laggards and regional Not Established Should establish China as a low-cost sour- Has not companies. Both laggards and cing base or enter established Has entered China sales as a sales China in either market and may have regional companies have neither market, way since the partial domestic sourcing industry is regional or manufacturing, but established China as a low-cost but hasn’t or local no export at all country for sourcing nor entered to 25% A2 Regionals 19% pursue sales opportunities, though Not Entered Entered for different reasons. Some regional China as Sales Market companies—such as those operating Hybrids = Companies that have a combined buy/sell approach, but without being a global integrator in the European trailer industry— x% Percent of survey respondents in each category are inherently local in nature, and thus selling in China is not Source: China Manufacturing Competitiveness 2007–2008; Booz & Company economically feasible or desirable. Alternately, some companies may choose not to source in China because of unfavourable labor high-end consumer electronics or it frequently includes smaller or versus cost thresholds—those that mobile equipment. medium-sized companies that, make axles, for instance. by necessity, had to take an • Type C: Sales-centric companies integrated approach from Day • However, there are also have had successful market One in China, launching a series laggards—companies that could entries in China in the past, of complementary initiatives that benefit from both sales and sourcing in some cases resulting in collectively have a company-wide opportunities in China, but simply significant sales volumes, which impact that the boards of some have not executed strategies to are either served out of their larger organizations may have do so. home country operations or considered risky. Others may have by small domestic operations • Type B: Sourcing-centric started out as Type B or Type C in China. These companies do companies have well-established companies and graduated to an not have major exports from China supply bases, but they are integrated approach. China into the company’s global primarily designed for export. operations. Typical examples are A good example of a global supply Type B companies’ sales operations some top-branded European car chain integrator is Hansgrohe, and capabilities are limited to manufacturers. a German plumbing products nonexistent; those that do have a company that became part of small sales operation may, in the • Type D: Global supply chain U.S.-based Masco Corporation in ultimate example of inefficiency, integrators have China sourcing, 2002. This company operates a source in China, complete manufacturing, and selling dual-mode operation in China that production in their home country, activities, in addition to innovation supports sales in dozens of cities and then re-import to China. The activities, and these are integrated, in China, plus supports its global typical companies in this segment optimized, and leveraged globally. operations network by producing are European or U.S. producers of This is an elite class of companies; 2 Booz & Company
  5. 5. some products in China and indicates that only a quarter of the sourcing opportunities have shown exporting to other countries. The survey respondents actually exhibit average profitability of 30 percent company still imports some high- the characteristics of a global sup- versus only 18 percent for other end products into China, but this ply chain integrator, while half still companies. Additionally, there are makes sense. The basic products leverage only the sourcing opera- other important differences in produced in China are labor- tion or the sales operation, and the the types of management actions intensive, whereas the premium last quarter are hardly in the game across GSCIs and non-GSCIs. To products from Germany, which at all. illustrate the point, let’s look at require significant innovation and two examples. are capital-intensive, benefit less Putting It to Work Volkswagen was an early entrant from factor-cost advantages in Sales and sourcing operations into China with a great deal of China, such as labor. are interdependent; they can be success in the market, due in combined to create truly dual-mode In another example, many vehicle no small part to the company’s operations (see Exhibit 2). manufacturers are in the process of advantage as one of the first movers building or extending dual-mode The performance improvement in the industry. It succeeded in operations, including Toyota, benefits for companies that realize localizing production, as well as Nissan, and GM. early on how to become global most sourcing, and localized the supply chain integrators can be China management team itself. At face value, the basic logic of substantial. Although it is difficult However, it was slow to react integrating the global supply to compare the benefits of becoming to increasing global product chain seems obvious. Yet a limited a GSCI across industries, a high- convergence, fueled by global number of companies have demon- level profitability analysis on GSCIs mergers and acquisitions in the strated a real understanding of the versus non-GSCIs has yielded some auto sector, and the resultant concept, let alone implemented it. interesting results and insights as to opportunity to globalize its supply A recent survey conducted jointly the potential value. Based on our base. The result? It suffered by the American Chamber of survey, companies that operate in major share losses in China as it Commerce in Shanghai (AmCham China for both its local market and continued to sell aging products Shanghai) and Booz & Company Exhibit 2 The Interdependent Elements of a Dual-Mode Operation China sourcing allows 1. China Growth 2. China Sourcing regional competitiveness China as the key growth market— China as the premier low-cost country across channels, customer segments, for both regional and global commodities and geographies 2 Additional scale China sourcing creates regional 4 creates global cost leadership 1 cost leadership 3 3. China Volume 4. China Export Leverage manufacturing expertise/ Establish China as the key source of technology leadership and enhance finished or semi-finished goods to capacity around additional products or Additional scale creates support global network third-party contracts/leasing capacity global cost leadership Source: Booz & Company Booz & Company 3
  6. 6. Transitioning into a Global Supply Chain Integrator Depending on their positioning, companies can follow certain strategies to become global supply chain integrators. For companies already globally sourcing or manufacturing for export out of China, the primary goal should be to gain additional scale benefits by capturing sales opportunities in the Chinese market itself. The key success factors in this case are differentiation, flexible business models, and third-party contract manufacturing. A good example would be Wal-Mart, whose sourcing from China will reportedly reach US$30 billion in 2008. Wal-Mart’s China sales were substantially below this figure at the time of the study, yet Wal- Mart is rapidly adding new stores in China. Another example would be Home Depot, a major U.S. retailer of building products. Although its acquisition of China’s Homeway, which was intended to grow Home Depot’s share in the China market, is fairly recent, it has been sourcing large volumes of products from China for a long time, whether directly or through its legions of suppliers. For companies that have high volumes of sales but limited production capacity in China, the main objective must be to fully leverage China as a low-cost country and to feed global delivery networks outside of China. The key success factors in this case are choosing the right ownership model, developing a cost-advantaged supply network through comprehensive footprint modeling, and deploying proactive risk-management practices across the entire implementation and relocation phases in China. Many of the global luxury vehicle manufacturers, pushed by local content rules and pulled by rapid sales growth with increasingly affluent consumers, are undergoing this process. BMW and Mercedes-Benz both have aggressive footprint expansion plans in the mainland China market. Mercedes-Benz recently announced the establishment of operations in India in what would initially appear to be a sourcing-centric operation, but which has the potential to add sales capabilities and grow into a global supply chain integrator as India’s demand for luxury-class vehicles grows. while competitors introduced organization in China, had the 2010. The company had also set attractive, new vehicles with more potential to address both challenges up sales and marketing operations modern technology into some of simultaneously. The company in China in the mid-1990s, but the same segments. At the same embarked on a turnaround effort because sales operations were time, due to the disconnect between and is now on a path to becoming a not focused on the same product its sales, sourcing, and production true global supply chain integrator. categories as the sourced products, operations, the company was Had it focused its attention in this there was relatively limited unable to leverage China as a manner sooner, it would likely have potential for synergies. As the low-cost sourcing base for vehicles reduced the lost opportunities that growth potential in China became produced in Europe. stemmed from its delay in becoming more evident, however, it realized a GSCI. the opportunity that a dual-mode This sequence of events brought operation in China could offer and Volkswagen to the realization In our second example, Masco, a sought to build on this. that leveraging China as both a global home and building products source and destination market company, initially succeeded in The company’s current agenda to reduce costs through greater sourcing commodities in China, includes moving toward more of scale in production in China for growing from approximately a dual-mode operation in China the domestic and global markets, US$100 million in sourced under a unified organizational while refreshing its product line materials in the early 2000s to an entity to encourage stronger and upgrading capabilities in the estimated $700 million or more by collaboration. Had the company’s 4 Booz & Company
  7. 7. initial plans included operations in for China-produced products can services related to aftermarket car China that were company-owned be postponed until the product repairs and services. From fewer and controlled, it may have invested is close to its destination market. than 100 outlets a few years ago, in a factory with optimal assets Kitchen cabinets, which can be flat- Goodyear is projected to have for a dual-mode domestic-export packed and shipped in containers, approximately 1,000 franchises by mission, building an advantaged are a good example. Many kitchen the end of 2008. The large domestic cost position for China and export cabinets today are manufactured in network provides the local reach much earlier on. The company’s China, but assembled in Mexico or to exploit the full potential of the opportunity cost was arguably in in the United States for the North dual-mission setup Goodyear has lost market share in China and American market. In general, now established (see “Goodyear as slower growth in its competitive however, our survey results suggest a Global Supply Chain Integrator,” position in the company’s primary that manufacturers that operate at pages 6–7). developed markets, the U.S. and the right zone on the continuum Europe, due to some lack of between selling all products locally Portrait of a Global Supply competitively sourced products. and exporting all products globally Chain Integrator tend to show better average For one European manufacturer Although sourcing can indeed be profitability, in this case 36 percent of high-end consumer electronics, treated separately, dual-mode setups for GSCIs versus 21 percent for GN Netcom, the key remaining often get a company to make earlier sourcing-centric companies and 6 challenge to successfully becoming investments in serving more than percent for sales-centric companies. a global supply chain integrator one market, given the need to keep was developing logistics capabili- a factory in China busy. Once this The global integrators we have ties to support global linkages into capital is invested, top management observed are, on average, larger and out of China. The company will give more attention to getting than companies that are Type B and had successfully established a plant the best answer for the company C models, given generally higher in Shenzhen that was supporting versus the more limited approach levels of management capabilities three regional distribution centers that a purely functional sourcing in understanding and exploiting (DCs) in Europe, the United States, manager may take. the game-changing status of China. and Asia. Furthermore, it had suc- They also tend to have had the cessfully established Tier One and How GSCIs Can Optimize resources to act on the opportunity Tier Two supplier bases in China, Their Supply Chains Out much earlier. representing the vast majority of of China Over time, these companies have total sourcing spend. Finally, it had Sourcing-centric (Type B) and been in a better position than reached domestic sales volumes in sales-centric (Type C) companies most new entrants to identify the China that represented an estimated must first determine China’s full real opportunities for dual-mode one-third of global sales volumes. potential for their businesses and missions and to act on them. A whether the strategic and financial The company had clearly estab- recent addition to the growing list costs of making the shift to a lished the mind-set necessary to of GSCIs in China is Goodyear, dual-mode operation is justified. become a GSCI, which is the first which now produces some of its For most companies in global or step in disseminating that approach most advanced tires in China for regional industries, the answer throughout a company’s operations the domestic and overseas mar- is usually yes, with one caveat. and a basis for future decisions kets while leveraging China as an Changes to what products are (see Exhibit 3, page 7). However, increasingly important geography made and sold in various markets although the company had become for exports. In an effort to acceler- are frequently necessary; in the a role model in establishing dual- ate growth in China, Goodyear has case of bulky products that cost a mode operations, it had not yet rapidly built a franchise network lot to ship, companies must stay redesigned its logistics and supply of aftermarket outlets selling tires aware of whether final assembly chain operations to support the and a range of other products and Booz & Company 5
  8. 8. Exhibit 3 Booz & Company Framework for Successful Global Supply Chain Integration Management Summary F Streamline Through Lean Operations Levers E S&OP D Footprint and network modeling C Tailored business streams/segmentation Define Your Operations Strategy B Postponement/late customization A Global integration/”The Zone” Source: China Manufacturing Competitiveness 2007–2008; Booz & Company Goodyear as a Global Supply Chain Integrator Goodyear is a leading global tire manufacturer that has had a presence in China since 1994. Between 1995 and 2002, its global sales stagnated, with a compound annual growth rate (CAGR) of less than 1 percent. But since its massive reinvestment in Dalian, China, in 2002, the company has positioned China as both an important growth engine and a global supply base. From 2002 through 2006, Goodyear’s global sales CAGR was marked by an impressive 10 percent growth. These global successes of Goodyear arguably began with its full leverage of value-creation opportunities in China and its understanding of the corresponding challenges that followed. China, having surpassed Japan in 2006, has become the second-largest auto market in the world, and is on its way to challenging the United States’ position as number one. Fully aware of the latent scale and dynamics of the auto market in China, Goodyear has designed its operations strategy to take full advantage of China’s opportunities in both growth and sourcing. The initial focus for Goodyear in China was on supplying tires for new cars to vehicle manufacturers. As the market began to shift, with more growth in the aftermarket, Goodyear rapidly built its presence from fewer than 100 aftermarket outlets to a franchise network of more than 1,000 outlets in an effort to capture surging demand. 6 Booz & Company
  9. 9. Goodyear as a Global Supply Chain Integrator (continued) Goodyear’s awareness and proactive pursuit of the duality of China’s opportunities has helped it outperform its key competitors both in market coverage and revenue. Within 10 months in 2005, Goodyear had established 300 outlets, whereas Michelin was only able to establish about 200 in two years. Average revenue per store had also increased by 30 percent from 2005 onward, as Goodyear recognized the increasingly globalizing customer needs, and upgraded its outlets strategically to offer full and tailored services. This was an effort to go beyond merely capturing sheer volume to creating additional revenue streams. In addition to growing sales in China, Goodyear also leverages China as a sourcing base for both its local and global operations, because the labor and material cost arbitrages available in China often allow companies to establish the required cost competitiveness to dominate not only the local but also the global market. The success of this strategy is reflected by Goodyear’s US$35 million annual cost savings as well as other top-line gains obtained through sourcing raw material, equipment, and finished goods from China. How Goodyear Overcame the Challenges of Becoming a Global Supply Chain Integrator Becoming a global supply chain integrator is about much more than merely sourcing from China and selling in China. Beyond the challenges of logistics and supply chain management common for most aspiring GSCIs, the ability to overcome challenges in product quality and management processes is critical to how successful a company can be. Goodyear’s key differentiator from many other companies that source and sell in China is its demonstrated capability to manage these challenges. Quality has been an issue for companies sourcing and exporting from China, as many Chinese suppliers still do not consistently adhere to agreed standards. Goodyear’s answer to this challenge is to build lasting partnerships with its suppliers, and sometimes suppliers of suppliers, to help them reach its standards. Thanks to these measures, Goodyear’s Dalian facility is now capable of producing high-end and high-value tires that receive Goodyear’s highest rating in quality audits for global markets. The same logic applies to the challenge of management process in China. According to our survey, far less than 50 percent of the respondents have applied manufacturing best practices. Unlike a local company operating only within a small region, a global supply chain integrator operates worldwide and requires sophisticated manufacturing processes to make the fully integrated supply chain reliable and flexible. In this respect, Goodyear again leverages its network of partnerships, strictly enforcing process control and process auditing in its operations and those of its suppliers. This effort has resulted in the company’s China operations receiving the highest process quality rating across all Goodyear facilities worldwide. This complexity of managing global supply networks is tied inevitably to the challenge most difficult for many aspiring global supply chain integrators: logistics capabilities. Supply networks that crisscross the entire globe are often not easy to manage, given their scope and interdependency. The situation is exacerbated in China due to its distance from many major markets, its relatively inadequate infrastructure, and its delivery unreliability. Goodyear recognized the importance of these issues and attempted to battle them using flatter, more integrated channels and considering alternative means of transportation (e.g., railway versus trucks) to reduce lead times and costs. This approach resonates well with our experience in rectifying the logistics malfunction found in many companies in China. Booz & Company 7
  10. 10. dual-operating mode. This resulted typically very costly and notoriously a global supply chain that was not in major logistics and supply chain difficult to run. fully integrated. problems: Overall lead times Coupled operations. Analyzing The team fixing this supply chain were up to 22 weeks, which was the overall value chain—including followed three clearly defined steps a major problem in an industry the three regional DCs, the to turn the production system of an with an average product life cycle Shenzhen plant, and the Tier One aspiring GSCI into a world-class of 45 weeks. The company had and Tier Two suppliers—revealed global logistics network. high inventory levels, with yearly extensive interdependencies for inventory turns below 10; it also Step 1: Decouple and postpone. both information and the materials had frequent out-of-stocks and high GN Netcom’s first step was to flows. This was being caused by a obsolescence costs. Lastly, it had focus on shifting the so-called lack of break points or “decoupling very high transportation costs, due cross-over points (COPs) back- points,” such that any material to the need to use air transport for ward. Cross-over points in the requirements in the distribution boxed shipments as well as many value chain are those points where centers required planning actions expedited air shipments in order to non-customer-specific parts or sub- along the entire supply chain. Due meet lead-time requirements. assemblies are assigned to a specific to the boxed shipments, SKUs were customer or an order. The objective All in all, this company achieved defined at a very early stage in is to push those cross-over points as world-class unit production costs production and packaging, thereby far as possible toward the beginning by buying and selling in China, but taking away any supply chain of the value chain; the farther back had below-average performance flexibility in the distribution centers. in the supply chain the inventory on landed costs due to a poorly As a result, the entire supply can be stored, the lower the inven- designed and managed China sup- chain required extensive upfront tory carrying cost. Having COP ply chain. Effectively, this company operations scheduling as well as far back in the chain also implies was flying “boxed air” around the long execution and delivery times. a switch from pushing to forecast globe, and all it got from these high Underdeveloped sales and toward pulling to real demand (see transportation costs were frequent operations planning (S&OP) Exhibit 4). out-of-stocks and lead times of 22 systems. An analysis of the overall weeks. What went wrong? The main lever for achieving those S&OP setup revealed planning decoupled cross-over points was An analysis of the logistics malfunc- systems that were mainly based on late-stage customization—i.e., tion revealed three root causes, push-to-forecast principles—i.e., shifting product-, country-, or which, based on our experience, are the expected demand triggered customer-related specifications to fairly representative of a wide range production of finished goods, semi- the end of the supply chain. When of GSCIs operating in China: finished goods, and even Tier One customization takes place later in and Tier Two components. The One-size-fits-all. The overall the chain, companies have a higher result was highly inflexible planning supply chain setup, as well as degree of flexibility to cope with processes, which were difficult to the logistics systems, lacked changing market demands and a control in the actual execution segmentation around planning lower risk of obsolescence. and delivery phases of the supply for varying predictability and chain. The company either couldn’t A key approach for achieving stability of products—resulting in support short-term campaigns late-stage customization and supply chains that were over- or by major customers, resulting creating highly flexible supply under-engineered for the majority in significant lost sales, or these chains is postponement—i.e., of products. As a rule of thumb, campaigns could only be fulfilled delaying the complete production one-size-fits-all, “mixed-mission” through costly ad-hoc rescheduling. or assembly of an end product supply chains, which are focused for a different geography and a on optimizing different objectives All in all, this situation represented later time. across cost, quality, and time, are a common logistics malfunction of 8 Booz & Company
  11. 11. Exhibit 4 We characterized these segments as Decoupling and Postponement at GN Netcom “runners,” for SKUs with highly predictable and recurring demand; Finished Post- Royal Component Tier Products ponement Group Warehouse Ones “repeaters,” for SKUs with fre- DCs China quent, but not necessarily stable, Royal demand; and “strangers,” for one- Group off SKUs whose recurrent demand was low or nonexistent and whose COP-1 future demand was therefore Push–Make and ship-to-stock difficult or impossible to model. COP-2 Identify optimal Push/Pull–Make-to-stock point to hold After identifying the relevant COP-3 inventory clusters, the company needed to Pull–Customize-to-order design differentiated supply chains, COP-4 optimized by segment, both for Pull–Assemble-to-order manufacturing design and logistics COP-5 systems. For example, runner Pull–Call-off-to-order (component level) COP-6 supply chains, with continuous Pull–Call-off-to-order (Tier One/VMIs) production cycles and steady DC = Distribution Center demand, were based on planning, COP = Cross-over point, where the pull chain and the push chain meet ordering, and scheduling routines. The repeater supply chains were Source: China Manufacturing Competitiveness 2007–2008; Booz & Company based on flexible batch production and consumption-based planning, with ordering and scheduling routines within a defined frozen There were multiple and immediate • Transformation of some difficult period. Finally, stranger supply benefits to applying postpone- “repeater” SKUs to easier-to- chains were built around a produce- ment strategies: manage “runners,” based on the to-order, one-off approach (see ability of postponement to reduce Exhibit 5, page 10). • More responsive supply chain practical lead times and improved customer service The logistics system to support levels, as the practical lead times to • Installation of independent these different supply chains was customers were shorter than in the vendor-managed inventories also developed by segmenting case of true one-off orders (VMIs) along plants (managed by different needs across different Tier One suppliers) but also on logistics, procedures, and processes. • Massively reduced transportation suppliers’ sites (managed by Tier The key factors considered were costs due to the ability to create Two suppliers), thereby significantly differences in the following (see bulk shipments instead of reducing time to customer in the Exhibit 6, page 10): boxed shipments “last mile.” • Assembly characteristics • Decreased risk of stock-outs given Step 2: Establish tailored business • Inventory replenishment shorter practical lead time streams (TBSs) using segmentation • Material capacity planning • Lower inventory levels due to and differentiation across SKUs. • Scheduling and sequencing safety stock pooling The initial step for GN Netcom in establishing tailored business • Orders/call-offs (in the case of • Stabilized upstream supply kanban—signal cards that are used streams was to properly segment chain due to mellowed demand- as part of a system of continuous the end products based on differ- signal variations supply of components, parts, ences in their inherent variability, predictability, and annual volumes. and supplies). Booz & Company 9
  12. 12. Exhibit 5 An Example of Tailored Business Streams ILLU STRA TIVE Cons Runners—Continuous Production ume Good r Packa s Co g Order to delivery: mpa ed ny 1–2 days Regional distribution Raw materials Plant center(s) VMI Buffer inventory Continuous production Repeaters—Produce to Replenishment Order Chem icals Com pany Order to delivery: Customer 2–5 days Regional distribution Raw materials Suppliers Plant center(s) inventory Safety/cycle inventory Batch production Spec Strangers—Produce to Order ialty C Com hemicals pany Order to delivery: 2–4 weeks Raw materials Plant inventory One-off production Source: Booz & Company Exhibit 6 Operational Implications of Tailored Business Streams Product Runners Repeaters Strangers Category Product • Continuous production • Batch production • One-off • Lifetime batch Characteristics production production Inventory/ • Safety/cycle stock • Safety/cycle stock • No stocks • Lifetime Replenishment • Call-off point • Reorder point stocking in Characteristics • Possibly kanban controlled • Possibly min/max controlled the hubs • Lead time is determined by the • Nonbinding four-week forecast • No planning • One-off Material and maximum given by tooling, capacity, with frequent changes on plans Capacity Planning and material SKU mix Scheduling and • Three-month capacity booking • Two-month capacity booking • Based on order • One-off Sequencing • One-month frozen time period • Up to 12 weeks’ schedules • One-week sequencing on SKU level delivery time Orders/Call-Offs • Call-offs out of hubs (decentralized) • Bundled orders • Dedicated sales order Source: China Manufacturing Competitiveness 2007–2008; Booz & Company 10 Booz & Company
  13. 13. For repeaters, the focus is on implemented in Steps 1 and 2. Conclusion bundling orders into logical This process included evaluating Even companies that have batch sizes. Switching over in the alternative bulk versus boxed successfully integrated their sales runner segment to consumption- cross-over points, which define at and sourcing operations still have based planning, scheduling, and what stage of the supply chain to challenges ahead of them. A very manufacturing systems usually keep inventory, as well as modeling common challenge is building generates both supply chain different assembly and packaging sufficient scale for effective global stability and improved logistics operations in the regional DCs, supply chain integration. costs. Finally, strangers, which are such as doing final assembly Wanxiang, the number one auto one-off production orders, should and quality testing in DCs, as parts manufacturer in China, has be planned where they can be fit opposed to in production plants. pursued multiple means to maxi- into production planning with Applying a heuristic approach, mize its scale and therefore cost minimal disruptions for runners the company calculated basic advantages to compete globally. and repeaters. distribution network scenarios and When it enters a new market, then locally optimized the costs Wanxiang begins by actively lever- Step 3: Fully integrate the global of inventory versus lead times. In aging third-party distribution to distribution network. Finally, the this specific case, a network design broaden its reach within the short- company remodeled the global incorporating one plant, one hub, est possible time. External partner- distribution network, including and global postponement proved to ships are collaborative and focused regional postponement and pack- be superior as it provided the best on acquiring the talent and tech- out facilities, where the piece-parts balance across lead times and cost nology that are conducive to scale of full orders were assembled. to serves (see Exhibit 7). efficiency and volume enhancement. This reflected the decoupled These combined efforts have been and segmented supply chains Exhibit 7 Cost-to-Serve Network Modeling 8¤ 0.02 0.36 0.50 7¤ 0.38 –19% 6¤ 0.71 2.13 0.39 Unit Costs (Euros) 0.56 0.45 5¤ 0.56 0.56 4¤ 7.05 3¤ 5.69 5.38 4.45 4.52 2¤ 1¤ 0¤ • Regional hub without • Postponement hub • Regional • Regional • Regional postponement in Asia postponement postponement hub postponement hub • Four local • Box by air from HK close to the sales in Poland in Czech Republic distribution centers to cross dock markets • Bulk by air from • Bulk by air from HK (FR, GER, DK, SE) • No local • Bulk by air from HK HK to Warsaw via to Prague via • Shipped in box by air distribution centers to Schiphol Frankfurt Frankfurt from HK to Schiphol • No local distribution • No local • No local centers distribution centers distribution centers Local Distriution Center Facility Costs Labor, Overhead, and Profits Inventory Carrying Costs Transportation Note: Data slightly modified from original to preserve confidentially. Source: China Manufacturing Competitiveness 2007–2008;Booz & Company Booz & Company 11
  14. 14. instrumental to Wanxiang’s impres- logistics. Indeed, the average scores they have applied postponement sive sales growth of more than 30 for domestic and international and segmentation methodologies to percent since 1999. logistics infrastructure in China are their logistics systems. only 2.5 and 2.7, respectively, out But for most companies, there are Building truly integrated sup- of 5.0, based on the comments of often three other main areas in ply chains and harnessing the full our survey respondents. Further, which they can best leverage their potential of China is not easy (see many global supply chain integra- China positions as global supply Exhibit 8). Although all companies tors have yet to design lean, highly chain integrators: logistics systems, don’t necessarily need to become flexible logistics systems across the network design, and end-to-end global supply chain integrators, value chain such that the network supply chain management. The especially in industries that are not is optimized. Many GSCIs recog- need for improvement in these global or regional in scope or those nize the opportunities inherent in a areas is highlighted by the fact that in which products and supporting dual-mode approach, but have not extended supply chains into and out process capabilities and assets are yet developed well-planned logistics of China often stretch the capabili- highly specific to each market, in networks or the integrated supply ties of existing logistics operations our experience, the benefits to suc- chains that deliver on their poten- and can even reveal the structural cessfully becoming one can be sub- tial. For example, only 16 percent weaknesses in the home country’s stantial and well worth the effort. of survey respondents report that Exhibit 8 Practical Steps Toward Becoming A Global Supply Chain Integrator Key Steps to Success 1 Establish global supply • Approach emerging markets from the outset with idea that ultimately, the greatest chain integration mindset value-creation potential comes from full global integration of your full value chain over time 2 Assess total value creation • Assess the total potential value impact across all business and functional areas, e.g., including potential the future value of intangibles stemming from market presence • Identify potential new sources of competitive advantage that can be developed in the emerging markets (e.g., new innovations, sources of talent, centers of excellence across functions) • Take a team with broad functional representation on road show of emerging market; seeing is believing 3 Get broad stakeholder • Ensure all key stakeholders inside and outside of your company boundaries are informed and involvement aware of emerging market activities, and engaged in exploring the potential of the market across the value chain • Set up an emerging markets senior steering committee to sustain broad involvement over time 4 Approach network and • Design operations and supply chain activities from the perspective of global supply chain supply chain top-down integration; only then, suboptimize for other functional objectives • Designate shared, cross-functional teams for supply chain ownership (not just supply chain staff!) 5 Align resources and efforts • Ensure key resources across company are focused on the same end game and supporting near-term objectives; align incentive systems accordingly 6 Continuously upgrade • Continuously adapt approach to the market as the market evolves and as your company grows and improve in size and in resources • Exploit new opportunities continuously Source: China Manufacturing Competitiveness 2007–2008; Booz & Company 12 Booz & Company
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