Advertisement

Blog

Global Supply Chain: Still a Work in Progress

If manufacturing had remained in one place, the supply chain would look very different today. But globalization has changed the very nature of the industry. Supply chain partners source, build, and deliver all over the world. Whether it means maintaining facilities in strategic locations or establishing partnerships that span the globe, the supply chain now operates 24/7.

But developing the optimum global footprint is still a work in progress. Component makers, following their OEM customers around the world, initially built regional factories. Since the early 1980s, economic downturns, obsolescence, and overcapacity have shuttered many of those sites, and the fabless semiconductor model has gained strength. Distributors, which expanded primarily through acquisition, have struggled with disparate IT systems, inconsistent franchises, and the need to retain local identities. For these two key suppliers to OEMs, flexibility remains the defining strategy for success.

Cost-cutting measures in the 1980s and 1990s drove suppliers to create hubs. Instead of maintaining manufacturing facilities and sales offices in all locales, suppliers began to centralize production and warehousing regionally. Local warehouses were replaced by mega-warehouses serving the Americas, EMEA, and the Pacific Rim. Financially, this strengthened the supply chain. Distributors could leverage economies of scale through centralized inventory, and manufacturers honed their just-in-time (JIT) and lean skills. However, twin disasters in 2011 forced a reassessment of these strategies.

A recent Gartner Group report argues that the best supply chain performers are adopting a “multilocal” strategy. Companies are trying to balance the advantages of global economies of scale with local service and responsiveness, the report says.

Leading companies are reassessing their sourcing and manufacturing networks, and rebalancing their supply network strategies in favor of multilocal design, supply and support. More specifically, they are shifting from a centralized model, where these functions support global markets, to a regionalized approach, where capabilities are placed locally, but architected globally.

{complink 4842|Seagate Technology LLC}, one of the world's largest manufacturers of hard disk drives, was devastated by the Thailand floods of 2011. Analysts say the flooding affected roughly 70 percent of the world's disk drive capacity. Supply and manufacturing lines were paralyzed by the disaster, and production is not expected to reach pre-flood levels until the third quarter of 2012.

Dennis Omanoff, Seagate's senior vice president for supply chain and procurement, wrote in an EBN post that his company is realigning its strategy. It is reducing its inventory-holding JIT hubs in favor of value-added fulfillment centers closer to where customers consume products.

“I think it's important to have strategic partners with global capabilities and regional locations to service the requirements of a particular geography,” Omanoff wrote in a follow-up comment to his blog. “This provides a more flexible network that can adapt rapidly to change while improving agility, responsiveness, velocity and customer service.”

The Gartner report identifies several other trends driving the multilocal trend:

Tax and other government incentives, coupled with meaningful concessions from organized labor, are enticing manufacturers to set up or expand operations in mature markets. Annual wage increases between 9% and 35% in China, combined with rising logistics expenses, are leading to higher core supply chain costs in a traditionally low-cost country. An ever-increasing demand to be responsive to local markets is further fueling the trend, and a growing sophistication with techniques, such as cost-to-serve analysis, is enabling it. Even within emerging markets, manufacturers are shifting capacity based on regional wage and logistics expense differentials.

Two global companies have recently announced plans to expand in the Americas. {complink 3426|Microsoft Corp.} said it will manufacture its Surface tablet in the United States, and {complink 379|Apple Inc.} announced plans to expand in Texas. Apple has had a well-known partnership with Foxconn Electronics, but the Chinese EMS has been raising wages following a public outcry over its treatment of workers. Foxconn also has announced plans to expand in Brazil, which has been a center of activity for a number of high-tech companies, including Avnet Inc., Samsung, Motorola, Research in Motion, SinoHub, and Ciao Telecom.

Suppliers and distributors are generally well prepared in these regions but continue to expand. In Europe, the struggling economy has provided acquisition opportunities for distributors. In early July, Arrow Electronics Inc. and Avnet announced a number of acquisitions of European IT and component distribution companies. Though the distributors merge operations when it makes sense, local offices and practices are often maintained long after mergers are completed. Even global customers tend to have unique requirements from region to region, so channel partners manage both sales and engineering resources accordingly.

Most Tier 1 distribution companies have established a physical presence in each of the world's regions. However, a global footprint does not make all sales and service offerings identical. Some services that have been around for decades (such as kitting and programming) are offered in all regions, but others have yet to migrate. Reverse logistics and after-market services, for example, started in the Americas but are expected to roll out worldwide.

One of the challenges is that regulatory issues regarding the collection and disposal of electronic products vary considerably from region to region. In addition, regional franchises limit distributors' ability to sell all products in all locales. Pricing disparity also presents challenges.

Distributors and component suppliers acknowledge it is their job to work through these issues for the OEM customers. Being there, as the saying goes, is only half the battle.

2 comments on “Global Supply Chain: Still a Work in Progress

  1. Daniel
    August 3, 2012

    Barbara, most of the supply chain or distributing companies have their own presence in all most all countries. Normally they are entering to local market either by alliance with any of the local channel partner or by M&A with any existing distributor. Eventhough they are working independent with the local market abiding the regulation of country, their reporting structure with the parent company or Head office is in a different way. Moreover I think since each country has their own rules and regulations, a global supply chain policy may not be feasible.

  2. Barbara Jorgensen
    August 6, 2012

    Jacob: you outline the very problem distributors have been facing for years. They want to provide the same products and services globally but those things might not be matched ideally in the local market. Yet, the customers want that global reach. That's why it is definitely still WIP.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.