Home or away

In discussion about the choice between sourcing materials and components from close to home or from countries far away, horror stories abound. However, there is little compelling evidence to suggest the wholesale abandonment of suppliers in low-cost countries in favour of a return to mythical halcyon days of mutual back-scratching within the confines of the local ring road. Anne-Marie Kilkenny, a partner at the sales and operational planning specialist Oliver Wight, tells some salutary tales including that of a division of FMC, the US-owned oilfield services specialist which, on importing product from China, found that the containers were not safe to be unloaded. Fixing it took many months, eating into the benefits predicted in the original cost/benefit analysis. She recalls a consumer adhesives manufacturer that changed to an overseas supplier for the plastic caps on its glue and turned a fault free, fully-automated production process into a sticky problem when the new supplier encountered real quality issues, slowing down output and increasing costs. And the case of a well-known cosmetics company which found it wasn't getting much love from its new supplier in Russia when the government there banned one of the key raw materials. Kilkenny's broad conclusion is that the advantages of extending the supply chain have to be substantial to offset the extra time, cost and risk involved. Companies are often pulled in two directions, she says: "The commercial side of the business is saying it needs more flexibility because consumers are expecting what they want, when they want it - which is usually 'now' - while the supply chain is being pressured on cost and is looking at how cheaply things can be done." To succeed, the supply chain strategy has to be fully integrated with the overall business strategy and value proposition, she believes. "People really do get seduced by the difference in the headline cost, which can be a factor of 20 or more. But there are very significant risks; you lose a lot of flexibility, and eight-week lead times from China can leave you with significant challenges if you're operating in a fast-moving market." Mike Bernon, senior lecturer in supply chain management at Cranfield School of Management has similar reservations. Many organisations have found significant hidden costs that were not identified when the original business case for low-cost, long-distance sourcing was formulated, he says. These included the lack of responsiveness in just-in-time supply chains, increased levels of finished goods inventory required to cover much longer lead times, loss of control of quality, more frequent product recalls and increased logistics costs for unplanned air freight movements. "In addition to these logistical aspects, global supply chains are increasingly under scrutiny from consumers, investors and policy makers regarding the environmental and societal impacts," says Bernon. "There are already some instances of retailers changing their sourcing patterns, for example returning to 'local to local' for grocery products. It remains to be seen how far this will extend into the future." Oliver Wight's Kilkenny underlines the point: "Environmental impact, social responsibility, and health and safety are much more important than they were even 10 years ago," she says. "For instance, in the chemical industry most companies sign up to the Responsible Care Code." Applying such standards in emerging economies and being absolutely certain they are adhered to can prove difficult. Another academic, Amir Sharif, professor of operations management at Brunel Business School, believes that the debate raises tricky issues but sounds a cautionary note for those who allow themselves to be too easily persuaded to believe in Dorothy's conclusion, on returning to Kansas from Oz, that there's no place like home. "If your company doesn't begin to consider or embrace alternative approaches to supply chain management, your competitors most probably will," he warns. Like Kilkenny, Sharif makes a strong case for evaluating overall business strategy in relation to supply chain issues; be it for growth, profit maximisation or sustainability. However, that is not the end of the story, he suggests. "Managing the continuity of supply chain operations is imperative," he urges. "Whether home or away, planning for a break in supply chain availability must be a primary objective. We only have to witness the increasing frequency of man-made as well as natural disasters, weather and other geo-political events: these are not going to go away in the long-term history of the planet. Hence any supply chain strategy worth its salt needs to have a comprehensive risk management plan, be it within 10 miles or 5,000 miles away." Kilkenny has another example that underlines Sharif's point. "There was a strategic decision at the chemical company Flexsys to always have an alternative local supplier for the raw materials and intermediate production it sources from 'deep sea' locations because the risks of stopping production are too great - any savings can be wiped out in just a few days because of a shipping or quality issue," she explains. "In cases like this there can be significant hidden costs so a thorough TCO (total cost of ownership) evaluation is critical. Volatile exchange rates, fuel prices and shipping costs are only the start." Andrea Harris, from logistics consultancy Davies & Robson - which has worked with the likes of Bacardi, Hyundai, Roche Pharmaceuticals, Samsung, Tate and Lyle, Toyota, and Wickes - illustrates the point: "Inexperience in the mechanics of global supply chains is often the cause when new outsourced solutions stumble as the true cost of contingency - and associated time delays - can be grossly underestimated," she points out. "For example, shipping and air freight rates are considerably more volatile than domestic road and rail transport rates; holiday structures are different to the domestic market and can lead to significant production and shipping delays; time zone differences can add days to the simplest of reactions; and language and culture differences should never be underestimated." Harris believes that the majority of excess costs in supply chains starting in low-cost countries (LCCs) arise from the need for contingency to address unpredictable demand patterns and the impact these have on stock. The key to an effective LCC-based supply chain lies in fully testing the true cost of the operation, through good times and bad, and a thorough understanding and stringent management of customer expectations, order schedules, replenishment cycle times, demand patterns, and seasonal variations, she says. "Every possible scenario should be considered, assessed for probability and modelled to understand the true impact to both cost and availability." Davies & Robson encourages logistics managers to adopt lean techniques in order to mitigate risk and manage cost in the extended supply chain. It advises that by adopting lean techniques that align supply to actual rather than forecast demand, managers can configure their supply chains to more reliably, accurately and cost-effectively meet future customer demand, regardless of variability or the distance between point of origin and point of consumption. By establishing a stockholding at source, the cost of shipping and handling in the destination market can be postponed until absolutely necessary. This enables the flow of product to be switched from push to pull, allowing production to be driven from customer demand through the use of kanban signals to trigger replenishment of product as it is withdrawn for despatch. This effectively prevents costly overstocks and removes over-reliance on forecasts. Allied to this, logistics managers should review distribution channels to ensure that the optimal mode of transport is employed. Bulk sea freight may be the cheapest option, but the actual delivered cost must also take into account the effect of long lead times on working capital and cashflow and the cost of handling, storage and inventory control of product in the destination market. Increasingly, Davies & Robson says, consolidation centres at origin are supporting the introduction of smaller, more frequent deliveries and in most cases, the optimal solution is likely to involve a mix of FCL (full container load), LCL (less-than container load) and air freight transport. Andrea Harris concludes: "The most efficient supply chains match the transport mode as closely as possible to the production replenishment cycle, to improve flow and minimise lead time to market." Tony Hardy, managing director at supply chain solutions provider Daylight, brings technology into the equation. "Manufacturers need to recognise that advances in technology have enabled us to easily identify and limit the negative effects of the traditional burdens, risks and volatility associated with longer, more complex and geographically diverse supply chains," he argues. "As a result, we've moved from a simple market exchange towards a hybrid supply chain with manufacturers often contracting within an inter-connected structure of both global and domestic relationships. "With the gap in quality shortening between domestic and low-cost foreign suppliers, and better software more effectively managing long delivery times in order to deliver components on time to plan, even under speed-to-market and demand volatile conditions; we can now negate the need for high inventory levels and unnecessary cost, making conventional supply chain equations obsolete. "Analysis of the cost of logistics against unit price remains critical in the decision-making process, but those manufacturers with the foresight to streamline their supply chain processes and introduce intelligent systems that offer real-time visibility and flexibility to respond efficiently to market changes as well as manage risk can enjoy far greater choice to purchase and contract in a genuine global market." To make his point, Hardy exemplifies Chesapeake, a UK headquartered paperboard and plastic packaging supplier with over 40 operations in North America, Europe, Africa and Asia and customers in a wide array of industry sectors. Chesapeake's suppliers deliver on a cycle of up to three months, while its customers demand their products within 10 days. This means the company needs to source materials quickly with lowest site input cost and working capital. To complicate matters further, Chesapeake's 18 paperboard product manufacturing sites are not only spread across the globe, but all have different procurement requirements. Its supply chain is thus a complex web of diverse and overlapping threads. A comprehensive supply chain management assessment led to the creation of a small centralised procurement team, charged with effectively managing the supply needs of multiple sites, and the building of a bespoke, internet-based tool. Chesapeake is now able to manage around £42 million in spend and supply 60,000 tonnes of material across 400 supply lines with just three people. It has been able to reduce the time raw materials have to be stored from 60 days to three, reduced customer turnaround from 15 to five days and saved £1 million in the first 12 months of implementation. However, for another technologist - Steven Hargreaves, group product director at enterprise software supplier Solarsoft - all is not lost for the domestic supply chain. Alarmist commentators who predict doom and gloom for advanced economies because of the growth of low-cost manufacturing in countries such as China have got it wrong, he believes. "As the level of technology adoption in these markets approaches the frontier of best practice, their growth rate actually slows because innovation is much harder than copying and prosperity erodes their cost advantage. The same process will happen in China," Hargreaves predicts. UK manufacturers will continue to prosper because there will always be UK companies that offer better response times and customisation than their international competitors. "Knowing your market and having the skills to turn designs rapidly into products may be central to the value proposition and may outweigh differences in manufacturing labour rates. Indeed, there are some specialist UK-based, make-to-order manufacturers who can offer incredibly fast response times. In many cases the products they manufacture might not be very economical to put on a plane, so in contrast it might take an international competitor six weeks to deliver the product via boat whereas a UK manufacturer can deliver product in a matter of days." Then, he adds, there are the environmental pressures that will only increase the cost of air transport in the future. Surface transport costs, too, will be an increasing factor in deciding where to make goods. "This is likely to be good news for UK-based specialist manufacturers who can continue to offer the quickest and fastest way of delivering the finished product to the customer."