Accenture-Supply Chain in Asia-Challenges & Opportunities

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    In this issue:Robert J. Easton and Tian Bing

    Zhang explore supply chain

    challenges facing companies that

    operate in Asia, and identify seven

    opportunity areas that have the

    potential to dramatically improve

    supply chain performance and

    competitiveness.

    Supply Chain Perspectives

    helps senior management

    optimise value through

    supply chain innovation.

    Supply

    Chainsin Asia:Challenges andOpportunities

    Supply Chain

    Management

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    Supply Chains in Asia: Challenges and Opportunities

    2 3

    Robert J. Easton is a

    partner in Accenture's

    Supply Chain Manage-

    ment service line

    responsible for supply

    chain services inChina, Hong Kong,

    Korea and Taiwan. He

    has more than 20 years of experience in

    supply chain strategy, process reengineering,

    performance management, system integra-

    tion and change management, and publishes

    frequently on these topics. Robert earned a

    masters of business administration degree

    from the Macquarie Graduate School of

    Managementand is a graduate of the

    Singapore Commandand General Staff

    College. Based in Hong Kong, he can be

    reached at [email protected].

    Tian Bing Zhang is

    a Shanghai-based

    manager in the

    Accenture Supply

    Chain Management

    service line. He

    specialises in supply

    chain opportunity

    assessment, regional supply chain strategy,

    network optimisation, strategic sourcing,

    procurement, inventory management, andmodelling and simulation. Bing has a

    bachelors degree in physics from Tongji

    University, and a masters of business

    administration degree from the Australian

    Graduate School of Management, with an

    exchange programme to the University of

    Chicago Graduate School of Business. He can

    be reached at [email protected].

    Supply Chains in Asia:Challenges and Opportunities

    The potential and the

    rewards associated

    with infrastructure

    improvements are clear,

    particularly since the

    economies of many

    countries rely on

    intra-Asian trade.

    Supply chain excellence has become a key driver of valueand competitiveness in most industries and geographies.Yet in Asia, the supply chains of multinational corporations

    as well as those of local private and nationally ownedcompaniestend to be more fragmented and less competitivethan their counterparts in the United States and Europe.By some estimates, they are three to f ive years behindthe West.

    Companies doing business or seeking to operate in Asia must acknowledge this

    performance gap. They also must work to understand the special nuances and chal-

    lenges that gave rise to the region's subpar supply chain performance. For example,

    dauntingly complex market and regulatory environments are common in Asia, as

    are underdeveloped network infrastructures, technological inconsistencies, adversarial

    cultural agendas and convoluted distribution networks. Identifying those barriers and

    understanding their impact is the first essential step toward building a supply chain

    capability with business outcomes equal to those achieved elsewhere in the world.

    This paper examines in detail the supply chain challenges facing companies that

    operate in Asia. It then explores seven opportunity areas that have the potential to

    dramatically improve supply chain performance and competitiveness. Pursuing these

    opportunity areas should be a top priority for CEOs and CFOs. In Asia, as with other

    parts of the world, supply chain excellence can provide a competitive weapon to

    deliver market advantage and achieve quantum leaps in cost and revenue performance.

    The Critical Supply Chain Challenges in AsiaFor a company to be competitive, its supply chain must be cost-efficient, responsive,

    flexible, agile, and support customer requirements to receive the product they need,

    in the quantity they want, and when and where they want it. Ensuring the presence

    of all these characteristics is difficult anywhere. But in Asiaa region of enormously

    diverse languages, cultures, currencies, regulations, taxes, infrastructures, business

    practices, organisational forms and economic-development levelsattempting to

    optimise the supply chain can seem almost futile. Complicating matters further, this

    diversity exists not only among countries, but also among cities within the same

    country; in countries such as China, it exists even within cities. Broadly speaking,

    Asia's supply chain challenges fall into five principal areas:

    1. Market and Regulatory Diversity

    2. Supply Chain Network Complexity

    3. Market Penetration

    4. Organisational Models5. Cultural Mind-Set

    1. Market and Regulatory DiversityIn Asia, diversity is the norm rather than the exception. For example, there is a

    growing gap among developed economies such as Singapore, Hong Kong, Japan

    and South Korea; developing economies such as China, Indonesia, Malaysia, the

    Philippines, Thailand and Taiwan; and emerging economies such as Cambodia,

    India and Vietnam (Figure 1). These disparities make the movement of goods

    within and across borders difficult at best. To meet the challenge, organisations

    must address four primary areas of diversity:

    Infrastructure

    Capabilities

    eCommerce

    Organisation

    Diversity of Infrastructure

    National, regional and municipal diversities are the product of many factors. The

    first of these is infrastructure, the quality, efficiency and capacity of which varies

    greatly from country to country. For instance, Japan, South Korea, Hong Kong and

    Singapore have highly efficient ports, airports, road connections, rail services and

    customs operations, while the transportation infrastructures of Indonesia, thePhilippines and Thailand are largely inadequate. Recognising the problem, some coun-

    tries are investing heavily to enhance their rail, port and air infrastructures. In the

    near future, for example, Malaysia will spend RM21.2 billion (US$5.6 billion) to

    upgrade its transport infrastructure.1

    China stands out as the country most affected by a subpar road, rail, air, port and

    technology infrastructure. In 1999, its aggregate road network was 1.526 million

    kilometres, less than one-fourth that of the United States. China's infrastructure is

    ranked last of seven of the world's most highly industrialised nations. As a result,

    1 June Lim, Malaysia Continues to Improve Logistics Infrastructure, MHD Supply Chain Solutions

    (November 2001), 14.

    Supply Chain Perspectives

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    Supply Chain Perspectives

    4 5

    For the most part,

    capability shortcomings

    are the result of

    a shortage of skilled

    people, a dearth of

    enabling technologies

    and/or insufficient

    access to third-party

    logistics providers.companies entering the Chinese market often find that standard theories of supplychain management do not apply, because the country cannot always support thetimely and economical movement of materials. China's government has announced

    major initiatives to improve the i nfrastructure; for the time being, though, supply

    chain performance improvements are innately handicapped.

    But China is not the only country with an inferior logistics infrastructure. In fact,

    there really is no pan-Asian integrated transport and distribution network to leverage.

    However, the potential and the rewards associated with infrastructure improvements

    are clear, particularly because the economies of many countries rely on intra-Asian trade.

    Diversity of Capabilities

    Superior supply chain capabilities exist in only a few of Asias more-developed

    countries, most notably Singapore and Hong Kong. Elsewhere, peak capabilities are

    largely the province of multinational corporations, conglomerates and a small

    number of foreign logistics companies. For the most part, capability shortcomings

    are the result of a shortage of skilled people, a dearth of enabling technologies

    and/or insufficient access to third-party logistics providers.

    People:The shortage of experienced supply chain professionals is a global issue that

    simply is more acute in Asia. In fact, the regions quest for supply chain

    excellence was nearly nonexistent until recently, which meant that few skilled

    managers were recruited and hardly any supply chain courses of study existed

    in top Asian universities. Fortunately, many Asian universities now are working

    to add supply chain management to their curricula.

    Enabling Technologies:

    In North America and Europe, implementation of materials resource planning

    systems began in the 1960s. By the mid to late 1990s, many companies across

    these regions had completed enterprise resource planning (ERP) and business

    reengineering initiatives, and were poised to build "intelligent supply chains"

    using focused applications for demand management, procurement, interenter-

    prise collaboration and customer relationship management.

    In Asia, however, local, regional and global players were far less inclined

    to embrace leading-edge technologies, primarily due to skill limitations, infra-

    structure shortcomings and a general reluctance to invest in intangible assets.

    In fact, many Asian companies have not reengineered their logistical operations

    and are only starting to implement ERP solutions. Even some multinationals

    have yet to integrate their ERP platforms regionally. Without a reliable ERPsystem as a central repository for accurate transactional data and standardised

    business processes, even basic operational improvements materialise more slowly.

    All in all, the information, costing, procurement and distribution systems of

    many Asian companies are antiquated, fragmented and largely unrationalised.

    It is therefore no surprise that in Asia, compared to North America and Europe,

    costs are higher, reliability is lower, transfer pricing and sourcing decisions are

    exceptionally difficult to make, and reliable reports on regional performance

    are hard to obtain.

    Modern distribution channels

    Intense competition

    Demanding consumers

    Availability of sophisticatedcapabilities and technology

    Easier to attract quality labour

    Greater propensity to outsource

    High Internet uptake

    Processes and infrastructure thatsupport collaboration

    Differences in:Economic development and political stabilityCustoms duties and taxes (some free trade zones)Language, complexity of documents, country-specific branding and packagingCurrency and stability

    Taxation and regulatory systemsLogistics and communication infrastructureBanking practicesSophistication of consumers, customersand vendors

    Uneven market penetration

    Complex sourcing,manufacturing, logisticsand distribution networks

    Conglomerateorganisational models

    Unwritten businessrules and entrenchedbusiness practices

    Market pressure andchanging business imperatives

    Poor infrastructure and distributionLimited data, low levels of automation

    Fragmented industriesHigh degree of governmentinvolvement

    Resistance to third parties, lowthird-party capability

    Very low Internet uptake

    Focus on fire-fighting

    Mix of traditional, modern andemerging distribution channels(e.g., super/hypermarkets)

    More demanding customers,increasing competition, consolidationand rationalisation of industriesDifficult to access sophisticatedsupply chain capabilities

    More advanced technology but withvarying levels of integration

    Low to medium Internet uptake

    Movement from reactive tocollaborative

    Supply Chains in Asia: Challenges and Opportunities

    Figure 1: Factors influencing supply chain competitiveness in Asia.

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    Supply Chain Perspectives

    Warehousing/distributionjoint venture or handledby local or joint venture

    third parties

    Rudimentary automated

    systems

    Delivery lead-times in weeks

    not days

    Manual accounting

    Little visibility of end-customers apart fromkey accounts

    Actual demand and serviceperformance masked

    Local and imported materials

    Some contract manufacturersfor specific projects

    Often responsible for ownoperations, including purchasing

    Sometimes based in

    multiple provinces

    Nonexclusive distributors

    Distribute product to stores

    Credit with stores

    Execute in-store promotions

    Some have willingness and

    capability to improve

    Little visibility ofsubcontracted distribution,

    unpredictable service

    76

    Figure 2:A typical supply chain network for a hypothetical consumer products company operating in China.

    is network complexity. This problem is endemic in Asian distribution channels, which

    generally are multilayered, with three or four intermediaries between manufacturer

    and customer. (In the US and Europe, one or two intermediaries are the norm.)

    In China, regulations prohibit foreign companies from owning distribution channels,

    and they have little choice but to rely on local concerns to distribute their product.

    Even if the performance of those local organisations were not suspect, foreign

    companies still lose their ability to view and understand actual demand levels and

    customer requirements (Figure 2).

    In China and Korea, distribution channels are particularly inefficient, fragmented

    and costly. Because neither country has national distributors, the market is owned

    by a plethora of small- and medium-sized local wholesalers. Consider the pharma-

    ceuticals industry in China and Korea, which is served by 16,000 Chinese wholesalers

    Third-Party Logistics Providers:

    Compared to North American and European companies, Asian companies have

    been slow to embrace outsourcing. There are only a few established logistics

    firms in Asia, a minority of which are internally networked and none of which

    are pan-Asian in scale. This dearth of outside resources means that companies

    have little alternative but to develop convoluted webs of relationships with

    multiple vendors and/or to rely heavily on subpar, internally developed supply

    chain capabilities. Fortunately, there appears to be both a consolidation and

    expansion of third-party resources in Asia, which in the near future should meanbroaderand more broadly availablecapabilities at the country and regional levels.

    eCommerce Diversity

    Internet penetration levels vary greatly across Asia, with highs of more than 25

    percent in Hong Kong and lows of less than 1 percent in China and India. Moreover,

    Accenture client experience indicates that most Asian companies use the Internet

    solely to share information and not as a mechanism for streamlining or managing

    their supply chains. As a result, efficient online payment systems, third-party

    eServices providers, mechanisms for managing supplier risk, and regulations that

    protect against electronic payment fraud often do not exist. Nor is reliable data for

    due diligence available publicly as it is in the US and Europe. Thus companies

    typically use letters of credit, which heightens security but adds complexity, time

    and inefficiency.

    Some industry analysts report that, within a couple of years, 20 percent of the

    world's business-to-business transactions will involve Asia. But with an eCommerce

    infrastructure that significantly lags the US and most of Europe, Asian players will

    have little choice but to tolerate supply chain inefficiencies and bring on extra

    players to build and maintain supply chain relationships.

    Organisational DiversityAsias linguistic, cultural and regulatory diversity has forced many multinationals

    to organise along geographic lines, with each division set up as an independent,

    country-specific profit centre. This approach helped many organisations penetrate

    local markets, but it also perpetuated supply chain inefficiencies by fragmenting

    product development, buying, manufacturing, logistics and planning efforts. In

    effect, opportunities to build cost-saving, sales-enhancing synergies continue to

    be undermined by the organisational barriers to a regional supply chain strategy.

    2. Supply Chain Network ComplexityAsia's market and regulatory diversity has created serious supply chain complexities.

    Tariff and non-tariff barriers, for example, hinder cross-border and regional trade,

    and severely complicate make-versus-buy decisions. The prime impediment, however,

    Supply Chains in Asia: Challenges and Opportunities

    Compared to North

    American and European

    companies, Asian

    companies have been

    slow to embrace

    outsourcing.

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    Supply Chain Perspectives

    98

    Indeed, many companies

    around the globe

    confront the pressure

    of achieving supply

    chain excellence to

    increase revenue,

    reduce net operating

    costs, reduce working

    capital and increase

    capital utilisation.

    4. Organisational ModelsIn North America and Europe, conglomerates are a declining organisational form.

    In Asia, however, vertical and horizontal conglomerates continue to dominate and

    shape their markets. In fact, about 30 percent of Asia's 50 largest companies could

    be classified as conglomerates. In Korea, the top 30 conglomerates account for

    more than 90 percent of the gross domestic product (GDP). In Southeast Asia,

    Hong Kong and Taiwan, family-owned conglomerates also are the rule, while in

    China the equivalent State-Owned Enterprises (SOEs) dominate.

    Despite the efficiencies that Asian conglomerates might derive from their scale,

    scope, wealth and long-standing relationships, this organisational model inhibits

    supply chain efficiency. That is because the entities within most conglomerates

    take a portfolio approach to i nvestment decision making, which has encouraged

    the development of disparate technology systems and architectures that inhibit

    companywide transparency of information. This results in fewer enterprise performance

    measures and less opportunity to collaborate at the group level (e.g., by leveraging

    aggregated spend, rationalising and sharing supply chain assets, jointly developing

    and sharing forecast and planning data, and leveraging core competencies

    across entities).

    Lastly, family-like perspectives, consensus decision-making approaches and highly

    insular relationships dominate the thinking of Asian conglomerates. In effect, a need

    to preserve the current order and not disrupt existing relationships can override

    conglomerates' pursuit of outsourcing opportunities or the establishment of new

    collaborative endeavours.

    5. Cultural Mind-SetAcross Asia, three culturally based barriers stand in the path of meaningful, sustain-

    able improvements in supply chain efficiency:

    Trust is the foundation upon which information sharing and c ollaboration

    are built. However, trust, particularly between supply chain partners, remains

    a significant issue in Asia.

    Win-lose perspectivesare common in Asia, particularly when dealing with

    suppliers. For example, a survey of 582 Asian companies found that most want

    their suppliers to add Internet capabilities (e.g., to help them obtain product

    prices, search and compare product features, and conduct online price negotia-

    tions). However, few plan to actually add such capabilities themselves. 3

    Supply Chains in Asia: Challenges and Opportunities

    In China and Korea, distribution channels

    are particularly inefficient, fragmented and

    costly. Because neither country has national

    distributors, the market is owned by a plethora

    of small- and medium-sized local wholesalers.

    3 David Manion, Asia Pacific Supply Chain Survey, CommerceNet (November 19, 1999).

    and 400 Korean wholesalersall with margins of more than 25 percent. In South

    Korea, a manufacturer that desires nationwide distribution must work with as many

    as 50 wholesalers. By contrast, there are only eight such wholesalers in the entire

    United States, four of which distribute 80 percent of pharmaceutical manufacturers

    output at an average margin of less than 5 percent.2 With Chinas accession to the

    World Trade Organization (December 2001), some regulatory restrictions controlling

    distribution channels and logistics services are being lifted. But until the transition is

    complete, the development of advanced supply chain networks will remain constrained.

    Overall, the development of pan-Asian networks has been routinely subjugated by

    mandatory adherence to local interests. Those regulations have forced the operating

    units of multinationals and conglomerates to enter Asian markets at different times,

    set up shop as independent operations, and/or enter enforced joint ventures. The

    result has been widespread duplication of supply chain infrastructures and burden-

    some levels of network complexity.

    3. Market PenetrationFor most global companies, Asian market penetration is deepest in the more-developed

    countries, such as Japan, Singapore, Korea and Hong Kong, as well as in urban

    centres along China's east coast. Not surprisingly, supply chain networks and infra-

    structures also are more fully developed in these areas, and thus they often are

    hubs from which broader, pan-Asian capabilities are launched. Still, as countries

    such as Indonesia, China, India and Vietnam become key markets or new points of

    penetration, current supply chain networks and infrastructures will have to be

    reconfigured and new capabilities will have to be developed.

    2 Asia Industry: Redefining the Pharmaceutical Supply Chain, Economist Intelligence Unit Regional Economic News

    (October 15, 2001).

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    Supply Chain Perspectives

    1110

    Asia has several

    highly entrenched

    business practices

    that profoundly

    affect the evolution

    of supply chain

    optimisation initiatives.

    Respect, in Asia, often refers to the importance of minding ones own

    business. Across the region, people generally are expected to stay within their

    own boundaries and avoid challenging the way others do business, especially

    when the relationship involves superiors. This mind-set has been inculcated

    within companies, among departments, and across external entities and trading

    partners. Because it discourages change, coordination and the development

    of new approaches, it can undermine a companys pursuit of greater supply

    chain efficiencies.

    Further Exacerbating Asia's Supply Chain ChallengesConsumer demand for better, faster, cheaper products and services is a worldwide

    phenomenon, as well as a major incentive for supply chain improvements. Indeed,

    many companies around the globe confront the pressure of achieving supply chain

    excellence to increase revenue, reduce net operating costs, reduce working capital

    and increase capital utilisation. But in Asiaa global hub for the manufacture of

    consumer products (and particularly electronics)the pressure to improve in these

    areas is even greater. The global economic slowdown left many Asian companies

    holding excess inventories at a time when spending on local goods also dropped.

    However, the regions astonishing diversity and complicated distribution network

    schemes make responding to these pressures even tougher than in other parts of the

    world. In contrast to the United States and Europe, for example, Asian companies face:

    In-store stock-outs.

    Lower levels of visibility over inventory and demand.

    Poor levels of forecast accuracy and demand management.

    Higher inventory carrying costs, lower inventory turnover,

    and lower levels of accuracy and control.

    Less understanding of customer and consumer needs and

    required service levels.

    Excess infrastructure (i.e., too many nodes and assets in the network).

    Lower levels of process and system standardisation and datatransparency across enterprises.

    Lower use of reliable performance measures.

    Lastly, Asia has several highly entrenched business practices that profoundly affect

    the evolution of supply chain optimisation initiatives. For example, improving

    the buying of materials and services is a significant savings opportunity in Asia; but

    it also threatens the livelihood of procurement officials who might accept off-book

    incentive payments. Unwritten rules and entrenched practices such as those vary across

    countries, but they are a major source of resistance in virtually any business context.

    Supply Chains in Asia: Challenges and Opportunities

    6.

    Key: Establish Foundations Organise and Measure

    IT and Systems

    Extend the Supply Chain

    Extend beyond the Supply ChainSource Capability Outsource

    Customer

    Customer's

    Customer

    Suppli er's

    Supplier Supplier

    Organise Follow-on

    IT Follow-on

    Organise Follow-on

    IT Follow-on

    AlternateChannel

    AlternateChannel

    7B. Extend beyond the Traditional Supply Chain

    7A. Extend the Traditional Supply Chain

    1. Strategise and Optimise the Network

    Source Capabilities Intelligently (Buy, Build, Borrow)

    Buy Move SellMake

    3. Integrate Demand and Supply, Manage Surges

    2. Achieve Functional Excellence

    5. Organise and Measure for Supply Chain Efficiency

    4. Integrate Technology and Systems Architecture

    AlternateChannel

    AlternateChannel

    Figure 3:Supply chain opportunity areas for Asia.

    The Opportunities:

    Seven Approaches for Supply Chain Success in Asia

    As the previous overview of challenges makes clear, realising supply chain improve-

    ments in this part of the world is not easy. Yet it can be done. As summarised in

    Figure 3, the remainder of this paper profiles seven ways that companies operating

    in Asia can significantly improve their supply chain efficiency and competitiveness:

    Opportunity 1: Strategise and Optimise

    Opportunity 2: Achieve Functional Excellence

    Opportunity 3: Integrate Demand and Supply

    Opportunity 4: Integrate Technology and Systems Architecture

    Opportunity 5: Organise and Measure for Supply Chain Efficiency

    Opportunity 6: Source Capabilities Intelligently

    Opportunity 7: Extend the Supply Chain

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    Obviously, Asias diversity complicates the task of prescribing solutions that success-

    fully relate to more than one group or business context, which is why many of

    the cited opportunities must be addressed on a country-by-country, company-by-

    company and/or supply-chain-by-supply-chain basis.

    The numbering of opportunities in Figure 3 is deliberatean attempt to proffer a

    logical order to approaching supply chain tasks and determining what is achievable.

    For companies dealing with underdeveloped infrastructures and tough regulatory

    constraints, simply excelling at the basics would be a significant achievement. For oth-ers (operating in more sophisticated environments), the task of synchronising supply

    chains and connecting networks of eMarkets might be a more appropriate goal. The

    greatest likelihood, however, is that multinational corporations operating throughout

    the region will have to address both scenarios.

    As Figure 4 shows, there also must be a clear path that companies follow in their

    quest for supply chain effectiveness. This is particularly true in Asia, where operating

    environments can be varied and unsophisticated, and basic infrastructure systems

    and capabilities are of utmost importance. In effect, the development and mastery

    of core capabilitiesconsistent processes and procedures, integrated IT, accurate

    and reliable data, straightforward performance measures, and thoughtful manage-

    ment of peopleare even more important to companies doing business in Asia. Thus,

    true leaders and innovators do not question the need for a logical, evolutionary

    approach to supply chain improvement. Instead, they look for ways to do it quicker

    and smarter.

    12

    Supply Chain Perspectives

    13

    Opportunity 1: Strategise and OptimiseCompanies in Asia often embark on multiple supply chain projects without a coherent,

    guiding supply chain strategy. In fact, few organisations operating in the region have

    such a strategy. The problem with this approach is that it produces little more than

    incremental improvements. Unless supply chain projects are implemented within the

    context of a broader, clearly defined strategy, their impact becomes diluted, localised

    and easily lost.

    However, when they are implemented within the context of a broader strategy, theresults can range, for example, from reductions in inventory costs and improved

    inventory visibility and control, to a competitively advantageous transportation

    structure. Plus, a more strategic supply chain approach leads to tax and duty optimi-

    sation and better end-of-life product management, which can reduce inventory

    obsolescence. This can be a big deal in Asia, but to date, few broad-scale efforts

    have been undertaken. Accentures client experience shows network and inventory

    savings ranging from 10 percent to 40 percent have been realised by companies in

    Asia that have focused on developing a strategy and optimising their network. More

    importantly, companies have experienced improvements in revenue and market share

    from 2 percent to 5 percent by aligning and optimising their supply chains.

    To realise these benefits, companies in Asia need to determine what drives real

    advantage in their supply chains and what drives real value to their customersand

    then configure their supply chains accordingly. As part of this effort, they need to

    align all relevant capabilities, processes and structures to an overall strategy.

    Sourcing, conversion, distribution and replenishment planning should be coordinated

    within the overall network design to ensure the optimal spread of resources, assets

    and lower cost-to-serve (Figure 5). Complexity in algorithms caused by the impact of

    tax regimes and regulatory diversity on make-buy decisions justifies the use of robust

    optimisation tools. Yet, to date, limited use has been made of network optimisation

    tools in Asia.

    Given the diversity of geography, language, culture, customs, regulations, and tax

    and tariff regimes, postponement is a key component of most pan-Asian strategies.

    In fact, the lack of local packaging, labelling, region-specific parts and/or multilin-

    gual documentation routinely adds cost, complexity and bloated inventories to the

    supply chains of companies that perform final configuration at their manufacturing

    sites. Asian companies that have implemented postponement techniques have

    realised inventory savings that average 10 percent to 30 percent. Additional savings

    have resulted from higher fill rates and lower product obsolescence.

    Supply Chains in Asia: Challenges and Opportunities

    Across AlliancePartners

    Functions Process

    Typical Companies

    WithinBusinessActivities

    BetweenBusinessFunctions

    WithCustomersand Suppliers

    Leading Companies

    Elite Industry Shapers

    Figure 4:The path to supply chain transformation.

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    Supply Chain Network Issues

    Raw materials Work-in-process

    Finished goods

    Sourcing

    Manufacturing costs Sourcing material costs

    Transportation costs

    Material handling costs

    Process execution costs

    Service objective orstock-out cost

    The Stock Holding Balance

    Availability of materialfor on-time fulfilmentof demand

    Identify lowest-cost sourcing strategy

    Determine number of manufacturing sitesand lowest-cost conversion strategy

    Determine lowest total cost finished-goods source locations

    Determine stock-holding locationsacross the network

    Determine new infrastructure requirements

    Identify cost-to-serve and service trade-offsfor specific customer segments

    Local vs. regional factories, warehouses, etc.

    Revenue vs. profit maximisation

    Role/relevance of each country/locationto the overall strategy

    Global implications and strategic directives

    Strategy Considerations for Asia

    Economics

    Variability Time

    Service

    StockLevels

    Cost

    Opportunity 2: Achieve Functional ExcellenceCompanies operating in Asia have a great opportunity to improve efficiencies

    across the core supply chain processes. The effort to achieve functional excellence

    in these areas provides the foundation to pursue other improvement opportunities

    as well. Following are some examples of the opportunities that exist in each of

    these areas.

    Buy

    Companies with well-managed, relationship-focused procurement practices outper-form other companies in financial terms (total shareholder return, return on equity,

    return on assets, cash flow, return on investment) and in productivity terms (sales

    per employee, income per employee, real growth in sales).

    However, it is clear that Asian companies lag their US and European counterparts

    in consolidating and leveraging purchasing activities across the enterprise. They also

    have been slower to adopt strategic sourcing practicesmaking suppliers true business

    partners and thus bringing greater transparency to the overall procurement process.

    In the short term, those companies may be foregoing the benefits of solutions that

    accompany strategic sourcing techniques, such as online auctions. Further down the

    road, they probably will be unable to match the lower cost-of-goods-sold profiles

    attained by industry leaders that have implemented highly efficient eProcurement

    solutions. In fact, the Aberdeen Group calculated that eSourcing applications have

    the potential to save US businesses more than $690 billion per year.4

    Excellence in sourcing offers multinationals, especially conglomerates, significant

    opportunities for immediate supply chain improvements and value creationoften

    by leveraging and transforming cross-entity procurement activities and capabilities.

    Strategic sourcing and procurement transformation will continue to grow across

    Asia. Here, in particular, the opportunities are too attractive to ignore. To remain

    competitive, companies must find ways to overcome the challenges of unwrittenrules, trust and transparency.

    Make

    Manufacturing dominates the industry landscape in Asia, and inexpensive labour is

    abundant throughout the region. Accordingly, there are many pockets of real manu-

    facturing excellence, particularly among the multinationals, which routinely apply

    advanced principles such as lean manufacturing and six sigma. But there also are

    numerous, large, local companies and State-Owned Enterprises whose processes are

    basic and for which improvement opportunities remain abundant.

    Supply Chains in Asia: Challenges and Opportunities

    15

    There are two types of postponement:

    1. Intracompany postponement is easier to achieve because it keeps activities

    in house: Final product and package configuration simply is moved from manu-

    facturing centres to distribution facilities, thus creating a ready supply of

    semiconfigured products that are customised just in time.

    2. Intercompany postponement moves final configuration from a companys manu-

    facturing site(s) to an outside distributor, reseller or retailer. In the personal

    computer industry, for example, assemblers ship semiconfigured products to

    distributors, which add components such as disk drives and memory only when

    actual orders are received. This approach is more of a challenge and requires

    higher levels of governance and trust, but it also can create savings in several

    supply chain areas.

    Supply Chain Perspectives

    14

    Figure 5:Strategising and optimising the network.

    4 Aberdeen Group, Strategic e-Sourcing Could Save Business $1.7 Trillion on a Global Basis, press release

    (April 3, 2001).

    Companies operating

    in Asia have a great

    opportunity to improve

    efficiencies acrossthe core supply

    chain processes.

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    Other sell-related opportunities also are available as the result of Asian companies

    limited success at:

    Understanding the relationship between line fill and revenue. (Increases in line

    fill generally lead to an increase in revenue.)

    Acknowledging a connection between inadequate service and increased costs.

    Measuring customer satisfaction from an external perspective. (Many companies

    simply do not query customers on a regular basis, preferring instead to rely on

    internal measures of service performance.)

    Measuring what is shipped as demand, rather than true demand (whatcustomers first ask for prior to negotiation, back orders, or other manual or

    automated manipulation of the customers initial requests).

    Opportunity 3: Integrate Demand and SupplyAs leaders such as Wal-Mart and Dell Computer have demonstrated, successful

    demand and supply management requires thorough integration across the enterprise.

    Unfortunately, many companies in Asia are silo-based, and thus do not have process

    owners to orchestrate an integrated demand/supply planning process. Moreover, the

    few that have implemented some form of integrated planning often retreat to silo

    formation because they lack the measures to drive full integration, or because they

    have failed to organise around the integrated processes. Lastly, forecast accuracy and

    inventory management in Asia generally are poor, which further complicates matters.

    To lay the groundwork for integrated demand and supply planning, companies

    should start with a fundamental, effective sales and operations planning process.

    That means having marketing, sales, logistics, manufacturing and procurement

    personnel talking with one another, planning together and identifying every

    opportunity to replace inventory with information. With this foundation in place,

    demand/supply planning software from companies such as i2 Technologies,

    Manugistics, SAP and Oracle can help organisations make complex operating decisions,ensure process consistency, adhere to key measures, and increase data integrity and

    transparency. The extensive use of demand and supply planning software in the US

    and Europe has not occurred to the same extent in Asia; but, as companies reengineer

    their processes and improve their technology and data integrity, wider use of these

    tools is expected.

    Supply Chains in Asia: Challenges and Opportunities

    17

    Many of those opportunities involve make-versus-buy decisions and plant rationalisation.

    As noted earlier, for example, outsourcing is significantly underrepresented in Asia,

    despite its potential to help companies (particularly small and medium enterprises)

    realise production and cost efficiencies. This opportunity has not escaped the atten-

    tion of contract manufacturers such as Flextronics, which plans to build a major

    manufacturing and logistics hub in Malaysia.

    Move

    For many Asian companies, the greatest cost-reduction opportunities are thoseassociated with logistics and distribution. Consider Korea, where the cost of trans-

    portation, storage, unloading and packaging accounts for 16.3 percent of the

    country's GDP, compared to 9.9 percent of the United States and 9.6 percent of

    Japans. In most parts of Asia, in fact, distribution centre productivity, layout and

    operations are rudimentary at best.

    In many cases, the key to better logistical performance is technology. For instance,

    Mayne Logistics recently implemented EXE Technologies supply chain execution

    software at Unilever's facilities in Malaysia. On-time performance rates subsequently

    rose from 75 percent to 99.8 percent.5 Route planning and transport-management

    systems also are underrepresented in Asia, which could mean large opportunities to

    reduce net landed costs. Data mapping technologies for transport management

    systems are in their infancy, but documented increases in transport efficiency should

    drive their use higher in the near future. Given the amount of product movement

    that occurs in Asia, transportation optimisation should be a top priority.

    SellIn the US and Europe, tailoring supply chain responses to customer requirements has

    yielded revenue increases from 3 percent to 5 percent for companies. But in Asia, a

    "one size fits all" approach often prevails. As a result, broad opportunities exist for

    companies to increase revenues and market share by understanding: a) the costsassociated with serving each customer; b) what specific services c ustomers require;

    and c) services for which customers are prepared to pay. Market leaders then will use

    those insights to align their supply chain culture, capabilities, infrastructure and

    people with the specific responses required by their best customers. The Asian com-

    panies that have followed a programme to segment and tailor their supply chain

    responses to specific customer requirementsdeveloping a more holistic cost-to-

    serve perspective that integrates sales and the supply chainhave seen significant

    cost and revenue benefits.

    Supply Chain Perspectives

    16

    5 Robert J. Bowman, Despite Obstacles, Shippers Score Success in Asia, Global Logistics & Supply Chain Strategies

    (July 1999).

    For many Asian

    companies, the greatest

    cost-reduction

    opportunities are those

    associated with logistics

    and distribution.

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    Enterprise application integration (EAI) technologies, or middleware, are another

    effective way to integrate applications and capabilities, and thus improve interenterprise

    data transfer and data transparency. However, before ERP or EAI can be effective,

    companies must separate their operational and technical challenges. If basic opera-

    tional measuresforecast accuracy, make adherence, l ine fill, inventory accuracy,

    inventory turns, operating cost and delivery accuracyare off-base, it is unlikely that

    any software package will provide much relief. Companies must recognise that, in

    general, 30 percent of the benefits to be derived from a software solution will come

    from the software and technology itself, and the remaining 70 percent will come

    from process reengineering. Without appropriate process improvements, a company

    may merely be speeding up or automating its current antiquated processes.

    Opportunity 5: Organise and Measure for Supply Chain EfficiencyCompanies striving for supply chain competitiveness must first organise for efficiency

    (Figure 7). That means optimising the whole, not the constituent parts of their supply

    chains. Asian organisations, however, historically have done the opposite: They have

    organised their supply chains around local markets, functions and business units. As

    a result, there is a deeply ingrained legacy of duplicated and inefficient supply chain

    infrastructures, technologies, operations, processes and people.

    Supply Chains in Asia: Challenges and Opportunities

    19

    Opportunity 4: Integrate Technology and Systems ArchitectureLeading organisations recognise the importance of developing an end-to-end supply

    chain view by linking planning/scheduling technologies with their ERP systems, as

    well as the systems of their customers and suppliers (Figure 6). However, in Asia

    and particularly in developing countriesmany companies have yet to implement

    ERP systems. The penalty they pay for this is greater than just the cost and difficulty

    of managing disparate and often archaic systems. It is the inability to integrate and

    optimise the newer technologiesincluding those in front-office, market-facing

    areas such as supplier relationship management and customer relationship management.Without integrated systems, organisations lose the opportunity to make better deci-

    sions, reduce overall operating costs, and further leverage resources and information.

    Supply Chain Perspectives

    18

    Advanced Planning and Scheduling

    Order Processing

    Demand Planning

    Constraint-BasedMaster Planning

    Customers

    Integrated OrderManagement

    ERP Legacy SystemsWarehouseManagement System

    Supply Chain Planning Demand Planning Demand Forecasting

    SupplierThird- and Fourth-Party Logistics

    Customer Demand Forecast

    In-Transits/Deliveries

    Goods Receipts

    Supply Chain Planning

    Forecasting

    Transport Optimisation Customer Collaboration

    Demand Collaboration

    Product Collaboration

    TransportationManagement/Optimisation

    IntegrationTools

    NEON Systems

    PeregrineSystems

    SeeBeyond

    webMethods Shipment Requests,

    Track and Trace Forecast/Material Requirements

    Procurement Processes

    Supplier Collaboration

    Figure 6:Illustrative example of integrated IT.

    Rationalise or relocateplants and supply chainassets across business

    units/markets

    Reduce network coststhrough use of

    postponement strategies

    Reduce invested capitalacross businessunits/markets

    Optimise cost-to-servetrade-offs for particularcustomer segments

    Optimise tax and dutyregimes across Asianmarkets through effective

    use of corporate

    organisation and location

    Network and Tax

    Optimisation

    Rationalise distributioncentres across businessunits/markets

    Lower transportationcontract rates and improveperformance across Asian

    markets through loadand creation tendering,carrier selection, andoptimisation services

    Optimise finished goodssourcing strategy acrossbusiness units/markets

    Reduce intercountry andin-country transport timesand costs

    Achieve operationalexcellence in fulfilmentand transportation acrossbusiness units/markets(e.g., track and trace,payment services)

    Fulfilment and

    Transportation

    Optimise supply/demandbalancing across businessunits/markets

    Plan and schedule atregional levels

    Improve forecast accuracy

    and line fill across businessunits/markets

    Reduce raw material,finished goods andpackaging inventory acrossbusiness units/markets

    Deliver sophisticatedplanning capabilities toemerging economies

    Reduce costs and improveservice throughcollaborative planningwith suppliersand customers

    Supply/Demand

    Planning and

    Replenishment

    Implement improvementsacross business units/markets:

    aggregation, auctioningand strategic sourcing

    - Improve supplier manage-ment and performance

    - Achieve greater complianceto supplier contracts

    - Leverage eProcurementsolutions

    Procurement

    Build capability rapidlyacross businessunits/markets

    Optimise training costsand increase trainingeffectiveness across

    business units/markets Facilitate transfer of best

    practices across businessunits/markets

    People and

    Capability

    - Reduce costs through

    Figure 7:Opportunities for a cross-business unit or regional supply chain organisation.

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    These important efforts currently are being pursued by multidivisional multinationals,

    conglomerates and regional companies, and are showing strong potential not only to

    reduce costs and increase efficiencies, but also to:

    Standardise processes.

    Adhere to best practices and create "centres of excellence."

    Develop tighter controls.

    Improve access to higher-quality management.

    Leverage scarce skills.

    Build critical mass.

    Clarify management's focus on areas of value creation. Provide sophisticated capabilities to less-developed markets that, if viewed in

    isolation as independent markets, would be constrained to the supply chain

    capabilities that characterised their stage of development (Figure 9).

    2. Rationalise across Business Units

    Balancing regionalisation and centralisation increases the transparency of a companys

    supply chain and planning requirements, while helping it to develop a more

    consolidated view of customer requirements across regions and divisions. This, in

    turn, can help the organisation recognise and realise opportunities to rationalise

    assets, infrastructure, people and operations across business units. As the Asian

    market grows and matures, the likely result will be more supply chain shared services

    centres and greater supply chain visibility in executive boardrooms.

    Supply Chains in Asia: Challenges and Opportunities

    21

    Following are four ways that Asia business leaders can rationalise their supply chain

    operations to increase efficiency:

    1. Regionalise Supply Chain Functions and Processes

    Several high tech and consumer goods companies operating in Asia have adopted

    regional manufacturing, distribution and marketing strategies. However, the areas

    exceptional diversity makes it difficult to prescribe a single pan-Asian operating

    model or rationalisation solution. Figure 8 summarises Accenture research into what

    various companies have done to organise for effi ciency.

    Perhaps the most important effort companies can make to balance centralisation

    and regionalisation is to consolidate the supply side to reduce variable costs and

    improve economies of scale. Several companies have successfully centralised demand

    and capacity planning, while still executing locally. Similarly, various intracountry

    logistics efforts now are planned and executed locally, but are centrally planned

    when material movement is between countries.

    Supply Chain Perspectives

    20

    Typically handled centrally Modification or

    customisation performedregionally or locally to fulfilcustomer preferences

    Typically performed regionally

    Product planningtypically performed locallybased on regional/centraldemand plan

    Typically handled locallyas the market in differentcountries varies

    Typically handledregionally or locally,depending on the nature ofthe products and degreeof configuration required

    Direct or strategicmaterial procurementtypically handled globallyor regionally

    Indirect or nonstrategicpurchases handled locally

    Possible Configuration:

    Country centrelocalises formula

    Regional centresharmonise for their region

    Possible Configuration:

    Regional sales andoperations planning

    Regional schedulingof production atlocal factories

    Possible Configuration:

    Handled and plannedregionally when

    between countries Handled and planned

    locally when withincountries, often by themanufacturing entity

    Possible Configuration:

    Regional

    Some activities outsourced

    (e.g., assembly/packaging)

    Possible Configuration:

    Regional or global centresmanage direct material

    procurementIndirect and packagingmaterials procured regionally

    Demand aggregatedregionally

    DemandManagement

    ManufacturingLogistics andDistribution

    ProcurementProductDevelopment

    Rationale:

    Ensure consistencyand fulfil localcustomer requirements

    Rationale:

    Reduce costs

    Ensure regional consistency

    Provide schedulingflexibility at factories

    Rationale:

    Achieve cost efficiencythrough economiesof scale

    Provide schedulingflexibility at factories

    Rationale:

    Limited benefitsin regionalising

    Rationale:

    Optimise regional production

    Maintain balancedsupply chain

    Figure 8:Summary of operating models and trends in regionalising supply chain management.6

    Figure 9:Applying sophisticated capabilities to less-developed markets.

    Emerging

    Developed

    Key Characteristics

    for Supply Chain

    Management

    Localise

    the supply chain

    Regionalise

    the supply chain

    Rationalise

    the supply chain

    Optimise local operations,

    integrate processes where

    possible

    Integrate, collaborate,

    think centrally or

    regionally, act locally

    Rationalise, collaborate

    and synchronise

    Emerging

    Markets/Companies

    Developing

    Markets/Companies

    Developed

    Markets/Companies

    Regional Capabilities

    6 The authors thank Jeremy Rowe and his Accenture team for the research that informed this chart.

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    performance are altered during a highly iterative transaction process. As orders

    are changed or cancelled during the fulfilment process, new documents generally

    are produced, while the original record is discarded. This prevents future analysis

    of the root causes for cancellations or shifts in demand.

    Archiving practices that are inconsistent. Historical records often are not

    kept or are lost.

    Inconsistent calculation and reporting of measures. From month to month,reported data may be drawn from varying sources and reflect different time periods.

    Targets that are not grounded in best practices, and do not represent the

    consensus of all participants. Rules of thumb for calculating key performance

    measures such as days of inventory coverage and forecast accuracy are applied

    instead of robust measures that have quantitative validity and reliability.

    Lack of a performance-management culture. People often do not know

    how measures in their companies are derived, nor what their purpose may be.

    There also may be a lack of designated process owners responsible for overall

    performance measure management from data capture through to reporting.

    Supply Chains in Asia: Challenges and Opportunities

    23

    3. Elevate People and Structures

    Regardless of geography, sustainable increases in efficiency can only be achieved if

    companies: a) successfully develop, attract and retain key talent; and b) migrate from

    a functional or subprocess orientation to one where direct, high-level accountability

    is established for each supply chain process. Boundary issues, resource conflict s and

    divergent opinions about the need for change naturally increase when higher levels

    of regionalism and centralisation are indicated. Without talented people and a single,

    cross-boundary process owner, most initiatives will not increase the effectiveness of

    the company as a whole. New cost-effective options for rapidly building supply chaintalent and capability across a dispersed supply chain organisation are emerging to

    provide immediate infrastructure and virtual supply chain training, which can be

    tailored to individual and corporate needs. These options also provide companies

    with the ability to rapidly transfer best practices across divisions and markets.7

    4. Focus on Performance Measures and Benchmarks

    We know of no organisation that has achieved high levels of supply chain effic iency

    and effectiveness without an effective performance measurement and benchmarking

    capability. In fact, Michigan State University's multiyear study of supply chain

    excellence cited performance metrics and benchmarking as one of the top four

    drivers of supply chain excellence.8 However, Accentures client experience confirms

    that few Asian companies have pursued this capability with any level of vigour. In

    fact, it is not uncommon to find:

    A lack of standard measurement definitionsacross countries, business units,

    plants or distribution centres. Where defined metrics do exist, there usually is

    not enough consistent data to develop reliable comparisons.

    Few integrated, supply-chain-wide measuresto improve cross-functional

    performance. The imperatives of saving face and minding ones own business

    are so strong and prevalent that measures sometimes are manipulated toproduce favourable results.

    Key performance indicator (KPI) source data that are not captured and/or

    maintained as history. For example, true demand often is not ascertained,

    since only the negotiated demand is recorded. Moreover, true order histories

    are lost, because source documents and records that are used to calculate

    Supply Chain Perspectives

    22

    7 Accentures Supply Chain Academy solution tailors virtual supply chain training on almost any supply chain

    management subject and offers a cost-effective option for Asian companies.

    8 The Global Research Team, Michigan State University, World Class Logistics: The Challenge of Managing

    Continuous Change, Council of Logistics Management (1995).

    The best firms in Asia recognise that performance measures

    provide the link between strategy and operational reality,

    which is why most use monthly, weekly and daily scorecards

    to hone in on the right activities and help set common

    goals for supply chain performance.

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    Dell Computer is an excellent example of a company that successfully turned the

    acquisition of supply chain capabilities into an art form. When given the task of

    setting up two assembly plants in Malaysia and China, Dell obtained various supply

    chain capabilities in several ways.

    First, Dell purchased off-the-shelf software applications (buy). To overcome gaps

    in the capabilities of its people, the company recruited a key supply chain manager

    (buy) and used consultants to help with high-impact projects (borrow), thereby

    accelerating the implementation of short-term projects. At the same time, the companyinvested heavily in training supply chain personnel to ensure strong management

    capabilities going forward (build). To bridge gaps in the technology capabilities of

    local suppliers, Dell provided them with access to demand information via the Web

    (ally). Lastly, the company recognised the basic limitations of its logistics infrastruc-

    ture, so it outsourced some of its transportation and distribution operations

    to third-party providers (borrow).

    The result: Dell successfully has implemented its direct sales model across Asia,

    and Dell factories in China and Malaysia are capable of delivering made-to-order

    personal computers to business customers within tight time frames. Currently,

    Dell's plant utilisation levels are at 90 percent, while production planning cycle

    time is down to two hours.

    Outsourcing in Asia

    Dell obviously understands that access to the best supply chain capabilities is more

    important than ownership of those capabilities. In fact, outsourcing has become a

    mainstream way for companies in the US and Europe to obtain supply chain capabil-

    ities that help them:

    Bring new capabilities online quickly and productively.

    Minimise capital investment.

    Convert fixed costs into variable costs. Respond quickly and economically to changes or surges in demand.

    Agilent, Colgate-Palmolive, Compaq, Danone, Ericsson, Herman Miller,

    Hewlett-Packard, Johnson & Johnson, Lucent, Motorola, Nokia, Procter & Gamble

    and Sun Microsystems also have outsourced some of their Asian supply chain

    management operations. The most commonly outsourced activity is fulfilment:

    tapping the transportation, warehousing and inventory-management expertise

    of local and foreign logistics services providers. Microsoft, for example, outsourced

    its logistics operations in Asia to BAX, and subsequently doubled its inventory

    turns, increased order-fill rates, raised the percentage of on-time shipments, and

    reduced obsolescence levels and the amount of returned scrap.9

    Supply Chains in Asia: Challenges and Opportunities

    25

    The best firms in Asia recognise that performance measures provide the link between

    business strategy and operational execution, which is why most use monthly, weekly

    and daily scorecards to hone in on the right activities and help set common goals for

    supply chain performance. Those leaders also apply rigorous measures based on high-

    quality data rather than rules of thumb. Most importantly, they clearly define what is

    needed to achieve total supply chain efficiency and competitiveness.

    For Asian companies, effective performance measurement and benchmarking could

    be the best opportunity to translate supply chain strategy and improvement initia-tives into real business results. But without those capabilities, they cannot see how

    they are doing today, nor can they know how they are progressing or when they

    actually have achieved success. In effect, they are driving blind.

    Opportunity 6: Source Capabilities IntelligentlyMany opportunities avail themselves solely to companies that are smart about how

    they acquire key supply chain capabilities. As shown in Figure 10, there are four

    different ways that those capabilities can be obtained; each has a clear-cut set of

    advantages and shortcomings.

    Supply Chain Perspectives

    24

    Figure 10:Alternative approaches to acquiring supply chain capabilities.

    In-House Ability

    High

    Low

    HighLow

    Buy

    Development

    Support

    BuildAlly/Acquire

    Moderate

    Moderat

    e

    OutsourcePreference for

    OutsourcingAbilitytoDifferent

    iate

    Access to the best supply

    chain capabilities is more

    important than ownership

    of those capabilities.

    9 Robert J. Bowman, For Asian Supply Chains, Good News and Bad, Supply Chain Brain (July 2000).

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    UsingTransformational Outsourcing to CreateNewEfficienciesand Revenue StreamsFollowing the lead of successful supply chain transformational outsourcing ventures

    in the US and Europe, a number of Asia's key business players and some large

    conglomerates are considering the development of solutions that provide: a) quantum

    leaps in the supply chain performance of their individual business units or markets;

    and b) a capability that can be marketed to other players in the industry. Selling

    supply chain services to other players clearly helps the originator build scale and

    synergies, which it may be able to then leverage as a service provided to the

    numerous small and medium enterprises that might be unable to achieve scale in more

    conventional ways. In fact, there is every reason to believe that in some industries these

    new supply chain service providers eventually may sell services to their competitors.

    Currently, the greatest potential for these services appears to be in the energy and

    resources industries, as well as utilities, high tech, telecommunications, automotive

    spare parts, beverages and pharmaceuticals. However, there are many questions about

    the structure, ownership and even the business feasibility of these endeavours in

    Asia. For one thing, a successful supply chain service provider requires an unusually

    broad array of capabilities that generally do not exist in one organisation and hence

    will need to be obtained from outside the organisation, including: technology integrators,logistic services providers, programme managers, supply chain experts with deep

    functional knowledge, and people with deep industry knowledge (Figure 11). However,

    Asias unique and formidable barriers, combined with the need for low-capability

    organisations to transform themselves rapidly, could be a catalyst for outsourcing

    models that transform rather than tinker with a multinational corporations

    supply chain.

    Supply Chains in Asia: Challenges and Opportunities

    27

    A noteworthy outsourcing leader in southern Asia is the pharmaceuticals industry,

    many of whose members routinely outsource traditional distribution functions and

    (in many countries) the formulation and packaging of product. Distributors such as

    Zuellig Pharma (with operations in 14 countries), Diethelm Keller Pharma Asia

    (operations in 13 countries) and JDH Healthcare, a division of Li & Fung (operations

    in seven countries), have invested heavily in technology, supply chain management

    systems and eCommerce platforms. Each offers a wide range of supply chain services,

    including manufacturing, warehousing, transportation and distribution. All in all, the

    outsourcing push is having a dramatic effect throughout Asia, with more and moreregional distributors using scale and critical mass to develop highly competitive opera-

    tions. Nevertheless, large pockets of opportunity remain in places like China and

    Korea, where the pharmaceutical industry is highly competitive and fragmented due

    to regulatory controls on distribution channels.

    Looking ahead, several factors are likely to drive even more Asian business

    operations toward outsourcing. They include:

    Intensifying competition.

    Tighter focus on profitability.

    Increasing customer demands.

    Enhanced abilities to disseminate, acquire and utilise information via ERP

    systems and the Internet, thereby communicating with and managing third-

    party providers more effectively.

    IDC predicts that the outsourcing market for logistics will rise from US$8.6 billion in

    2002 to $29.2 billion in 2005, with the most significant opportunitiesappearing in

    greater China, Singapore and Malaysia.10 In addition to the worldwide benefits noted

    above, these dramatic increases will be driven by Asia-resident companies' need to

    surmount linguistic, cultural, regulatory, political and economic barriers more readily,

    and to forge new inroads into other Asian markets. In the short term, many conglom-

    erates will rely on internal departments for logistics support,particularly in Korea andChina. But over timeas external logistics providers become more adept at managing

    supply chainsconglomerates will outsource logistics support. Despite being suspicious

    of external parties, there are major opportunities for internal logistics departments of

    conglomerates to break free of their parents, and for large conglomerates to involve

    themselves in comprehensive outsourcing deals.

    Supply Chain Perspectives

    26

    10 Douglas A. Jaffe, Caron Harrison and Wilvin Chee, Taking Logistics into the 21st Century: A Study of Logistics in

    Asia-Pacific (Excluding Japan), IDC (July 2001) 27-28.

    IDC predicts that the outsourcing market for logistics will

    rise from US$8.6 billion in 2002 to $29.2 billion in 2005,

    with the most significant opportunities appearing in

    greater China, Singapore and Malaysia.

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    Not surprisingly, this movement of raw materials, semifinished goods and finishedproducts poses a significant supply chain challenge, particularly to smaller

    businesses. However, many Asian players are working hard to fill the void. A premier

    example is Li & Fung, Hong Kong's largest export trading company, which works

    with more than 7,500 suppliers across 37 countries. Working primarily over the

    Internet, this innovative firm coordinates the pan-supply-chain efforts of

    numerous suppliers, manufacturers, wholesalers, retailers and customers.12 It

    collaborates with virtually all of them on forecasts, capacity management

    and resource availability, thus enhancing each party's flexibility, responsiveness

    and agility.

    Supply Chains in Asia: Challenges and Opportunities

    29

    There is a strong rationale for creating an independent supply chain service organisa-

    tion that consolidates management of the supply chain across business units or

    markets. For those companies that independently manage supply c hain activities

    within each business unit or market, such a transformation can result in numerous

    benefits, as outlined in Figure 11.

    Opportunity 7: Extend the Supply ChainAcross Asia, major opportunities exist to build collaborative supply chain capabilities

    that span multiple business entities. If issues relating to trust, data capacity and

    win-lose thinking can be overcome, then companies' regional and national supply

    chains could become significantly more competitive and cost-efficient. Here are two

    basic extension opportunities.

    1. Extend the Traditional Supply Chain

    Extending the traditional supply chain refers to collaboration with suppliers and

    customersa strategy with three principal permutations:

    Industry Collaboration. Thus far, industry-level collaboration across Asia has

    been approached only informally. Moreover, there are few organisations working

    toward standardised rules, protocols and/or accepted practices. There are two

    exceptions, however: Singapore and Hong Kong. In the latter, several initiatives

    are under way to increase collaboration levels, including the formation of the

    Hong Kong Logistics Development Council, comprising key industry and govern-

    ment leaders. There also are some indications that the Association of Southeast

    Asian Nations (ASEAN) may spur collaboration efforts in the near future. A study

    has been launched to examine this issue. Similar experiences in the US, Europe

    and Australia show that industry-level collaboration around data standards,

    protocols, pallet and container standards, and the like can produce significantsavings and efficiencies.

    Supply Chain Collaboration for Dispersed Production. Dispersed production

    refers to the process of developing goods and materials at a sequence of facilities.

    According to a Harvard Business Reviewarticle, for example, yarn purchased from

    a Korean producer is shipped to Taiwan, where it is woven and dyed, and zippers

    produced in Japan are purchased through a Chinese manufacturer. Then,

    because of quotas and labour conditions, woven yarn and zippers are shipped

    to Thailand, where garments are made in one of five factories.11

    Supply Chain Perspectives

    28

    Figure 11:Transforming the supply chain across markets and/or business units.

    From independent market/business unit management ofthe supply chain with points of resistance...

    ...to consolidated management of the supplychain across markets/business units by a newsupply chain service organisation

    Custom

    ers

    Suppliers

    Supply/Demand Planning

    CustomerManagement

    DistributionLogisticsMakeBuy

    Market/Business Unit 1

    Supply/Demand Planning

    CustomerManagement

    DistributionLogisticsMakeBuy

    Market/Business Unit 2

    Supply/Demand Planning

    CustomerManagement

    DistributionLogisticsMakeBuy

    Market/Business Unit 3

    Supply/Demand Planning

    CustomerManagement

    DistributionLogisticsMakeBuy

    Market/Business Unit 4

    Supply Chain Service Organisation

    Sourcing and procurement

    Fulfilment and transportation

    Supply/demand planning; inventory, network and tax optimisation

    Supply chain technology and execution management

    Supply chain people capability-building and knowledge management

    Culture, Entrenched Practices

    People and Capabilities

    Systems and Transparency

    Accelerating savings and release of cash

    Overcoming resistance to change in regions, countries andfunctions overcomes strong organisational inertia

    Provide a reason and rationale to change the operatingmodel by introducing a new supply chain service organisation

    Achieve rapid development of people and skills, instant

    access to capabilities and infrastructure

    Achieve fact-based, rational decision making by includingan outside party that isn't influenced by existing models

    Direct centralised savings to areas that can achieve thehighest economic value-add

    Custom

    ers

    Suppliers

    Supply/Demand Planning

    CustomerManagement

    DistributionLogisticsMakeBuying

    Market/Business Unit 1

    CustomerManagement

    DistributionLogisticsMakeBuying

    CustomerManagement

    DistributionLogisticsMakeBuying

    CustomerManagement

    DistributionLogisticsMakeBuying

    Rationale/Benefits

    Supply/Demand Planning

    BuyCustomerManagement

    DistributionLogistics

    Across Asia, major

    opportunities exist to

    build collaborative

    supply chain capabilities

    that span multiple

    business entities.

    11Joan Magretta, Fast, Global and Entrepreneurial: Supply Chain Management, Hong Kong StyleAn Interview with Victor Fung,

    Harvard Business Review(September-October 1998), 105-106.

    12 A Surprising World Leader in Supply-Chain Management, The Economist(June 6, 2001).

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    Making the hub concept work involves developing solutions that move synchro-

    nisation beyond supply chain participants to trade chain participants

    connecting customers, suppliers, enterprises, bankers, third-party logistics

    providers, air and sea ports, freight forwarders, and customs/tax officials. In

    places such as Hong Kong, there is no higher supply chain imperative, even

    though overcoming hurdles relating to trust, data standardisation, language,

    currency, security, bureaucracy, ownership and leadership will be a major challenge.

    Even further out, the distributed nature of Asian manufacturing, and thesubsequent trade flows that occur among Asian countries, suggest that a major

    opportunity may exist to connect several hubs into a network of co-opetition

    (cooperation and competition). In the long term, this sort of synchronisation

    could help make Asian supply c hains a formidable business force.

    Alliances for Logistics Providers. Seeking to leverage new market opportunities

    and the growing popularity of hubs are the logistics arms of several nationally

    backed conglomerates. These forward-looking organisations desire to use their

    logistics capabilities to develop a network or alliance of national supply chain

    services providers. This network likely would resemble the oneworld alliance

    and Star Alliance developed by the airline industry, which bring together

    a number of competing, national fl ag-carrying airlines. Just as competing

    national airlines collaborate on (and synchronise) the flow of passengers to optimise

    capacity utilisation, an alliance of l ogistics providers could synchronise the

    complex flow of goods into, out of and across Asia (Figure 12).

    Supply Chains in Asia: Challenges and Opportunities

    31

    As a spokesperson commented on Li & Fungs model of borderless manufacturing:

    Were not asking which country can do the best job overall. Instead, were

    pulling apart the value chain and optimising each step. Not only do the benefits

    outweigh the costs of logistics and transportation, but the higher value added

    also lets us charge more for our services.13

    In addition to overall cost savings, value is realised in the reduction of delivery

    cycle-times from months to weeks. Plus, Li & Fung uses informationnot

    assetsto create competitive supply chains. Its adroit use of eCommerce helpsto counteract the threat of major retailers going directly to suppliers, which

    might cut Li & Fung out of the loop.

    Collaborative Planning and Synchronisation. Collaboration among supply chain

    partners (i.e., customers and suppliers) can involve vendor-managed inventory,

    collaborative demand planning, manufacturing and design, joint capacity planning

    and/or synchronised order fulfilment (which involves the most risk because it

    makes parties dependent on each other).

    In any context, however, collaboration represents a new way of thinking for

    many Asian companies. It also involves several prerequisites. Companies must

    reengineer and integrate their internal supply chain planning processes and

    technologies prior to involving themselves in collaborative activity. They also

    must be able to ensure that the data produced by their respective supply chain

    technologies is valid, consistent and transparent. Lastlybecause real collabora-

    tion means sharing information on demandcompanies must develop a

    trust-based "win-win" perspective. When these requirements have been met,

    it becomes possible for trading partners to understand each other's basic operating

    mechanisms and thus develop unified processes that drive down costs and

    increase the effectiveness of both parties.

    2. Extend beyond the Traditional Supply Chain

    Extending beyond the traditional supply chain involves creating new revenue

    channels and cost-reduction opportunities by interacting in new or less-conventional

    ways. Here are four examples:

    Trading Hubs. The establishment of logistics and distribution trading hubs is a

    hot topic in Asia. China, Hong Kong, Malaysia, Singapore, South Korea and

    Taiwan are competing to develop supply chain hubs that will control and shape

    the movement of goods i n and around Asia. In the case of Hong Kong and

    Singapore, the challenge is to maintain their edge by improving the efficiency

    and competitiveness of existing hubs. Many observers believe that the economic

    well-being of these regions depends on the success of trading hubs.

    Supply Chain Perspectives

    30

    Because real collaboration

    means sharing demand

    information, companies

    must develop a trust-based

    win-win perspective.

    Profitability and Growth

    MarketDominance

    Profitability and Growth

    MarketDominance

    Profitability and Growth

    MarketDominance

    Supply Chain 1 Supply Chain 2 Supply Chain 3

    Alliance Relationships Alliance RelationshipsLogisticsLeader

    LogisticsLeader

    LogisticsLeader

    Followers Followers Followers

    Figure 12:A vision of the best working with the best across Asia: This model demonstrates how several nationally

    backed conglomerates could link their logistics capabilities into a network of supply chain service providers to synchronise

    the flow of goods into, out of and across Asia.

    Source: Andrew Berger and John Gattorna, Supply Chain Cybermastery: Building High Performance Supply Chains of the Future, Gower (2001), 25.13 Magretta 106.

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    The Time to Act Is NowAsia is one of the world's most dynamic and diverse markets, and certainly will

    remain so for quite some time. From a supply chain standpoint, it also is one of the

    most challenging markets; that, too, is unlikely to change anytime soon. In

    fact, different (and generally divergent) cultures, business practices, regulations,

    technology capabilities and transportation infrastructures often combine to make

    effective Asian supply chain management seem more like a lofty ideal than an

    achievable objective.

    Certainly, the seven opportunities discussed in this white paper will not completely

    alleviate the basic differences or conflicting priorities that characterise the Asian

    marketplace. But they do constitute a viable framework for reaching levels of supply

    chain efficiency and competitiveness that might otherwise be unattainable. They

    have been used successfully by othersboth outside and within the region.

    The Path ForwardDiverse companies obviously will position these opportunities in varying ways and

    contexts. While some will focus on mastering the basics, others will move more

    quickly to develop advanced optimisation and synchronisation capabilities. But in

    all cases, there are several immediate actions organisations can take to accelerate

    along the path to success:

    Supply Chains in Asia: Challenges and Opportunities

    33

    eMarkets. Most of Asias eMarkets, or electronic markets, are focused on

    procurement: SESAMi in Singapore, BayanTrade in the Philippines, Cyberlynx

    and CW Optus in Australia, and Pantavanij in Thailand. However, no pan-Asian

    eProcurement marketplace yet existsand the market and regulatory diversity

    makes development of such an entity unlikely in the near term. However, there

    is an opportunity for a hub that connects and synchronises the activities of

    multiple eMarkets.

    Toward this end, SESAMi recently announced that it has linked six of the mostactive eMarket operators in the world to form the Global Interoperability Group

    (GIG). A network of horizontal marketplaces within the Global Trading Web

    Association, GIG will move eCommerce transactions seamlessly around the

    world. The theory is that companies working with any of the participating

    eMarkets will be able to use GIG to interact online with trading partners around

    the worldwith one consistent business contract and no concerns about

    technical compatibility.

    Horizontal Conglomerates. With superior supply chain capabilities developed

    within and/or across verticals, companies doing business in Asia can further

    leverage their scale, efficiency and knowledge by improving information flows

    among horizontals. The goals are to: a) provide a simpler, more integrated,

    one-stop service to customers by synchronising the delivery of services; and

    b) make services available to othersparticularly Asia's myriad small-to-

    medium-size businesses.

    In Hong Kong, for example, Hutchison Whampoa Limiteds Global Trade

    Exchange is creating new sales channels and opportunities by integrating its

    ports business with its other transport-related businesses. Similarly, Hutchison

    Port Holdings LINE (Logistics Information Network Enterprise) subsidiary

    provides a wide variety of supply chain management services, including onlineprocurement; inventory management; transportation management and load

    optimisation; order visibility and track and trace; sourcing of spare parts for

    ports and vessels; and a trading community. Targeting banks, freight forwarders,

    buyers and sellers of transportation services, insurance companies, and govern-

    ment agencies, LINE demonstrates the dramatic extent to which traditional

    supply chains can be extended.

    Supply Chain Perspectives

    32

    There are several

    immediate actions

    organisations can take

    to accelerate along

    the path to success.

    Asia is one of the world's most dynamic and

    diverse markets, and certainly will remain so

    for quite some time. From a supply chain

    standpoint, it also is one of the most challenging

    markets; that, too, is unlikely to changeanytime soon.

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    Bibliography

    A Surprising World Leader in Supply-Chain Management, The Economist

    (June 6, 2001).

    Asia Industry: Redefining the Pharmaceutical Supply Chain, Economist Intelligence

    Unit Regional Economic News (October 15, 2001).

    Bowman, Robert J., Despite Obstacles, Shippers Score Success in Asia, Global

    Logistics & Supply Chain Strategies(July 1999).

    Jaffe, Douglas A., Caron Harrison and Wilvin Chee, Taking Logistics into the 21st

    Century: A Study of Logistics in Asia-Pacific (Excluding Japan), IDC (July 2001),

    27-28.

    Kim, M., LG Electronics' Global Supply Chain Management System Goes Live,

    Business Wire (September 5, 2001).

    Lim, June, Malaysia Continues to Improve Logistics Infrastructure, MHD Supply

    Chain Solutions(November 2001), 14.

    Magretta, Joan, Fast, Global and Entrepreneurial: Supply Chain Management, Hong

    Kong StyleAn Interview with Victor Fung, Harvard Business Review(September-

    October 1998), 105-106.

    Manion, David, Asia Pacific Supply Chain Survey, CommerceNet (November 19, 1999).

    Establish the imperative or pressure for change. Complete a supply chain value

    targeting exercise so that the benefits potential and business value are evident

    and owned by key stakeholders.

    Develop a time-phased business case and road map in which priorities are based

    on driving significant value early from the supply chain. Success breeds success.

    It is vital that all supply chain initiatives in the road map are integrated with

    other organisational initiatives.

    Articulate a supply chain vision that supports the companys operating model

    and is compelling for all stakeholders.

    Appoint an executive sponsor and process owner who will champion the change.

    Create the capacity to change. That i s, clearly define responsibilities, train the

    appropriate people and provide worthwhile incentives.

    Establish an end state through performance measures that are clearly tied to

    strategic and operational goals. Communicate these measures and goals, and

    then rigorously monitor performance.

    Continually monitor customer reactions, market conditions and outcomesand

    adjust as necessary.

    Celebrate success and then continue to innovate and drive value.

    Lastly, the time to act is now. For those companies that do not begin to capitalise on

    these opportunities in As