As business becomes more global, the journey of goods and services to market becomes increasingly complex. International sourcing, marketing and distribution have become critical factors in a company’s success or failure as well as cornerstones of any corporate global expansion.
The role of international logistics and distribution centres in the global trade route matrix has therefore become increasingly important. And choosing the right location is key to devising an effective global supply chain strategy. But with so many locations along strategic trade routes vying to become global trade centres, identifying the optimum location for a logistics and distribution hub becomes ever harder for multinationals.
As countries begin to appreciate just how powerful logistics zones are in attracting international investment, competition has intensified significantly. Egypt has a number of projects under way around the Suez Canal to attract international businesses along the Europe-Asia trade route to its logistics and distribution centres around Port Said. There are several port developments afoot in the Gulf, compounding the success of Dubai’s Jebel Ali free zone as an international logistics hub, including a redevelopment of Abu Dhabi’s Khalifa port. In the Levante region of the Middle East, Aqaba port development is part of a masterplan for a free zone which encompasses the entire Jordanian coastline. China is also investing heavily in upgrading its port infrastructure because it has quickly become an important international trade partner.
As locations gear up to attract more trade, companies are re-examining their sourcing strategies, distribution facilities and logistics hub locations in the light of the global economic downturn. Add to that the rising cost of goods and workers in China, fuel price increases, increased risks of natural disasters, labour actions and terrorism, and global supply chain decision-making starts to shift.
Each year, AMR research ranks the top 25 corporate global supply chain networks. The one thing these companies have in common, says AMR’s Kevin O’Marah, is agility.
A flexible supply chain partly explains why Apple ranks number one in the world, according to AMR’s research. Apple’s chief operating officer Tim Cook redesigned the company’s supply chain based on contract manufacturing, which made it a very agile organisation, and in turn gave Apple a competitive edge, says Mr O’Marah.
“The most successful global supply chains are driven by consumer demand,” he says. This may sound obvious but, he notes, most companies are still being driven by internal operations – a legacy of the 20th century industrial world.
Companies fail when their global supply chain is not integrated. Manufacturing, transportation, and shipping and purchasing must all work together in order to assess how shifts in consumer demand affects profitability. These departments are now located across different global sites. Whereas silos were cultural in the past they are now structural, says Mr O’Marah.
This is why the internet, IT and communications are key in integrating a company’s global supply chain. “The top companies are not just buying in the right software – it is about how they are using IT to get a view of the business from all areas,” he says.
Optimising a supply chain may include liaising with suppliers to eliminate bottlenecks and sourcing strategically to strike a balance between the lowest material cost and transportation. But maintaining the right mix and location of factories, distribution centres and warehouses to serve customer markets is what can make all the difference.
Locating distribution centres close to large customers often makes good business sense these days, according to Tompkins Associates supply chain expert Gene Tyndall.
“The variability in consumer demand is such that forecasting sales is especially difficult, and the lead times to plan, make and move the products are up to 12 weeks. So, storing inventories near the larger customers can reduce the total delivered costs,” he says.
Hubs and spokes Until recently, most multinational companies used the ‘hubs and spokes’ distribution of large regional distribution centres linked to a series of smaller centres with delivery systems out from there. “Today’s economics can change the balance of costs and, thus, the inventory positioning strategies,” says Mr Tyndall. “The only way to be certain about distribution centre locations is to evaluate the total delivered costs of the complete supply chain, factoring in customer service requirements such as order cycle times.”
Trade routes change with market demand and will affect distribution centre locations. This is not so much of an issue in Europe because the Netherlands’ hubs can reach customers within a day, as can others such as Le Havre, Trieste, Felixstowe, as well as German, Italian and Spanish ports of entry. “Market demand from Asia, however, has seen multinationals reassess their dual strategies of sourcing and distribution to examine whether distribution centres can serve both functions,” says Mr Tyndall.
The US is experiencing the most dramatic shifts in distribution centre locations as consumer demand slows and total costs increase. According to Mr Tyndall, multinational companies are re-evaluating their ports of entry, which affects their choice of distribution location. “A shift to east coast ports, for example, is resulting in changes in distribution centre locations in which to consolidate and then redistribute to customers as well as many multinational companies using the model, which takes goods directly from factory to retail distribution centre,” he says.
German chemical manufacturer BASF has a presence in 170 countries and focuses on being close to customers where it makes sense. Global supply chain senior vice-president Robert Blackburn says the company has a well-designed balance between world-scale production sites on the one hand and local production and supply for customers on the other. The strategy is supported by a regionally differentiated distribution structure, taking into account the different requirements and developments of each region.
“That’s the reason in Europe, with only a few exceptions, that we supply all main markets and customers directly from our production sites, while in other regions, such as Asia, we use regional and local distribution centres,” he says.
Most companies evaluate each global location for optimum total delivered costs. Keith Harrison, global product supply officer at multinational consumer products firm Procter & Gamble (P&G), says the company tackles each market differently. “We design our business systems looking from the store shelf all the way back to our manufacturing systems and material and equipment suppliers to determine what is required in each market to build a cost-effective supply network,” he says.
P&G examines points of distribution; response time to the market; and the supporting capacity of the full supply network for production and distribution.
Efficiencies and risks
The sheer size of P&G’s global business provides scale efficiencies that are difficult to match, says Mr Harrison. But there are always risks so P&G has a forward-looking and comprehensive supply network masterplanning process that factors in constraints such as cost increases in China, energy/fuel price increases, increasing risks with supply chains from weather, labour laws and terrorism threats.
“This process is helping us to mitigate the impact of these issues where they are already affecting us, and to stay ahead of the others as we make changes to our supply system design,” says Mr Harrison. Designing and delivering a supply network means continuously adapting a business model to face ongoing challenges. “The days of designing a supply network once every five to 10 years to support your growth, cost, cash and service objectives are over,” he says.
Trading with countries such as China, which has become one of the most significant trading partners for Western economies, presents challenges in terms of logistics infrastructure because, although expanding rapidly, China supply chain infrastructure improvements do not reflect its volume of trade.
There is enormous capital investment in ports and ground facilities, but the lack of value-added capabilities, advanced technologies and supply chain talent lags significantly. These gaps worsen as development is pushed beyond the coastal industrial centres, which will constrain not only sourcing but also distribution.
As mainland China deals directly with other countries for trade after the country’s accession into the World Trade Organisation, the role of Hong Kong as an export hub and Guangdong province as a manufacturing base is gradually shifting toward Shanghai and northern China.
These regions are now attracting foreign investment and are growing faster than the south. The government’s plan for a network of distribution parks throughout China will compound Shanghai’s growing stature as a central trading hub. Shanghai is the largest port in the world by tonnage and the third largest by container throughput. The volume of trade passing through Shanghai has increased by 20% to 30% a year since 1994. To accommodate the growth in trade, the port has received about $6bn of FDI from 1992 to 2002 for port infrastructure development. AP Moller Maersk is a key investor in the second phase $12m expansion of Shanghai port.
At the end of 2006, Shanghai’s throughput surpassed that of Los Angeles Long Beach port, the largest container port in the US. Shanghai is growing quickly in size but the city’s overall economy is also growing at about 12% annually, compared with Los Angeles’ 3% growth.
Such varying degrees of global supply chain infrastructure depending on the global location means risk mitigation needs to be incorporated as an element in product design as well as the design of the value chain associated with that product, says Angel Mendez, Cisco’s senior vice-president for global supply chain management.
“Also, we’ve developed a system to stay vigilant 24/7 around the world for potential disruptive influences on our supply chain,” he adds.
Cisco has invested in a dedicated team supported by the tools and business processes needed to enable global, real-time monitoring and notifications. “We’re able to understand supply chain impact and related recovery times down to the individual site and component level and to respond very quickly, if needed, after an event,” he says.
Infrastructure is not the only supply chain challenge facing multinationals. “This year has been particularly heavy on hurricanes and typhoons. In most instances, we can quickly re-route products through our global network, avoiding major disruptions to our customers,” says Mr Mendez. Rising energy costs and increasing environmental legislation has impacted upon Cisco’s logistics approaches. “For many products, our approach has been to locate distribution centres close to major concentrations of customers.”
But the company is also deploying a ‘direct ship’ model where appropriate, sending Cisco products directly from the factory to the customer. This method has several advantages and enables Cisco to significantly cut back on transport-related energy use and associated carbon emissions. “I envision us continuing to design logistics networks that allow us to optimise speed, configure to order capabilities, landed costs and overall customer value,” says Mr Mendez.
Environmental concerns are likely to increasingly affect the way in which companies approach their international supply chain strategy in the future. Retail giant Wal-Mart recently announced targets for the reduction of water and energy use, reductions in packaging and commitments to developing more sustainable products. “Our environmental footprint is primarily through our supply chain as a company,” says Matt Kistler, head of Wal-Mart’s global sustainability function. And that may mean reverse logistics, green product design and supply network compliance.
Environmental concerns – compounded by oil price volatility – could see companies choosing cheaper sea routes rather than air freight in future. As differences in environmental regulations and in-country manufacturing requirements across the globe continue to proliferate, agility becomes a key requirement of every multinational corporate supply chain.
As markets, customers, sources of innovation and talent become increasingly globalised, companies with the flexibility to respond quickly to unexpected events or new opportunities will be among the most successful.