PANEL 2B Logistics and Integration into Global Supply Networks

1. PANEL 2B Logistics and Integration into Global Supply Networks

2. Knowledge Economy Forum IVLogistics and Integration into Global Supply Networks Global Industrial Context Prof. M.J. Gregory Institute for Manufacturing

3. Overview • Industrial ideas • Global context • Emerging capabilities • Working in networks • Implications

4. Industrial Ideas • Products – ARM – Microcircuit design • Production – Zara – Fashionable clothes • Distribution – Dell – Personal computers • Services – Rolls-Royce – Aero-engines

5. ARM – microchipsmarketing>design>production>distribution>service • ARM designs used in 75%of mobile phones • Close to global customers and OEMs • ‘Fabless’ business model • Substantial process knowledge

6. Zara - clothesmarketing>design>production>distribution>service • Spanish clothes maker Zara owns all production capability • Products in own shops change every 2 weeks • Production can be flexed to respond to demand • Competitors can’t follow!

7. Dell – personal computersmarketing>design>production>distribution>service • Dell pioneered large scale direct selling. • Their model allows on-line customisation of products • Production and delivery status can be tracked by the customer • On-line diagnostics and after sales service minimise support costs

8. Rolls-Royce – Aeroenginesmarketing>design>production>distribution>service • Responding to customer needs • Rapid growth in market share • ‘Totalcare’ service model ~60% of revenues • Implications for design and production

9. Innovation, Value Chain & Business Models Innovation can occur within and between each stage along the value chain Marketing>Design>Production>Distribution>Service but the stages often have different ‘owners’ and the interfaces and interdependencies between them are often poorly understood.

10. …and the context is changing rapidly • Global demand for products is rising • ‘Disintegration’ of stages in some value chains • Value-adding opportunities at each stage BUT • Globalisation is changing industry configurations • Industrial capabilities are evolving rapidly

11. USA – they say… • Growing economy • Strong in research and some production • Emphasis on education BUT • Falling share of production • Economic imbalances

12. Europe – they say… • Increasingly ‘high-tech’ • Spectrum of large and small businesses • Good global connections BUT • Some countries thought to be inflexible • Intense competition

13. Japan – they say… • Continuing strength in production • Capable global networks • New investments in local production BUT • Ageing population • Rigid structures

14. India – they say… • Growing capability in software • Highly educated population • Growing interest in manufacturing BUT • Infrastructure limited • Production has not been a priority

15. China – they say… • Growing production scale and capability • Dominant position in some products • Growing R&D • BUT • Imbalance between production and services • Shortages of energy

16. Globalisation – the case of China • China is emerging as an industrial powerhouse • It has received massive inward investment • Industrial development has been systematic • ‘High-tech’ capabilities are increasing rapidly • Growth impacts global industrial structures

17. Growth Average annual growth rate was more than 10% between 1980 and 2004 Source: Chinese National Statistics Annual Report (2005)

18. Foreign Direct Investment Billion US Dollars Source: http://www.china.org.cn

19. New Workshop of the World- Pearl River Delta • 70% of the world’s photocopiers • 60% of the world’s microwaves • 160,000 people in single factory for running shoes

20. New Workshop of the World - Yangtse River Delta • 30% of the world’s ties • 70% of the world’s • lighters • fastest growing car production location

21. Domestic appliances - Galanz • Largest microwave oven production base in the world • Annual production capacity of 15 million units 11,000 employees. • Turnover $700m • 70% of China market, • 40% of global market.

22. Clothing - Meters/Bonwe • Virtual company in Garment Industry • Grown dramatically from a shop into a regional brand and into the leading national brand • Over 1000 retail outlets in China • Sales of US$250 million in 2003.

23. So how do they do it? • Cheap labour • Foreign Direct Investment • Natural resources But also • Systematic development of infrastructure • Strategic development of industries • Increasing focus on innovation and service!

24. So what are the underlying patterns? • Attraction of ‘service-oriented’ business models • Networks a source of innovation* • Competition increasingly between networks rather than firms • Increasing role of ‘contract’ production!* ...all of which require new skills and capabilities

25. Entrepreneur spotted a rotating sweet!! Healthcare professionals designed the product Production outsourced Leading P&G brand Crest distributes. Networked Innovation – P&G

26. Contract Production - Hon-Hai marketing>design>production>distribution>service • Global electronics production capability • Developed strongly from component production • Value capture through economies of scale and flexibility • Moving to design and service

27. ..and is extending its scope For example Hon-Hai’s strategy reads: • ‘Focus on global logistic capabilities …’ • ‘Expand production capacity …’ • ‘Achieve further vertical integration …’ • ‘Maintain technologically advanced and flexible production capabilities…’ ‘… will leverage off its manufacturing expertise and continue to move tirelessly into new areas of related business’

28. and as for brand… • We have no brand • but, our quality is the “brand” • our technology is the “brand” • our people are the “brand”

29. ..and then the ODMs… Original Design and Manufacturing businesses • Execute the whole manufacturing cycle • Ask you (the brand owner) if you would like some • Sell the surplus under their own brand and • Develop proprietary design, product and process technologies!

30. QCI - Quanta computer Inc. Established - May 1988 Market Cap - US$7B Revenue (04) - US$ 10.14B Employees - 25,000

31. Strong and diverse customer base

32. Modern manufacturing involves “The full cycle from understanding markets through R&D, product design, production, supply and services within an economic and social context” and is increasingly Global, Connected, Multi- partner, Multi-business

33. B&Q China • B&Q is the leading DIY chain in China • It commissions designs, outsources production, distributes, sells and services • These activities are orchestrated from the UK

34. Implications for emerging economies Need to • Understand the ‘maps’, capabilities and trajectories of key industries • Identify points of entry – potentially via major multinational businesses • Anticipate local demand and changing global context

35. which needs need a better understanding of • Value creation and appropriation – which requires knowing what it is and how it can be captured • Partner identification and evaluation - which requires sophisticated ‘due-diligence’ • Production ramp-up - which requires sophisticated technical capabilities • Management of dynamic relationships - while making sure they don’t eat your lunch!

36. Conclusions • The structures and dynamics of global industries are changing rapidly • Product supply chains rapidly evolving to networks of knowledge and services • Many opportunities to access global networks BUT • Visibility of capabilities & trajectories essential • Product-service systems an emerging theme

37. Enterprise Logistics & Integration into Global Supply Networks Nimish Jhaveri Consultant CARANA Corporation World Bank Knowledge Economy Forum VI April 2007

38. Overview • The Relevance of Transport & Logistics • Challenges • Successes • Considerations

39. Industrial Country Average Import Tariffs Before and After the Uruguay Round Source: Marcelo Paiva Abreu (2004), "Trade in manufactures: the outcome of the Uruguay Round and developing country interests" Trade liberalization creates new opportunities for exporters

40. 14.0% 12.3% 11.9% 12.0% 9.8% 10.0% 9.1% 9.1% 8.6% 8.0% 5.4% 6.0% 3.9% 4.0% 2.0% 0.0% Asia Africa Europe Oceania Latin America World Average Developed countries Developing countries Freight Costs as % of Import Value Source: UNCTAD, “Review of Maritime Transport, 2005,” Chapter 4, based on data supplied by the IMF. Transportation and logistics efficiency plays a critical role in export competitiveness

41. Planning and scheduling inefficiencies • Documentation errors cause delays at the border • Lack of fleet management technologies • Regional border customs not consistent Idle Time (27%) Load & Discharge (2%) Border Crossing (3%) Productive Time (23%) Drive Time (18%) Security Curfew (50%) TRANSPORTATION UTILIZATION Example: Nicaraguan CoffeeManagua to Miami via Puerto Cortes

42. Result: Logistics costs for Nicaraguan exports are competitive regionally, but not internationally Logistics Costs as Percentage Of Market Value REGIONAL MARKETS International averages for developed and developing countries INTERNATIONAL MARKETS

43. Impact: Curtailed access to higher value markets REGIONAL GLOBAL Ad hoc transactions with intermediaries Compete on price, labor Independent operators Long term relationships with end-customers, transportation providers and value chain partners Compete on higher service and value Efficient supply chain

44. Transport costs are just one element of logistics efficiency… 69 Warehousing 100 156 62 Inventory Carrying TRANSPORT COSTS OTHER COSTS Order Processing 15 10 Administrative MANAGE MOVE MANAGE TIME, INFORMATION & PROCESS

45. … and logistics efficiency has a direct impact on trade A 10% reduction in… Shipping costs Trade related processing costs Trade related processing time Variation in processing time Results in a… 14.2% increase in trade 2.5% increase in trade 1.4% increase in trade 3.1% increase in trade Adapted from Study of 80 countries by Hausman, Lee and Subramanian, World Bank and Stanford University, 2005

46. Argentina Poland Brazil Kenya Romania Belarus Ukraine Logistics Costs/GNP Belgium • Transportation Network Efficiency • Logistics Infrastructure Availability • Customs and Border Requirements • Banking & Financial Services • Logistics Service Intermediaries Australia Canada Japan United States Singapore The constraints imposed by the logistics environment varies widely by country and industry

47. SUPPLIER • Supply chain excellence • Higher service levels • Smaller, just in time shipments • Shorter delivery lead times • Global competitors with lower costs CUSTOMER Moving up the value chain requires business innovation More demanding business environment Limitations of logistics environment • Efficient Transportation Networks • Logistics Infrastructure • Customs and Border Requirements • Banking & Financial Services • Logistics Service Intermediaries

48. INFRASTRUCTURE & FACILITIES CUSTOMS & BORDER CROSSING PROCEDURES ACCESS TO FINANCING, INSURANCE AVAILABILITY OF TRANSPORTATION & WAREHOUSING CAPABILITY AND CAPACITY OF INTERMEDIARIES GOVERNMENT REGULATIONS & POLICY Case Study: Bulgarian Apparel Manufacturers SUPPLIERS ASIAN PRODUCERS VOLUME ORDERSHIGHER EFFICIENCYLOWER CAPITAL COSTSLOWER WAGES BARRIERS INTERNATIONAL CUSTOMER LOW COST PRODUCTION  HIGHER VALUE DIFFERENTIATORS

49. Bulgarian Apparel Manufacturers:Transport & Logistics Process • 50+ Steps (lead participant) • 20 – 40% of value of delivered product • Up to 50% local/regional origin • Few long term contracts • Efficiency & price before service • Low visibility to total costs

50. Bulgarian Apparel Manufacturers:Logistics innovation captures greater value Increasing Importance of Logistics BRAND MANAGEMENT SUBCONTRACT FULL PACKAGE CUT MAKE TRIM DOMESTIC TRANSPORT INTER-NATIONAL TRANSPORT SERVICES None None QC, Packaging Subcontractors Domestic suppliers International suppliers Distribution centers International retailers QC, Packaging Consolidation Warehousing Customs Distribution Subcontractors Domestic suppliers Buyer International supplier QC, Packaging Consolidation Warehousing Customs Subcontractors Buyer QC, Packaging Consolidation Customs