Cross-Border Supply Chain Management in Asia

1. Cross-Border Supply Chain Management in Asia Masato Abe Economic Affairs Officer Trade and Investment Division United Nations ESCAP

2. About ESCAP • United Nations Economic and Social Commission for Asia and the Pacific • 58 regional members & associated members • Policy advocacy, analytical work & technical assistance for regional socioeconomic development • Headquarters in Bangkok • Nine branches

3. My background • B2B • Automotive, electronics and high-tech industries in Asia, North American and Europe • Supply chain management • Logistics • Procurement and supplier development • Planning • Sales operations

4. Objectives • Present corporate strategies and business practices related to cross-border supply chain management using a case study, which covers four Asian countries at the different development stage • Present theoretical background of the development of cross-border supply chains • Discuss the direction of the development of cross-border supply chains

5. A case study: M Group Inc • Home Country J • B2B • Direct sales and manufacturing • Standardized components and tools for metal press dies, injection moulding and assembly lines • More than 1.2 million items

6. Line of business

7. M Group Inc (continued) • More than 20,000 customers worldwide • Automobile assemblers, electronic appliance manufacturers and high tech companies as well as their suppliers • More than 4,000 employees worldwide • About 200-250 employees during the 1980s • Sophisticated supply chain management • In-house ERP (IBM System 36) and EDI with suppliers developed in the mid 1980s

9. Annual sales • Annual turnover: yen 89.1 billion in 2009 (equivalent to approximately US$ 1 billion) • Net income: Yen 3.8 billion (4.3% of annual turnover) • More than 25% of sale to foreign customers Dot.com Crisis Bubble burst

10. Ball guide postfor large sized press dies

11. The product • A standardized metal die component for automotive and electronic sectors • A long-time best selling product of M Group Inc. • No seasonable demand fluctuation (average 7,500 units / month) • Sold through an internet ordering system linking to the ERP system • Sales price: @US$ 100 • Weight: @5 kg

12. Three phases of development • First Phase: 1980s • Direct exports • Second Phase: 1990s • International procurement • Host country supply chains • Third phase: 2000s • Regional / multilateral supply chains

13. Four countries Sources: Transparency International (2010); World Bank (2010)

14. Phase I: 1980sDirect exports • Foreign exchange volatility: Plaza Accord in 1985 • Customers’ international expansion with increased FDI outflows • Both markets and production bases • North America • Europe • South-East Asia FDI & export driven development strategies • Less than 1 % of sales to foreign customers

15. Home Country J Phase 1: 1980s Supplier J Country L Country T 100Km 1 week by air Distribution Centre J Customers Customers 1.5 months by ocean Country V

16. Discussion • What was the advantage of direct export strategy? • What risk should the M Group Inc consider?

17. Challenges • Less international experience • High transportation costs • Price vs weight • Inadequate volume for ocean shipping • Quality vs price issue • No delivery tracking system • Unreliable delivery • Heavily relied on forwarders

18. Phase II: 1990sHost country supply chains • Globalization • Internationalization of M Group Inc • Recession in Home Country J • Cost cutting pressure • Emerging economies (NIES; Asian Tigers; China) • Expanding customer base at Country T • Lower labour cost

19. Home Country J Phase 2: 1990s Supplier J Country L Country T 100Km 5 days by air Distribution Centre J Supplier T Customers 1 month by ocean 100km Distribution Centre T Country V Customers

20. Discussion • What factors should M Group Inc assess to justify international procurement?

21. Challenges under Phase II • High inventory (carrying) cost • Ocean shipping • Long lead time (tripled) • Unreliable delivery • Large order quantity • Large inventory and warehouse space

22. Inventory management Max 15500 2-month inventory Lead time 1 month Lead time 1 month Inventory Order line 7500 0.5 month delay 500 Min Buffer 0 Unfilled order Time

23. Challenges under Phase II • High administrative cost • Order processing cost (fax & email; no EDI) • Communication (phone and fax) • Site visits • Import procedures (documentation) • No transport tracking system • Less flexibility • Customs clearance (Country T) • Slow but can make it predictable

24. Challenges (continued) • Unstable quality • Urgent shipment by air and/or hand-carry • Supplier development • Engineering consultation • Training • Incentives • Relationship development (trust and cooperation)

25. International Procurement:Outcomes • Considerable cost down in terms of CIF value • Cost up in terms of supply chain management (total cost analysis) at the beginning • Stabilized relationship over time • Gained experience

26. Phase IIIRegional supply chains • New emerging economies in Asia • China, India and others • Customers’ movements to Country V • Country L’s trade and investment liberalization • Improved road infrastructure • Logistical linkage between Countries T and V • Special economic / export processing zones • Increased cost cutting pressure • Weak demand in Home Country J • Intensified competition at the global level • Dot.com burst in 2001 and global economic crisis in 2008

27. Home Country J Phase 3: 2000s Country L Country T 5 days by air Distribution Centre J Supplier T Customers Supplier L 600km 1 month by ocean 100km 1200km Distribution Centre T Country V Customers Distribution Centre V Customers

28. Discussion • What impact do you see if customs clearance at the borders of Country L (or Country V) were totally unreliable? • Is there any option for M Group Inc to take to mitigate the impact?

29. Cross-border procedures • Documents preparation • Customs clearance and technical control • Ports and terminal handling • Inland transportation and handling

30. Export Export license Packing list Pre-shipment inspection clean report of findings Technical standard/health certificate Bill of lading Certificate of origin Commercial invoice Customs export declaration Import Technical standard/health certificate Certificate of origin Commercial invoice Customs import declaration Customs transit document Import license Packing list Bill of lading Cargo release order Documents for border trade

31. Cross-border costs Source: World Bank (2010)

32. Present Status • Maintain business with Supplier L, but no increment • Establish dual production lines in both Countries T and L • Consider investment, jointly with Supplier L, in a special economic zone of Country L • Test delivery to Distribution Centre V • Commit the development of regional supply chains

33. Cross-Border Supply Chains: Drivers • Globalization • Policy Liberalization • Trade, investment, capital & finance, HR • Multilateral and regional free trade agreements • Technological innovation • Transportation and ICT • Increasing competition • Pressures for low cost and high quality • Low labour cost

34. Drivers (continued) • New management strategies and techniques • EDI, ERP, JIT, lean manufacturing, TCM, SCM, etc • Willingness to be internationalized

35. Cross-border supply chains: Objectives • Foreign market penetration • QDC (quality, delivery and cost) • Speed, effectiveness and flexibility • Local supplier development • Local content requirement • Strategic focus and outsourcing non-core functions • Access to expertise / technology • Long-term security • Customer’s request

36. Models • Export model • Foreign market penetration model • Offshore manufacturing model • Mixed model • Flying geese model

37. Models (continued) • Export model • No operations in importing countries • Foreign market penetration model • Marketing and distribution in importing countries

38. Models (continued) • Offshore manufacturing model • Production in host countries (low cost labour and/or natural resources) • Marketing and distribution in both home and host countries • e.g. footwear sector in Viet Nam

39. Models (continued) • Mixed model • Offshore manufacturing • Marketing in home and host countries • Export to third countries • e.g. Japanese auto assemblers in Thailand

40. Catching-up process of industrialization of latecomer economies (Akamatsu 1962) from import to production and export from simple to more sophisticated product from advanced to developing countries Flying geese model Source: GRIPS

41. FDI flows Source: ESCAP based on data from UNCTAD (2010)

42. Risks • Fluctuating foreign exchange rates • How high is operating exposures within supply chains, which cover various countries? • Linking all partners with ERP • Adequate ICT infrastructure? • Relationship with partners? • Cost involved? • HR?

43. Risks • Growing environmental concerns • Proximity to markets, production facilities vs supplies • Green transportation • Customer services vs SC efficiency vs environmental smartness

44. Future direction • Development of regional supply chains with less developed economies • Supply side capacity building • Technology transfer • Policy changes required (cross-border trade facilitation) • Region-wide approach to reduce transaction costs • e.g. ASEAN connectivity initiative • Pro business environment

45. Masato Abe, Ph.D. Economic Affairs Officer Private Sector and Development Section Trade and Investment Division United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) Bangkok, Thailand Email: abem@un.org