Shifting the supply chain overseas can bolster businessGlobalization has moved some of the world's biggest groups to transfer manufacturing to low-cost countries including China or India in a bid to boost profitability.
Now many of these companies are shifting management of their supply chains including quality control and order preparation to these countries too.
“Moving parts of the supply chain offshore is one way to keep the costs down,” notes Philippe-Pierre Dornier, head of the operation management department at Essec Business School in Paris and chairman of Newton Vaureal Consulting. “This is enormously important for the modern business model.”
Dornier, who advises companies on supply-chain management, says that groups investing in overseas production sites should at least consider moving logistics offshore as well. He notes that in China, warehouse employees on the east coast earn on average less than a quarter of the equivalent salary in France.
A company selling furniture through the internet, for example, prepares deliveries for their final destination before the goods leave China where they are manufactured. The local transporter at the final destination has advance notice of the deliveries to be made a few weeks later. Similarly, another company practices just-in-time delivery to its European factories through containers that have been prepared by grouping products from different suppliers in line with the company's production schedule.
When moving logistics overseas, Dornier recommends companies pick a provider with strong information technology capabilities that can offer real-time, end-to-end tracking. He advises companies to ask the provider to show what a typical day would look like, to see what kind of information and quality certificates would be provided. He says the provider should be well integrated in the country's culture with a longstanding presence there. Crucially, Dornier says companies should look for groups that can offer economies of scale. “You need a company that has enough volumes to fill a container,” he says.
Moving logistics offshore does not work for all companies, however. Groups selling their goods over the internet when speedy delivery is at a premium will likely need stock in the country where the goods are distributed.
In addition, offshore logistics makes the supply chain increasingly complicated with more room for errors, Dornier says. “The more complex the supply chain, the more unexpected events can happen,” he warns.
Finally, some goods are simply unsuitable for long-distance transportation because the costs become prohibitive. Roofing felt, for example, is lightweight but takes up huge volumes and is a “nightmare,” to transport, Dornier adds.
Electronics products, in contrast, are well-suited to long-distance trade. Distribution costs account for just four percent of the cost of electronics products such as mobile phones as modifications including the fitting of plugs adapted to individual countries are also made overseas.
“The value-added part of the process is increasingly moving from Europe to countries like China and India for electronics or Tunisia and Madagascar for textiles,” says Dornier. “The numbers simply make sense.”