Not long ago, manufacturers such as telecommunications equipment maker Huntsville, AL-based ADTRAN Inc. launched the globalization gambit mainly to take advantage of lower labor and parts costs. Today, while sourcing and producing offshore still delivers those cost breaks, they are not the only reason ADTRAN continues to go global. Increasingly, says Tom Dadmun, vice president for supply chain operations, ADTRAN is growing operations offshore because that's where the customers are.
"When you look at the growth areas and emerging markets, they are not in the U.S.," says Dadmun. "The growth in my business domestically will be in the single digits whereby the countries in Asia, South America, South Africa and India are growing much faster; therefore, you must set up global supply chains to reach these customers."
ADTRAN is far from the only manufacturer noticing that, as the economies in developing countries such as China and India continue to grow and mature, they are quickly evolving from producers of low-cost goods to big-time consumers. In China, for example, even as overall gross domestic product growth has been slowing, retail consumption has been booming. Monthly retail sales growth for the six-month period ending in February averaged 14% over the same period in 2005, according to a recent report by the Manufacturers Alliance/MAPI (Arlington, VA). In February, year-over-year retail sales growth in China spiked to 15.8%, the report says.
FULL SPEED AHEAD
Hungry to cash in on that growth, manufacturers are accelerating their globalization efforts in a bid to get closer to offshore customers. A recent survey by AMR Research Inc. (Boston) found that 90% of manufacturers today are outsourcing configure-to-order assemblies to contract manufacturers, many of them offshore. And, in a recent report from Aberdeen Group (Boston), 94% of manufacturers say global sourcing is important, very important or critical to the success of their companies.
And it's not just large manufacturing enterprises that are trying to tap into the growth of global markets. While large manufacturers told Aberdeen they planned to increase their use of offshore suppliers by 44% between now and 2008, small manufacturers say they plan to increase their use of offshore suppliers by 117% over the next five years.
"There's little doubt that, for most companies, the intensity of globalization has increased, and it's going to continue to increase as global markets grow and continue to offer a lower-cost production alternative," says Douglas A. Engel, U.S. manufacturing industry leader and vice chairman at Deloitte & Touche LLP (Chicago).
But, as they increase the number of global plants, suppliers, contractors, customers and regulations with which they are dealing, manufacturers are finding themselves in the middle of a high stakes game of growing complexity. "In the pursuit of new markets, manufacturers must deal with increased product variation, new delivery mechanisms, the need to make things in different places and to deal with new logistics networks," says Engel. "Those that aren't focused on managing all of those things efficiently are going to find it much harder to compete in the future."
To be sure, some are mastering the globalization game. But not many. Deloitte's Engel estimates that 7% of companies have managed to master the complexities of globalization, mainly by taking a holistic approach to managing global operations and relationships and by focusing on continuous improvement.
That leaves a large group of manufacturing companies that are not holding their own on the global field of competition. Deloitte estimates that 80% of manufacturing companies are failing to capture full-potential returns on their global investments.
So what are the globalization gotchas tripping up most manufacturers today? The absence of consistent processes and standard systems across the supply chain -- and among global plants, contract manufacturers and suppliers -- is at the heart of most of the problems. Without consistent processes and standard systems, manufacturers lack visibility into demand signals, inventory positions and logistics. And that can expose global manufacturers to significantly lengthened cycle times and escalating transportation costs which, in the end, can easily nullify the very cost advantages they sought by going global in the first place.
GLOBAL QUALITY TEST
On the production side, for example, manufacturers relying on contract manufacturers are increasingly concerned about the lack of visibility into their global partners' production processes and quality standards. Manufacturers responding to a recent AMR Research survey say managing product quality is the second most significant challenge they face in dealing with contract manufacturers. Facing increasingly rigorous regulatory and customer quality requirements, many manufacturers are struggling with the need to monitor contractors more closely without going broke paying to locate managers at every contractor site around the globe.
Telecom equipment manufacturer CSI Wireless Inc. (Milpitas, CA), for example, until recently struggled to satisfy demands from customers such as Motorola for up-to-the-minute capability analysis reports used to monitor manufacturing processes at CSI's contract manufacturers' plants in Mexico and China. With little automation and few consistent processes, CSI was barely able to keep up with customers' demand for quality data. When production volumes on the company's fixed wireless terminal products began to rise, the company was forced to look for a better way to get visibility into its contractors' operations.
"In terms of determining things like what was going wrong with test yields [at contract manufacturer plants], our processes were very manual," says Bill Crook, director of test and manufacturing at CSI Wireless. "We would take files off of the [test] machines and use a utility to pull it into an Excel spreadsheet. Then we'd try to analyze it by hand."
CSI Wireless' answer was to further automate the quality information gathering and analysis processes. The company deployed SigmaSure, a Web-based system from SigmaQuest Inc. (Santa Clara, CA), that automates the collection, analysis and reporting of quality information produced by printed circuit board testing equipment located at contract manufacturers' sites. The tool allows CSI Wireless to quickly analyze quality information as if the production were taking place in the company's own plants down the street rather than at a contractor's facility half way around the world.
"If the first pass yield is 80%, we can go in and do a Pareto failure analysis and focus on those things that need to be done to improve the process," says Crook. "And, because the whole thing is Web-based, we can manage the line from [Milpitas] using Internet Explorer."
In the year since CSI Wireless has been using the tool, first pass yields at its contract manufacturers' plants have gone from averaging between 80% and 85% to between 90% and 95%, Crook says. And that's translated into lower return rates and happier customers.
Like CSI Wireless, many manufacturers are attempting to get a handle on global production trends by deploying consistent processes and implementing consistent systems. "They want to look at yield trends in each country and at each plant, to be able to answer questions such as, 'Why is one asset in one country performing differently than another?'" says Carter Johnson, vice president for strategy and business development at MES software vendor Visiprise (Alpharetta, GA). "Only when they can answer those questions are they able to respond quickly and cost-effectively to shifts in customer demand."
CHAIN, CHAIN, CHAIN
As their networks of plants, suppliers and customers spread across the globe, manufacturers also are having a hard time maintaining supply chain visibility. In particular, they are struggling to understand where they may be running out of critical parts and where inventories have swollen, costing them money.
According to the AMR Research report, planning and managing inventory through the supply chain is the biggest challenge facing manufacturers and their global contract manufacturing partners. At least part of that difficulty is due to manufacturers' inability to forecast demand on a global basis.
According to the AMR report, 80% of manufacturers rate demand forecasting as very important, but only 29% say they are performing adequately when it comes to forecasting global demand. Manufacturers are also unable to respond on a global basis even if they do adequately capture demand information. Seventy-one percent of respondents to the AMR survey say inventory management is very important, but only 36% say they are performing adequately on that front.
SEEING THE SUPPLY CHAIN
Two years ago, Teradyne Inc. (Boston) was one of those suffering from inventory management problems due to a lack of supply chain visibility. The manufacturer of semiconductor test equipment is in an industry that is notorious for dramatic boom-and-bust cycles, so managing inventory -- particularly on high-value parts such as application-specific integrated circuits (ASICs) -- has always been a problem. In recent years, however, the problem has gotten much worse as Teradyne has gone global, moving much of its manufacturing to contractors in Asia.
"As our supply chain got longer and we had to deal with longer and longer lead times, we were increasingly in danger of getting stuck with millions of dollars in inventory every time the business started to fall apart," says Jim Wood, Teradyne's director of supply chain information systems.
Two years ago, Teradyne launched a concerted effort to fix the problem, forming a special team to reduce lead times and inventories. The team first set out to improve Teradyne's visibility into what was going on at its contract manufacturers' plants. The company deployed RapidResponse, a collaborative manufacturing performance management tool from Kinaxis Corp. (formerly WebPlan) with which it is able to download information from contract manufacturers' ERP systems, such as bills of material, on-hand and on-order materials and master schedules. With that system, Teradyne is able to not only keep track of global inventory levels, but also to run simulations that help the company understand, for example, how much inventory is likely to be required at a given contractor's plant over a given period of time.
With that information in hand, Wood's team then focused on streamlining relations with its suppliers. Teradyne took over responsibility for ordering and managing the supply of high-ticket parts such as ASICs and worked out arrangements with suppliers who agreed to stock finished goods until Teradyne needed them. Teradyne then built its own system, which emulates a kanban manufacturing process and allows the company, essentially, to order high-cost parts at the last minute, as contract manufacturers' plants need them.
The approach has paid off. Teradyne has reduced its liability on high-dollar-value parts by between 25% and 30%.
As globalization grows and more products cross borders, another process that is stumping many manufacturers is trade and logistics management. While most manufacturers build the business case for globalization around the opportunity to save on procurement, the simple fact is that longer, cross-border supply chains drive up complexity, lead times and transportation costs. Even manufacturers that are relatively good at managing trade can expect logistics costs to double when they go global.
According to a recent report by Aberdeen Group (Boston), the average manufacturer's logistics costs for products bought or sold offshore is 6% of revenue. That compared to an average of 3% of revenue for companies that are best-in-class at managing logistics domestically. More than a third of global respondents told Aberdeen that they spend 11% of revenue or more on logistics. The Aberdeen report also found that one out of 10 international shipments are late and, according to large enterprises, one in five international shipments are out of compliance with order or routing information.
BEWARE: GLOBAL TRADE COSTS
"Companies that think globalization is just about low-cost procurement and fail to think about logistics find, after the fact, that the costs of transportation and logistics have gone through the roof," says Deloitte's Engel.
One of the key reasons high global trade costs happen, says Beth Enslow, vice president of research at Aberdeen, is that few manufacturers have automated their global trade management processes. According to Enslow's research, approximately two-thirds of companies still manage their global trade and logistics processes using paper and spreadsheets, sometimes in combination with homegrown software.
"Global trade is the last bastion holding out against automation," says Enslow, partly because governments, trade brokers and forwarders have historically demanded paper forms. That, however, is changing as government customs organizations move into the 21st century. As that change occurs, Enslow says, the best-run global manufacturing companies are beginning to deploy their own global trade management systems that can be used to improve collaboration with logistics providers while minimizing in-transit inventory costs. Increasingly, says Enslow, those systems, from vendors such as G-Log and TradeCard Inc., combine information about the physical movement of goods with financial information -- invoices, purchase orders, etc. -- and give global manufacturing companies better insights into the cost of running the global logistics network.
But simply deploying a new trade management system will not be enough. The most proficient global manufacturers are also working hard within their organizations to cultivate the expertise they will need to stay on top of an increasingly complex global trade environment, says Enslow. The best companies, she says, are creating dedicated trade compliance organizations and moving those groups from the logistics organization to the finance organization where they can take on a more strategic view of global trade issues.
"The global trade group shouldn't just be asked to fill out trade documents," Enslow says. "They need to create standard processes for the entire company and roll them out globally."
GLOBALIZATION BY DESIGN
As manufacturers' globalization efforts increasingly target offshore customers -- rather than just low-cost suppliers -- global product design and development looms as another process that must be mastered. Specifically, say experts, manufacturing companies must figure out how to take advantage of design resources in countries where business is growing while avoiding the duplication of effort that often comes with disbursed design centers.
The key, says Deloitte's Engel, is to roll out common design tools and processes around the world and to start with a single product design platform that can be easily adapted to local markets. "Just look at the automotive market," says Engel. "One reason U.S. automakers have been so challenged around the world is because they have been slow to develop a global platform, while Asian automakers build a single platform that can be easily adapted."
Parker Hannifin Corp., the $8 billion maker of motion and control systems, was, until recently, a company that lacked standard development processes and platforms. As a result, the company's 107 divisions around the world often found themselves spending time and money on a design that had already been created elsewhere in the Cleveland-based company. And product variation was getting out of control.
"Between Europe and the United States, particularly, we were terribly unorganized," says Russ Stroboach, marketing vice president for Parker Hannifin's automation division. "We'd have different people working on the same problem, and we had no standard way to make a business case for each new product proposed for production. We realized we needed some sort of global engineering coordination." That coordination is coming as part of a major design re-engineering project at Parker Hannifin dubbed Winovation. The project includes worldwide deployment of standard design tools from Autodesk Inc. (San Rafael, CA) and a standard product lifecycle management platform.
In addition, Winovation includes a standard product development methodology, to be followed by all divisions, which will take new products from the idea phase all the way through production.
Winovation will, says Stroboach, "help us select the right products to build and release them at the right time. This way, only the best products will get worked on, and it will all be coordinated globally."
So what's the common thread that unites manufacturing companies that are successfully contending with the challenges of globalization and separates them from those that are not? The single most important factor, says Deloitte's Engel, is the ability to think holistically about globalization and avoid the trap of focusing on just one facet of the issue. Companies that think globalization is just about low-cost sourcing, for example, may easily overlook the challenges involved in logistics, trade management or contractor management.
NOT IN KANSAS ANYMORE
"Especially with the cost of ocean freight, energy and increased investments in inventory, many companies that think only about low-cost sourcing find themselves right back where they started from a cost point of view, and they wonder what the hell happened," says Engel.
Manufacturers that consider all the global angles, however, end up with a lot to show for their efforts. Those companies, according to Deloitte's research, are 73% more profitable than companies that have been less successful at mastering global complexity. Those are the manufacturers who are winning the globalization game.