Cross-Border Supply Chain Management in Asia Masato Abe Economic Affairs Officer Trade and Investment Division United Nations ESCAP
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
My background • B 2 B • Automotive, electronics and high-tech industries in Asia, North American and Europe • Supply chain management – Logistics – Procurement and supplier development – Planning – Sales operations
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
A case study: M Group Inc • Home Country J • B 2 B – Direct sales and manufacturing • Standardized components and tools for metal press dies, injection moulding and assembly lines – More than 1. 2 million items
Line of business
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 1980 s • Sophisticated supply chain management – In-house ERP (IBM System 36) and EDI with suppliers developed in the mid 1980 s
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
Ball guide post for large sized press dies
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
Three phases of development • First Phase: 1980 s – Direct exports • Second Phase: 1990 s – International procurement – Host country supply chains • Third phase: 2000 s – Regional / multilateral supply chains
Four countries Income Population Country J Country T Country L Country V High Lower middle 130 million 70 million 10 million 90 million Ease of doing business ranking 2011 15 20 170 80 Starting a Business 98 95 93 100 Dealing with Construction Permits 44 12 115 62 Employing Workers 59 19 163 n/a Registering Property 15 72 152 43 Getting Credit 16 12 182 15 112 91 116 173 Paying Taxes 24 12 170 124 Trading Across Borders 19 25 110 63 Enforcing Contracts 1 46 183 31 Closing a Business 1 48 183 124 17 78 154 116 Protecting Investors 2010 Corruption Perception Index Sources: Transparency International (2010); World Bank (2010)
Phase I: 1980 s Direct 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
Home Country J Phase 1: 1980 s Supplier J Country L Country T 100 Km Distribution Centre J Customers 1. 5 months by ocean Country V Customers 1 week by air
Discussion • What was the advantage of direct export strategy? • What risk should the M Group Inc consider?
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
Phase II: 1990 s Host 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
Home Country J Phase 2: 1990 s Supplier J Country L Country T 100 Km Distribution Centre J Supplier T 100 km Country V 1 month by ocean Distribution Centre T Customers 5 days by air
Discussion • What factors should M Group Inc assess to justify international procurement?
Challenges under Phase II • High inventory (carrying) cost – Ocean shipping – Long lead time (tripled) – Unreliable delivery – Large order quantity – Large inventory and warehouse space
Inventory management Max 15500 Inventory 2 -month inventory Lead time 1 month Order line 7500 0. 5 month delay 500 Min Buffer 0 Unfilled order Time
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
Challenges (continued) • Unstable quality – Urgent shipment by air and/or hand-carry • Supplier development – Engineering consultation – Training – Incentives – Relationship development (trust and cooperation)
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
Phase III Regional 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
Home Country J Phase 3: 2000 s Country L Country T Distribution Centre J Supplier T Supplier L 600 km 1 month by ocean 1200 km Country V Distribution Centre T Customers 5 days by air
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?
Cross-border procedures • • Documents preparation Customs clearance and technical control Ports and terminal handling Inland transportation and handling
Documents for border trade • Export – Export license Ø Packing list – Pre-shipment inspection clean report of findings – Technical standard/health certificate Ø Bill of lading Ø Certificate of origin Ø Commercial invoice – Customs export declaration • Import – Technical standard/health certificate Ø Certificate of origin Ø Commercial invoice – Customs import declaration – Customs transit document – Import license Ø Packing list Ø Bill of lading – Cargo release order
Cross-border costs Indicators Documents to export (number) Time to export (days) Cost to export (US$ per container) Documents to import (number) Time to import (days) Cost to import (US$ per container) OECD Country J Country T County L Country V 4 4 4 9 6 11 10 13 48 22 1, 059 1, 010 625 1, 860 555 5 5 3 10 8 11 11 13 50 21 1, 106 1, 060 795 2, 040 645 Source: World Bank (2010)
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
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
Drivers (continued) • New management strategies and techniques – EDI, ERP, JIT, lean manufacturing, TCM, SCM, etc • Willingness to be internationalized
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
Models • • • Export model Foreign market penetration model Offshore manufacturing model Mixed model Flying geese model
Models (continued) • Export model – No operations in importing countries • Foreign market penetration model – Marketing and distribution in importing countries
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
Models (continued) • Mixed model – Offshore manufacturing – Marketing in home and host countries – Export to third countries – e. g. Japanese auto assemblers in Thailand
Flying geese model • 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 Source: GRIPS
FDI flows Source: ESCAP based on data from UNCTAD (2010)
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?
Risks • Growing environmental concerns – Proximity to markets, production facilities vs supplies – Green transportation – Customer services vs SC efficiency vs environmental smartness
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
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
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