Supply chains are being transformed as sourcing from emerging markets continues to expand. That's creating new opportunities for cost reduction but increasing the risk of supply chain disruptions and management challenges. In addition, companies seeking revenue growth are seeking more efficient ways to sell into international markets.

So what are leading companies doing to master global supply chains? To find out, Aberdeen Group, a best-practice and technology research organization, benchmarked more than 150 manufacturers and retailers.

Global Supply Chain Concerns

Companies report that their top concern is the continued lack of supply chain visibility due to manually-driven processes. Fully 79 percent of large enterprises cite this as a major concern. Says a respondent at a large industrial equipment manufacturer: "To help improve the bottom line, we need more accurate supply chain visibility."

The second-highest concern is the uncoordinated nature of global supply chain processes across all the parties involved. "Our key pressure," confirms the CIO of a mid-market retailer, "is coordinating the diversity of forwarders and suppliers delivering a wide collection of merchandise."

Challenges with aligning multi-party actions and poor supply chain visibility result in an imbalance of supply and demand across tiers, leading to stock-outs, significant "just in case" inventory carrying costs, high transportation costs, and extended cycle times.

In many companies, these challenges are the result of insufficient automation and over-stretched global supply chain staff.

"¢ Technology challenge: On average, large companies report that their international supply chains are only 50 percent as automated as their domestic supply chains. Overall, only 6 percent of companies report that they have highly automated end-to-end and cross-functional processes.

"¢ Staffing challenge: Just 36 percent of all respondents and only 13 percent of large enterprises say their company's staffing for managing global supply chain and trade compliance processes are fully adequate to meet their needs.

Global Supply Chain Best Practices

To improve their supply chain performance, companies are adopting new best practices. Here are the ones making the greatest impact.

Improving Visibility

Supply chain executives identify improving visibility as their number one priority. They overwhelmingly desire better transparency to orders, inventory and shipments across their extended supply chain. Yet most companies still have rudimentary levels of visibility, using a hodgepodge of spreadsheets, carrier tracking systems, and homegrown department-centric applications. Visibility leaders have deployed visibility software with cross-functional access, and they are achieving better results than their peers across key metrics (Figure 1).

Companies are on a path to take their visibility systems far beyond basic order and shipment tracking. They are looking to turn these systems into exception-based process management platforms that enable staff to manage exceptions rather than micro-managing steady-state processes. Key elements include escalation policies to ensure corrective action is being taken, incorporation of resolution advice or workflow (e.g., expedite options and policies for a late shipment), and performance trending and root cause analysis of disruptions and lead time fluctuations.

Supply Chain Visibility in Action

Pharmaceutical supply chain: A European pharmaceutical company has 180 users worldwide that use an on-demand international visibility system from Management Dynamics to monitor 750 trade lanes on six continents. By effectively mining the information collected, the company found significant opportunities for consolidating shipments, reducing expediting costs, removing bottlenecks, and addressing potential shipping issues before they impact customer service. It also helped them exploit more opportunities for competitive advantage in new markets. In total, the company cut its inventory costs by $55m and lowered its total logistics costs by 5 percent through its international visibility initiative.

Consumer goods supply chain: Liz Claiborne, the $5bn apparel and accessories producer and retailer, sources goods from over 3,000 factories in more than 35 countries. Due to its diverse sourcing locations, shipment delays are common; strikes, security issues in less stable countries, weather, capacity issues, congestion, and equipment failures are some of the events that create delays. To increase control, Liz Claiborne's import team decided to improve shipment visibility by implementing a global supply chain visibility system from TradeBeam.

Any stakeholder in any Liz Claiborne division can now track shipment status online, seeing events such as when a shipment departs supplier, leaves departure port, arrives at initial port of entry, customs entry filed, released from customs, reaches deconsolidation facility, scheduled for final delivery, and arrives at final destination.

Because of the increased visibility, Liz Claiborne's import group is able to manage international shipments proactively to keep the supply chain moving. For instance, staff members may redirect cargo into a different transload facility or an alternative port to avoid congestion or to make up time because of unanticipated supply chain delays. The result has been a reduction in import transit times of 5 to 7 days and removal of 7 to 10 days of inventory due to shorter lead times and increased certainty of the position of goods

Protecting Gross Margins

Companies are seeking to monitor and more actively manage their transaction costs, even down to the order or ocean container level. For instance, a number of retailers are now looking to expand their visibility solutions so they can see total landed cost build as transactions occur and identify discrepancies with cost targets. They can then take action to protect their gross margins, such as shifting to a slower but lower cost of transportation for later legs of a shipment or changing product pricing or promotions.

Companies sourcing from China report that transportation is the top area of budget discrepancies. "In our domestic supply chain, we can easily attribute freight costs and even understand the impact of truck fuel surcharges at a carton level," says a retail international transportation director. "But on the international side, we were challenged to answer even basic questions such as, 'What's the average ocean freight spend per month, by lane?' because we lacked integrated systems and normalized data." This company has deployed an international transportation management solution from GT Nexus and has achieved multimillion-dollar ocean freight savings as a result.

Many innovators are now focused on improving their transportation management contracting, costing and execution processes to avoid unanticipated cost overruns that lead to gross margin erosion. Companies that have not yet audited their supply chain costing weaknesses and created a remediation plan should begin this process; it is the first step to ensuring more accurate and predictable budgets and total landed costs-and to identifying savings opportunities.

Increasing Logistics Agility

Managing international logistics is not like managing an extended domestic supply chain; it's fundamentally a multi-party process fraught with greater unpredictability in quality, lead times, costs and risks. Rather than create the absolute-lowest-cost fixed network, leaders are building into their logistics networks more points of flexibility. This helps them continually scan their environment for bottleneck symptoms or spikes in demand and take action.

Figure 2 shows the usage of some of the more common agility practices. Among survey respondents, 59 percent employ three or more of these practices at least sometimes. However, only 11 percent use three or more of these practices on a frequent, systematic basis. These preemptive organizations are just as likely to be mid-sized companies as large enterprises. Their common attribute is that they are twice as likely to have highly automated supply chains as their peers. This automation enables them to cost-effectively manage global shipments and inventories in a much more aggressive and exception-based manner.

One practice in which large enterprises do outstrip their smaller competitors is in supplier drop shipping. Some 35 percent of large enterprises report they have their international suppliers drop ship more than 15 percent of their orders directly to their customers. Just 8 percent of small and mid-sized companies use drop shipping to this extent. This is a clear area of potential improvement, which can help cut lead times to customers and reduce pipeline inventory and related inventory liability exposure. A best practice for drop shipping is to use a supplier collaboration platform to insert monitoring and control points at the supplier, thus ensuring seamless delivery to your customer, including ensuring shipments follow your business rules for completeness, labeling, and so on.

International Transportation

Management

Approximately eight out of 10 companies say they feel pressured to improve their transportation processes because of growing international shipment requirements. Today, 39 percent of participants say they are going to seek to adopt a commercial international transportation management system vs. just 12 percent in Aberdeen's 2004 benchmark. Another 9 percent say they plan to build a new system in-house to manage international requirements.

In international transportation management, companies are seeking increased technology support for both planning and execution processes. Recent advances in transportation technology solutions include:

"¢ Closed-loop international transportation management platforms, often delivered on an on-demand basis. These closed-loop systems support contract procurement, booking, allocation, tracking and settlement processes for ocean and air shipments. These platforms also typically come with already established electronic connections to freight forwarders and carriers, reducing the time and cost to establish electronic messaging.

"¢ Transportation execution technology that makes it easier to enforce corporate shipping rules and create spot buys for ad hoc or capacity constrained shipments, which often result in the greatest freight overruns.

"¢ Transportation optimization technology that can be used to direct forwarders to execute better plans and make better use of shipment consolidation and pooling opportunities. About half of companies are considering the value of dynamic routing of international shipments (vs. static, itinerary-based routing).

"¢ Transportation procurement technology that can be used to negotiate lower ocean and air rates by enabling more flexible expressions of bid options by carriers and forwarders, identifying freight that best fits their networks and capacity availability. CombineNet is an example of a procurement solution specialist that's been able to help multiple companies cut contract rates by 3 percent to 25 percent in the midst of today's inflationary freight rate environment.

Enterprises with international freight expenditures above $15m should be evaluating how these solutions can deliver savings and improved budget accuracy for their organizations.

Improving Trade Compliance

Trade compliance has traditionally been a difficult area in which to convince management to spend money for technology automation. However, this is changing:

"¢ First, government scrutiny is increasing around areas such as import security and restricted-party screenings for exports, so the fees and fines are becoming more onerous, as well as the risks of bad publicity for noncompliance.

"¢ Second, manual compliance processes are becoming a much greater productivity drain as global trade becomes a larger part of a company's business.

"¢ Third, it is becoming increasingly well-known that market leaders are gaining total landed cost advantages through origin management, which includes preferential treatment programs and free trade agreements (e.g., NAFTA, CAFTA, European Union, MercoSur), quota management, and the general process of using trade knowledge to help a company architect lower total landed costs from product design through final delivery.

Aberdeen research has shown that best-in-class performers-those companies reducing their total landed costs and documentation issues the most-are twice as likely to have current budgeted trade compliance projects as their peers.

"A year ago, trade compliance was viewed as a tactical, necessary evil," reports a director in finance at a billion-dollar manufacturer. "Now we understand that we must operate global business processes and stop thinking of ourselves as a U.S. manufacturer. Now we're seeing compliance as strategic."

As regulatory oversight intensifies, enterprises are finding increasing value in moving to a single trade compliance platform for the entire company that enables consistency of product classifications and restricted-party screenings and provides a common view of compliance activity and trade costs.

Centralized trade management information is also a critical instrument for lowering the cost of goods sold. In fact, leading companies are architecting new products and sales initiatives around trade compliance knowledge housed in automated compliance systems.

Renault, for instance, has used the origin management information housed in its centralized trade compliance platform from TradeBeam to drive a whole new low-cost car. Called the Logan, the vehicle is partially built in Western Europe and then exported to emerging markets for final assembly and sale. By setting manufacturing and distribution strategies based on maximizing free trade agreements and minimizing duties and taxes, Renault has been able to create a markedly lower total landed cost. Its compliance platform also tracks actual activity closely to ensure that currency fluctuations and other changes don't threaten these savings-which could potentially trigger much higher total landed costs than expected.

Adopting Supply Chain Finance

Perhaps the hottest new area emerging in global supply chain management is supply chain finance. Such a solution is a combination of trade financing services provided by an enterprise or a financial institution and a technology platform that unites the trading partners electronically. It can involve early payment discount programs, inventory financing, and other programs to help improve payment predictability and cash flow for suppliers while helping buyers extend payment times and lower unit costs. 

Aberdeen research shows that leaders in supply chain finance enjoy a 13.6-day advantage in payment terms and achieve a lower unit cost while creating a healthier supply base.

Supply Chain Finance in Action

Retail supply chain: AJT, a European fast-fashion retailer, has reduced its unit costs by 5 percent to 10 percent this year by using supply chain finance services from UK-based EZD Global, while simultaneously improving its Asian suppliers' margins and their responsiveness.

"We were looking to maximize our margins but we also wanted to cultivate better trading partner relationships," explains AJT's finance director. "In the fast fashion market, we often have to request quick turnaround from our Asian clothing vendors, so we need them to view us as a valued customer."

According to AJT, its suppliers used to go to their local country banks and get an advance on the money off of the letters of credit. This would get them their cash faster, but they could lose as much as 20 percent of the value of the purchase order by doing this. "We now invite our clothing vendors to use the supply chain finance service, which enables them to get paid 70 percent when the container the leaves their shipping dock and 30 percent at some later point, such as receipt at the UK warehouse," says the finance director.

"Using the supply chain finance service, the suppliers gain back 5 to 15 percent of the purchase order value they were losing. We share in the savings by getting 5 to 10 percent more off of our unit costs. However, we want our vendors to have an improvement in their bottom lines-we are not looking to have all the savings passed on to us."

To make the process work, AJT sends information from its supply chain transactions to EZD Global so the supply chain finance provider can more accurately assess the financial risk on an ongoing basis. This translation of supply chain risk into financial risk also has been beneficial for AJT. "The assessment data has been an unexpected benefit," says the finance director. "It has given us a better view of our supply chain base and its strengths and weaknesses-for instance, can a vendor actually supply goods in the volume, quality and speed you need?"

Consumer goods supply chain: "Before we started our supply chain finance program, we had good relationships with suppliers on the purchasing side but struggled to keep up with the back end payment side," says the vice president of finance at a North American apparel manufacturer. "We were putting our supply chain at risk because of inconsistent payment times and the lack of shared visibility to purchase order and invoice status."

To create stronger supplier relationships, the company moved to a trade platform from TradeCard that enables the company and its suppliers to have shared visibility and document and transaction control of the orders from purchase order placement to invoice receipt, reconciliation and payment. This allows many more payment problems to be dealt with at the front of the process instead of at the back of process, where they cause payment delays and unpredictability. Suppliers can also access credit insurance and participate in an early payment discount program funded by third-party financing.

"Our first goal was improved payment visibility for our suppliers and creating a lower-risk supply base, but we found that this better cash predictability drove so much benefit for our suppliers that we've been able to move 95 percent of them from net 30 terms to net 45," explains the finance executive. "In fact, we're now looking to ask some of our large customers to use the solution for paying us so we can improve our cash flow projections and reduce the amount of time our people spend tracking down payment problems." 

Deploying Commercial Global Supply Chain Technology

Nearly six out of 10 companies say they have been relying on applications built in-house to manage their global supply chains. But a big shift is occurring as software vendors are finally delivering systems designed for global supply chain management. Only 18 percent of companies surveyed say they plan to build additional global supply chain technology in-house.

Companies are seeking to upgrade multiple facets of their global supply chain technology. Figure 3 shows the technology investment plans for organizations. All these investment areas are critical components for a comprehensive global supply chain automation portfolio.

Companies are now about equally likely to seek global supply chain technology from their ERP vendor, from a specialist vendor of global supply chain technology, or from an on-demand provider (also called "software as a service" or hosted application provider).

Educate your company on the different sources of global supply chain technology and their pros and cons. For instance, ERP systems hold the promise of strong cross-functional workflow, while on-demand platforms can deliver pre-connected communities of suppliers or logistics providers and faster return on investment times.

Global supply chain technology solutions are no longer only for large corporations: Mid-sized and smaller companies are increasingly gaining access to technology from their third-party logistics providers or from on-demand global trade platforms that offer functionality on a subscription or transaction basis. Some emerging vendors are tailoring their solutions specifically for mid-sized organizations, such as Mitrix, which provides supply chain visibility and logistics control applications on an on-demand model.

Transforming the Global Supply Chain

Following these emerging best practices can help companies regain control of their extended supply chain operations and improve corporate profitability. Enhancing supply chain visibility, improving gross margin management, increasing logistics agility, enhancing international transportation management, improving trade compliance, adopting supply chain finance, and deploying commercial technology are all opportunities that companies should be evaluating as they seek to make the most of today's globalized business world.  

Beth Enslow is senior vice president of enterprise research for Aberdeen Group, a leading business and IT benchmarking and advisory company. For more than 15 years Enslow has helped companies improve their supply chains by using technology better. Visit www.aberdeen.com.