Exploiting the Global Supply Chain

The difference between an international and purely domestic supply chain strategy? “Everything!”

So says Greg Lehmkuhl vice president, global automotive, for Menlo Worldwide Logistics, one of five veteran executives World Trade asked to advise companies going global for the first time or expanding existing international operations. Doing business abroad introduces vast new variables to a preexisting mostly domestic supply chain.

“If I looked back five years ago, probably five percent of the requests for transportation solutions were international,” says Erv Bluemner, vice president, product marketing transportation solutions, RedPrairie. “Now the numbers are between thirty and thirty-five percent. Most of that shift has occurred in just the last twenty-four months.”

Lehmkuhl tells the same story. Five years ago, the automotive suppliers he serves might have seen ‘going global’ as a choice. Now, however, competitors have set up shop in Asia or South America or Eastern Europe. “Clients aren’t asking if you have an international strategy anymore,” he says. “They’re asking you to demonstrate it. It’s becoming the ante instead of the differentiator.”

Take the example of an automotive components manufacturer operating primarily out of Mexico. When a major U.S. automaker representing half their business ordered them to shift some of their sourcing to China, management balked, asking Menlo to perform a total landed cost comparison. “It took us four weeks,” Lehmkuhl says. “We did studies of sixty percent of their procured parts. We came back with the opinion, given all the risks and all the costs, that it did make sense in most cases for them to move their sourcing to China.”

Yet the company wasn’t convinced. They decided to wait and see. Within a year, Lehmkuhl says, they lost forty percent of their business.

Granted, making the change from a North America-based to a global supply chain is no slam-dunk.

“The complexity of managing the supply chain increases exponentially when you move offshore,” Greg Lehmkuhl says. “You have to have a defined, well-articulated, and proven strategy.”

According to the experts, companies must be willing to examine and rethink every aspect of their existing business model. That means looking inward before expanding outward and revising P&Ls to focus on total landed cost.

“It’s often the C-level executives who make these decisions, but when they go international, companies need a coordinated strategy across their procurement, operations, sales, marketing, and logistics groups,” says Jeff Scovill, vice president, global forwarding, C.H. Robinson. “All those entities need to be involved.”

Here, as ever, logistics is the tie that binds. “You can be reactionary and still be successful domestically because the logistics team can come in at the last moment and take in the slack,” says Scovill. But that doesn’t work internationally. Start to finish, he says, “Logistics has to make sure, at every step of the supply chain, you’re moving goods through, you’re tracking of inventory, and you’re keeping customers happy.”

As firms go global, for example, Scovill says, they should understand their long-standing channels may become obsolete. “Often customers will just assume they can feed inventory from overseas supply channels into their existing domestic supply channels,” he says, “rather than evaluating total landed costs of ownership.”

A C.H Robinson customer sourced products from Asia and Europe and shipped them to the Midwest simply because that’s where existing distribution centers—remnants of domestic manufacturing operations—existed. But eighty percent of their customers were located close to the East or West Coast. “They incurred costs moving the products from the East or West Coasts to the Midwest facilities, and then they incurred costs shipping them back to the coasts,” Scovill recalls. “Of course, one of the first things we did was change their distribution channels, so when they were bringing product in, they could keep them on the coasts and avoid having to go through that additional expense.”

The promise of lower total landed cost—and, with it, higher market share—lures American companies offshore. Delivering fully on that promise, however, calls for optimal end-to-end supply chain visibility.

Supply chain software solutions provider RedPrairie sees more and more middle-tier customers engaging in global supply chain networks for the first time, Erv Bluemner says. Not all understand the trade-offs. “You can’t save fifty cents per widget and then pay an extra sixty cents for transport—especially if it doesn’t get through customs. Purchase and transportation management systems need to be connected.”

Jim Ritchie, president and chief executive officer of YRC Logistics, agrees. “The current supply chain process for a lot of clients is that the product gets sourced in a foreign country, loaded in a container, put on an ocean vessel that moves to the U.S., gets offloaded, clears customs, and then somebody breaks open the container.” But opening a container should never be the first real confirmation companies have that what they ordered was what was shipped. If so, mistakes and miscommunication will take months rather than days to discover.

“If you don’t have good visibilities, you can have product that can arrive at port and sit there for an extended period of time, with no knowledge that they are there,” says Jeff Scovill. “We have customers who have had their products sit for 60, 90, 100 days without knowing it. By the time they figure out what’s happening they’ve incurred thousands of dollars in detention and demurrage fees before they even get access to their products.”

C.H. Robinson served a consumer products company whose earlier efforts at overseas sourcing ended in an even worse situation. As flow of goods increased from China to the U.S. West Coast, the buyer found itself with significant gaps in supply chain visibility. “They needed a set of four or five SKUs for fulfillment of their customers and didn’t know where they were located, when they were arriving, or when they would be available,” Jeff Scovill says.

The solution: assert control and get visibility, either with your own custom transportation management system (smaller companies can subscribe to hosted solutions at affordable cost) or through service providers like 3PLs, freight forwarders and ocean carriers. If you choose the second option, Erv Bluemner warns, buyer beware. “Any number of times I’ve gone into customers and they’ve said that they use one specific freight forwarder for everything and they don’t have any basis for cost comparison,” he says. “Often you can do better if you have a system that allows you to connect to multiple ocean providers and multiple freight forwarders, where you can consider multiple ports of exit and entry.”

An international supply chain entails a new approach to financing. Mike Bellardine, director of global trade and international payment services, KeyBank, suggests hiring an experienced cash manager. “Working capital is hard to forecast. One size doesn’t fit all.”

New sets of risks comes into play. “It’s possible that the seller may have the goods on the boat and delivered before the financial papers clear,” says Bellardine, offering the example of a KeyBank client purchasing internationally in an Asian country for the first time: “The inventory was time-sensitive and they wanted to make sure it fit their sales window. What happened was physically the goods arrived in port ahead of the documents necessary to clear customs.” No documents, no deliveries. No deliveries, no sales.

Tricky as it may be, coordinating international inventory and paperwork can seem simple by comparison with the task of foreign currency calculations. “As soon as a customer crosses the border, they face the same cash management issues they did domestically—but now on steroids,” says Bellardine.

Or consider the more complicated case of a domestic grain seller distributing in Eastern Europe. A surging euro made such export sales attractive, but what guaranteed each new buyer would pay as promised? “Normally, if you have a new domestic client, you can set internal house or credit limits,” Bellardine says. “In this case there were two problems. One, they’re in Eastern Europe—how do I get a view on the buyer? Two, even if the buyer’s good, how do they get the currency to pay me?”

Answering those questions required the buyer to get a letter of credit from a Russian bank, then the seller to get a confirmation from KeyBank of the Russian bank’s reliability. “Of course it costs a fee, but it’s almost like buying insurance on the receivable.”

The physical supply chain carries additional risks when it goes global. Containers take an average of 11 to 23 days to travel from foreign suppliers to the United States. What happens in the case of delay or error?

“If you have only a one-week float to meet your customer’s lead time and you’re shipping by sea, a blip is going to devastate you,” says Menlo’s Greg Lehmkuhl.

He speaks from experience. An automotive component manufacturer turned to Menlo for help after betting big on Asian outsourcing without properly calculating the risks to inventory. “They were going to save $4 or $5 million a year, but there was port congestion in Los Angeles-Long Beach,” Lehmkuhl says. Instead of paying $20,000 for a chartered aircraft from Mexico to the United States, the company paid $750,000 for aircrafts originating from Asia. Just like that, an anticipated $5 million savings became a $20 million loss.

Whether moving goods by land, sea, or air, going global means a company or its partners must adapt to existing physical infrastructure, supply channels, and foreign regulation.

Europe, for example, has a well-developed transportation infrastructure and short distance between ports, but an emerging market like Vietnam—where an increasing number of American companies are sourcing—often lacks direct ocean or air freight links to the United States. That creates opportunity for delay, damage, and other risk factors. Even in fast-modernizing China, standard business practices may ignore what can be taken for granted in the U.S. Pallets, for example are costly compared to labor in China, so goods move manually, taking extra time to load and unload as well as increasing the frequency of damage. Paperwork, meanwhile, literally changes hands, passing from driver to driver, truck to truck, all to align with different regional regulations.

“There’s no slick Internet system that’s going to manage that process in China or any other country,” says Greg Lehmkuhl. “It’s about real, on-the-ground operations.”

Last on the going global checklist: read the fine print.

Changing international regulations may challenge even the best expansion plan and execution. “It’s shocking—if you don’t pay attention to regulatory events in targeted emerging markets—how fast your business case can dissolve,” says Greg Lehmkuhl. He cites the case of an automotive parts distribution center moving from Southeast Asia to China’s Guangxo province. “In this province, hazardous material regulations changed. They had to warehouse all hazardous materials offsite in a separate and contained hazardous material warehouse.”

Existing U.S. trade agreements and customs laws are no less important. Time and again, return on investment may disappear with a single duty rate or classification change.

Remember, too, work-in-progress inventories may enjoy lower duties than finished products.

A concurrent trend—often called pre-mixing—is siting distribution centers outside the United States. Rather than by individual item or manufacturer, shipments are grouped by ultimate destination—regions, cities, and even single stores. Total transit time shrinks, domestic labor and infrastructure costs decline, and orders are verified before they leave the foreign country; nor do overseas mixing centers show up on a company’s working capital balance sheet.

“You eliminate your risk based on what was ordered versus what was shipped and you accelerate your time to final destination,” says Jim Ritchie, calling it one of today’s strongest international supply chain trends.

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