Knowledge Economy Forum IV

Logistics and Integration into Global Supply Networks

Global Industrial Context

Prof. M.J. Gregory

Institute for Manufacturing

Overview

• Industrial ideas

• Global context

• Emerging capabilities

• Working in networks

• Implications

Industrial Ideas

• Products – ARM – Microcircuit design

• Production – Zara – Fashionable clothes

• Distribution – Dell – Personal computers

• Services – Rolls-Royce – Aero-engines

• ARM designs used in 75%of

mobile phones

• Close to global customers and

OEMs

• ‘Fabless’ business model

• Substantial process

knowledge

ARM – microchipsmarketing>design>production>distribution>service

Zara - clothesmarketing>design>production>distribution>service

• Spanish clothes maker Zara

owns all production capability

• Products in own shops change

every 2 weeks

• Production can be flexed to

respond to demand

• Competitors can’t follow!

Dell – personal computers marketing>design>production>distribution>service

• Dell pioneered large scale direct selling.

• Their model allows on-line customisation of products

• Production and delivery status can be tracked by the customer

• On-line diagnostics and after sales service minimise support costs

Rolls-Royce – Aeroenginesmarketing>design>production>distribution>service

• Responding to customer needs

• Rapid growth in market share

• ‘Totalcare’ service model ~60%

of revenues

• Implications for design and

production

Innovation, Value Chain & Business Models

Innovation can occur within and between each

stage along the value chain

Marketing>Design>Production>Distribution>Service

but the stages often have different ‘owners’ and the

interfaces and interdependencies between them are

often poorly understood.

…and the context is changing rapidly

• Global demand for products is rising

• ‘Disintegration’ of stages in some value chains

• Value-adding opportunities at each stage

BUT

• Globalisation is changing industry configurations

• Industrial capabilities are evolving rapidly

USA – they say…

• Growing economy

• Strong in research and

some production

• Emphasis on education

BUT

• Falling share of

production

• Economic imbalances

Europe – they say…

• Increasingly ‘high-tech’

• Spectrum of large and

small businesses

• Good global connections

BUT

• Some countries thought

to be inflexible

• Intense competition

Japan – they say…

• Continuing strength in

production

• Capable global networks

• New investments in

local production

BUT

• Ageing population

• Rigid structures

India – they say…

• Growing capability in

software

• Highly educated population

• Growing interest in

manufacturing

BUT

• Infrastructure limited

• Production has not been a

priority

China – they say…

• Growing production

scale and capability

• Dominant position in

some products

• Growing R&D

• BUT

• Imbalance between

production and services

• Shortages of energy

Globalisation – the case of China

• China is emerging as an industrial powerhouse

• It has received massive inward investment

• Industrial development has been systematic

• ‘High-tech’ capabilities are increasing rapidly

• Growth impacts global industrial structures

Growth

0

2000

4000

6000

8000

10000

12000

14000

1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002

Average annual growth rate was morethan 10% between 1980 and 2004

Source: Chinese National Statistics Annual Report (2005)

Foreign Direct Investment

0

10

20

30

40

50

60

70

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Total FDI

Source: http://www.china.org.cn

Bill

ion

US

Dol

lars

New Workshop of the World- Pearl River Delta

• 70% of the world’s photocopiers

• 60% of the world’s microwaves

• 160,000 people in single factory for running shoes

New Workshop of the World - Yangtse River Delta

• 30% of the world’s ties

• 70% of the world’s lighters

• fastest growing car production location

Domestic appliances - Galanz

• Largest microwave

oven production base

in the world

• Annual production

capacity of 15 million

units 11,000 employees.

• Turnover $700m

• 70% of China market,

• 40% of global market.

Clothing - Meters/Bonwe

• Virtual company in Garment Industry

• Grown dramatically from a shop into a regional brand and into the leading national brand

• Over 1000 retail outlets in China

• Sales of US$250 million in 2003.

So how do they do it?

• Cheap labour

• Foreign Direct Investment

• Natural resources

But also

• Systematic development of infrastructure

• Strategic development of industries

• Increasing focus on innovation and service!

So what are the underlying patterns?

• Attraction of ‘service-oriented’ business models

• Networks a source of innovation*

• Competition increasingly between networks rather

than firms

• Increasing role of ‘contract’ production!*

...all of which require new skills and capabilities

Networked Innovation – P&G

• Entrepreneur spotted a

rotating sweet!!

• Healthcare professionals

designed the product

• Production outsourced

• Leading P&G brand Crest

distributes.

Contract Production - Hon-Hai marketing>design>production>distribution>service

• Global electronics production

capability

• Developed strongly from

component production

• Value capture through economies

of scale and flexibility

• Moving to design and service

..and is extending its scope

For example Hon-Hai’s strategy reads:

• ‘Focus on global logistic capabilities …’

• ‘Expand production capacity …’

• ‘Achieve further vertical integration …’

• ‘Maintain technologically advanced and flexible production

capabilities…’

‘… will leverage off its manufacturing expertise and

continue to move tirelessly into new areas of related

business’

and as for brand…

• We have no brand

• but, our quality is the

“brand”

• our technology is the

“brand”

• our people are the

“brand”

..and then the ODMs…

Original Design and Manufacturing businesses

• Execute the whole manufacturing cycle

• Ask you (the brand owner) if you would like some

• Sell the surplus under their own brand and

• Develop proprietary design, product and process

technologies!

QCI - Quanta computer Inc.

Established - May 1988

Market Cap - US$7B

Revenue (04) - US$ 10.14B

Employees - 25,000

Strong and diverse customer base

Modern manufacturing involves

“The full cycle from understanding markets

through R&D, product design, production, supply

and services within an economic and social

context”

and is increasingly

Global, Connected, Multi- partner, Multi-business

B&Q China

• B&Q is the leading DIY chain in

China

• It commissions designs,

outsources production,

distributes, sells and services

• These activities are orchestrated

from the UK

Implications for emerging economies

Need to

• Understand the ‘maps’, capabilities and

trajectories of key industries

• Identify points of entry – potentially via major

multinational businesses

• Anticipate local demand and changing global

context

which needs need a better understanding of

• Value creation and appropriation – which requires

knowing what it is and how it can be captured

• Partner identification and evaluation - which

requires sophisticated ‘due-diligence’

• Production ramp-up - which requires sophisticated

technical capabilities

• Management of dynamic relationships - while making

sure they don’t eat your lunch!

Conclusions

• The structures and dynamics of global industries

are changing rapidly

• Product supply chains rapidly evolving to

networks of knowledge and services

• Many opportunities to access global networks

BUT

• Visibility of capabilities & trajectories essential

• Product-service systems an emerging theme