Cross-Border Supply Chain Management in Asia
Masato AbeEconomic Affairs Officer
Trade and Investment DivisionUnited 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
• B2B• 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
• B2B– Direct sales and manufacturing
• Standardized components and tools for metal press dies, injection moulding and assembly lines– More than 1.2 million items
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 1980s
• Sophisticated supply chain management– In-house ERP (IBM System 36) and EDI with
suppliers developed in the mid 1980s
Annual sales• Annual turnover: yen 89.1 billion in 2009 (equivalent to 89.1 billion in 2009 (equivalent to approximately US$ 1 billion)approximately US$ 1 billion)• Net income: Yen 3.8 billion (4.3% of annual turnover)• More than 25% of sale to foreign customers
Bubble burst
Dot.com Crisis
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: 1980s– Direct exports
• Second Phase: 1990s– International procurement– Host country supply chains
• Third phase: 2000s– Regional / multilateral supply chains
Four countries Country J Country T Country L Country V
Income High Lower middle Low Lower middle
Population 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
Protecting Investors 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
2010 Corruption Perception Index 17 78 154 116
Sources: Transparency International (2010); World Bank (2010)
Phase I: 1980sDirect 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
DistributionCentre J
Cus
tom
ers
Country L Country T
Home Country J
Country V
100Km
Supplier J
Phase 1: 1980s
Customers
1.5 months by ocean
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: 1990sHost 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
DistributionCentre J
Cus
tom
ers
Country L Country T
Home Country J
100Km
1 month by ocean100km
Supplier J
Supplier T
5 days by air
Phase 2: 1990s
Customers
DistributionCentre T
Country V
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
0
500 Min Buffer
Order line7500
15500
Time
Inve
ntor
y
2-monthinventory
Lead time1 month
Lead time1 month
Max
Unfilled order
0.5 month delay
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 IIIRegional 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
DistributionCentre J
Supplier L
Cus
tom
ers
600km
Country L Country T
Home Country J
Country V
DistributionCentre V
1 month by ocean
1200km
100km
Supplier T
5 days by air
Phase 3: 2000s
Customers
DistributionCentre T
Customers
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 Packing list – Pre-shipment inspection
clean report of findings – Technical standard/health
certificate Bill of lading Certificate of origin Commercial invoice – Customs export declaration
• Import– Technical standard/health
certificate Certificate of origin Commercial invoice – Customs import declaration – Customs transit document – Import license Packing list Bill of lading – Cargo release order
Cross-border costs
Indicators OECD Country J Country T County L Country V
Documents to export (number) 4 4 4 9 6
Time to export (days) 11 10 13 48 22
Cost to export (US$ per container) 1,059 1,010 625 1,860 555
Documents to import (number) 5 5 3 10 8
Time to import (days) 11 11 13 50 21
Cost to import (US$ per container) 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
Source: GRIPS
• 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
FDI flows
0
500
1000
1500
2000
2500
2003 2004 2005 2006 2007 2008 2009
South-East Europe and the CIS Africa Middle East
Latin America and the Caribbean Asia and the Pacific Developed Economies
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 OfficerPrivate Sector and Development SectionTrade and Investment DivisionUnited Nations Economic and Social Commission for Asia and the Pacific (ESCAP)Bangkok, ThailandEmail: [email protected]