Figure 1. The inefficiencies in global supply chains.

Jay Horton

For executives planning a global supply chain, this article describes a useful framework, based on the tools of scenario planning, strategic design, supply chain optimisation and organisation economics.

Firms aiming to globalise their supply chain can benefit from new frameworks and capabilities to enhance planning processes. This article addresses four interrelated questions. Firstly, what are the special challenges in global supply chains? Secondly, how to anticipate the future global business environment? Thirdly, what are the strategic factors that drive success? Fourthly, how should the global supply chain be organised?

It explains how these questions can be addressed using the ESO framework: environment, strategy and organisation. This framework is based on constructing scenarios on the future business environment, designing the organisational model to manage the hazards, and understanding the strategic rationale on how to win. By achieving an alignment between the business environment and the strategic and organisational choices, the odds of success can be improved.

By applying the framework described in this article, companies can benefit in the following ways: It will enhance the company’s ability to anticipate shifts in supply and demand, and enable the development of robust supply chain strategy in a changing global economy. It can facilitate more effective project implementation, reduced costs and delays, leading to maximisation of value for shareholders and customers.

What are the key challenges in global supply chains?
Global supply chain strategy involves many choices on network design and operation to lift performance. Additionally, there are different ‘rules of the game’ to learn, so the ‘home bias’ can undermine effective decision-making on international initiatives. Unavoidably, the risks and uncertainties are higher. Let’s look at these in turn.

Many choices in network design to improve performance
A key challenge is to identify structural improvements needed to reduced costs and lift service quality. Inefficiencies almost always exist within the existing supply chain as illustrated in Figure 1: poorly located facilities in the face of growing markets, lengthy supply links, and capacity imbalances.

However, companies face a massive array of strategic and tactical choices in designing their future global supply chain; for example how and where to process, manufacture, package, load, transport and distribute retail and industrial goods. The opportunities to reduce costs in the supply chain by eliminating duplication and inefficiency can run into savings of tens or hundreds of millions of dollars annually.

Other choices are to with how facilities can best serve changing markets and customer channels. What assets to divest? What assets to acquire? Where and when to locate facilities to meet growth? Where to source inputs? Which transport options to ship raw materials and products?

These decisions have many interdependencies. There are literally thousands or even millions of ways of interconnecting suppliers, production and warehousing facilities, and consumer markets.

Global supply chains involve a different set of ‘rules of the game’
The rules of the game are the cultural, legal and regulatory constraints that shape supply chain interactions.
Cultural differences include the level of hierarchy accepted in business differs from country to country, and the importance of the individual versus the group in business situations.

‘Guanxi’ or interpersonal relationships is one of the major dynamics of Chinese society. A pervasive part of the Chinese business world for the last few centuries, it binds literally millions of Chinese firms into a social and business web.

Any business in this society, including local firms and foreign investors and marketers, inevitably faces guanxi dynamics. In China’s new, fast-paced business environment, guanxi has been more entrenched than ever, heavily influencing Chinese social behaviour and business practice.

Failure to recognise these different rules can cost foreign firms dearly, so foreign entrants need to learn new ‘rules of the game’ in host countries to overcome the liability of their non-native status.

For example, in 2006, Kodak’s chief executive called for a less ‘western-centric’ approach to doing business in Asia after the US imaging company misread how quickly Chinese consumers would embrace digital technology.

Initially, Kodak had forecast continued growth in sales of traditional film canisters in markets such as China and India. The US Company had hoped this would cushion the impact of losing this highly-profitable business when customers switched more rapidly to digital cameras in Europe and the US.

But consumers in China quickly adopted digital photography. In June 2005, Kodak accelerated plans to phase out its traditional film business – in part due to having underestimated the rapid decline of film in China.

Today Kodak is re-framing its world-view, acknowledging that its biggest consumer markets are increasingly a long way from the home base.

The risks and uncertainties are higher
By their very nature, global supply chain projects are innovative; that is:
�� Risky. There is a high risk of failure, but also prospects for extraordinary pay-offs.
�� Uncertain. Many contingencies are difficult to foresee.
�� Long-term. There are often numerous stages of development.
�� Knowledge intensive, both local and global. The effort and insights of specific individuals is crucial.
�� Idiosyncratic. The comparability of specific international projects with other projects is low.

Designing the strategy
The ESO framework - environmental scanning, strategy and organisation - for crafting global supply chain strategy is shown in Figure 2. It is based on constructing a range of future business scenarios, designing the organisational model to manage the hazards, and understanding the strategic rationale on how to win. By achieving an alignment between the business environment and the strategic and organisational choices, the odds of success can be improved.

The following sections explore in detail how this process works.

Imagining the future global supply chain environment using scenario planning
Creating a robust and adaptive strategy starts with scenario planning
Scenarios explore alternative pictures of the future that can weave together changes in technologies, markets, politics, social values and other elements in the form of a ‘storyline’. Scenarios do not predict what the global business environment will look like in ten or twenty years time, but they do offer a rich set of hypotheses which provide a framework for strategic supply chain planning.

The natural inclination of managers is to work from what is known. Scenarios force managers to look at what is not very well-known, and what cannot be controlled. Importantly, they help planners think about the larger picture. They aim to stretch thinking and question assumptions. In so doing they help managers overcome decision making biases, open up new frames of reference, and so lead to more robust strategies.

Scenario planning helps in strategy development in three ways
Firstly, scenarios provide a framework and process for thinking about change, uncertainty and opportunity that lies in the global market. It’s an ‘outside in’ approach of understanding the future environment. It’s possible to challenge conventional wisdom constructively, and enable executives to consider a variety of possible futures.

Secondly, by educating decision makers about the different ways in which the global market might unfold, it can help them to better prepare their supply chain to respond and adapt. In an uncertain world, supply chain strategy is really about creating options and opening up new choices.

Thirdly, since future success cannot be predicted with certainty, scenarios help the company adjust course in the light of events. The better the scenarios, the less frequent these surprises will be and the more successful the strategy.

The process of building and using scenarios
Figure 3. shows there are two main phases in scenario planning: building scenarios and using scenarios, starting with a specific decision set or issue that the organisation will need to think hard about.

There is little doubt that a company’s ‘shared mental models’— the implicit assumptions and thought processes that key decision makers use to make sense of the world — are strongly influenced by the cultural traditions which are forged in the home market.

The Kodak example described earlier illustrates that cognitive bias – systematic errors in the way decision makers process information – can wreak havoc on international success. In Kodak’s case what was needed was a judicious, deliberate re-framing of the company’s view of the world ‘outside.’ The scenario process aims to do this.

The key step is to understand the key drivers of change, and then determine which of those are predictable and which are uncertain. The uncertainties which are most influential are used as the basis of the scenarios. Next time is spent exploring the implications of those scenarios.

Building scenarios
The key step in building the scenarios is to identify the key drivers of change that might shape the future. For example, important drivers of long-term change in global supply chains include those shown in Table 1. These cover social, technological, economic and financial, environmental, political and regulatory drivers of change.

Using the scenarios
Once scenarios have been crafted, the most crucial step begins: developing and testing the company’s strategic supply chain options against the scenarios, addressing the following questions. What should the company be doing under each scenario? What actions are common to all scenarios — the ‘no regrets’ strategy? What actions work under one scenario, but are very risky under another scenario? What is the essence of the underlying formula for the venture’s success, given the range of scenarios?

All these questions and more will be answered in Part 2 in the next issue of MHD Supply Chain Solutions magazine. Jay Horton, founder and managing director of Strategis Partners, is recognised as a leading adviser of strategic scenario planning, innovation, value chain strategy and organisation. During his twenty year management consulting career, he has worked with clients in Australia, Brunei, Canada, China, Japan, Hong Kong, Indonesia, Malaysia, New Zealand and Singapore. Contact Jay on (02) 8004 0808 or visit www.strategispartners.com.au.

Excerpted from MHD Supply Chain Solutions March/April 2008, pp.52-6.

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