E-Logistics and International Supply Chain Management in Singapore - Report Example

E-Logistics and International Supply Chain Management Table of Contents 0 Introduction 3 2.0 Factors Attracting Rolls Royce to Singapore 4 2.1 Outsourcing to minimize risk 4 2.2 Friendly labour laws 5 2.3 Cheap efficient labour 5 2.4 Cost of doing business and low tax rates 7 3.0 Challenges and Risks 8 3.1 Negative publicity 9 3.2 Increase in Product Margins 10 3.3 Ease of new entrants into the business 10 3.4 Increased supplier and buyer power 11 4.0 Recommendations 12 4.1 Vertical integration 12 4. 4 Strategic Image Management 14 5.0 Conclusion 15 6.0 References 16 1.0 Introduction In the last few years, Singapore has distinguished itself among other Asian nations as a “silicon city” however; as opposed to producing electronics and microchips, as the term would suggest, they manufacture aircraft parts. Since 2012, the words largest makers of Jet airliner engine and the technologies that are used in their core components such as fan blades have profoundly invested in the manufacturing in the city-state. These are however not the only firms that have picked Singapore for outsourcing their production process, many other manufacturing firms are attracted to the friendly and investor-centric nature of the city. Among the many attractions of the city to the aircraft manufacturers and other investors is the fact that the corporate tax is marginally low at 17% in addition to a stable and predictable political environment. The government has also taken steps to encourage investment by promotion of a series of sector hubs one of which is the aerospace industry (Tegtmeier, 2005). Rolls Royce, a listed British firm chose to assemble its Trent series engine in Singapore, which is also significant in that it was the first time the company was outsourcing its production process outside Britain (Raghuvanshi, 2013). The facility located at the aerospace hub at Seletar produces titanium blades that are claimed to be by far lighter and more effective than traditional ones, its America rival Pratt, Whitney also pitched tent in the same hub in 2013, and they are set launch production by the year 2015. This paper will examine the key factors that motivated Rolls Royce to enter outsourced in Singapore and their effects on their production and supply chain as well as the challenges they may expect to face and finally make recommendations for action to be taken in response to the emerging challenges. This will be achieved through and examination of literature on the subject from a variety of documents both online and off-line including but not limited to newspaper reports, Business journals, books government documents and company literature from which the discussion will be commenced and synthesized. 2.0 Factors Attracting Rolls Royce to Singapore 2.1 Outsourcing to minimize risk Today, Rolls Royce current strategy is driven by an objective to manufacture as much high value products as it can from an in house perspective, however it is worth noting that the term in-house should not be necessarily mean within the UK. On the contrary, in the course of the last decade, the firm has established major manufacturing centres without the UK specifically in the US Germany and case to point Singapore (Jefferys, 2011). Instead of outsourcing its operations to other countries like many firms such as apple do by contracting foreign firms to manufacture parts for them, Rolls has opted to build its own plants in the host countries and manage the production process. This is a particularly potent logistic strategy; by definition, logistics is defined as the design and administration of systems that control the supply chains and geographical positioning in order to ensure finished products are arrived at the lowest cost possible. This has advised its effectively implementing a largely successful culture of vertical integrating in which it manages to control most of the production process and to a large extent reduce the middlemen and ultimately costs of production. As a manufacturer of plane parts, RR is cognizant of the high risk factor and they by diversifying their manufacturing, process through dual outsourcing they are strategically hope to minimize exposure to risk. This is often necessitated by the fact that the customers who buy their parts are very demanding in view of the fact that the investment of commercial planes it too great for them to chance the risk of their plane being grounded for more than a few hours due to shortage of parts. Many of the suppliers therefore make it conditional or prefer supplies that have a buffer off common spare parts; this has put RR under pressure to institute dual sourcing. Nonetheless, this is an extremely complex process and the perspective firm, in this Case, RR has to undergo very stringent vetting process before they can qualify to be a supplier (Mutter, 2013). 2.2 Friendly labour laws RR has picked the destinations for its outsourcing in a notably strategic way; although as aforementioned Singapore has investment friendly political and industrial environments, a critical look reveals that there may be more than meets the eye. To put this into a comparative context, consider another of the places RR has relocated its investments to; apart from Singapore, the new fan disk is also being manufactured in Crosspointe Virginia in the USA (Jefferys, 2011). What do they have in common one may ask? Crosspointe is located in Virginia a state with a right to work policy, this means that workers are not legally bound not be a trade union members. Singapore on the other hand despite its investment friendly policies has some notably poorly developed labour laws that give employers more leeway in their dealings with their employees than the case in other countries where the government is actively involved in policing the regulations. While not suggesting that RR takes advantage of the labour laws to exploit or underpay its employees, it is reasonable to suppose that they have considerably more autonomy than they would have if they had relocated to places with stringent labour laws. 2.3 Cheap efficient labour One a related note, RR may also have been attracted to Singapore by virtue of the Cost competitiveness that is enhanced in part by the business infrastructure. For one, salaries range at around USD 56k which is roughly 60% the Average in the US by although not by such a wide margin the cost of labour in most other Asian count are marginally higher than Singer pore’s (Syed, 2012). Average Salary Table Singapore (fig 1) (Payscale, 2014) Apart from been relatively cheaper, the supply of labour is dependable and in most cases highly skilled, majority of the employees are locals (Grant, 2014). The government had invested heavily in training technicians, this way they take advantage of the availability of labour provided by the many multinationals therein(Rolls-Royce, 2010). Most of the technicians in the RR assemblies in Seletar are hired from the government-sponsored institute of technical education which has 25,000 students at any time. In addition to the technical skills over 80% of the employees in the country are educated and can communicate effectively in English, this makes it’s even more attractive to western investors more so from the UK and US. Almost half of Rolls-Royces new orders for aircraft engines last year came from airlines in this region. As a result, RR and indeed any other firm that has committed it to make sophisticate engines and parts in Asia will be well served by the highly skilled cheap labour, which is made available at their doorstep, so to speak. In addition, the competitive edge that RR acquired after moving to Singapore has motivated its competitors such as Pratt and Whitney and suppliers to follow it there for the sake of logistic economics of scale such as Isle man in the UK which manufactures the titanium alloy used by RR for their fans. There is also the added advantage of having brought itself closer to its supplier from south East Asia such as Leistritz, besides even before they moved to Singapore, there were already some of its supplies that were located there. The proximity to suppliers has the advantage of allowing them to more closely monitor the production process and also gives them power over them because it has several options to choose from, a switch which for RR would be relatively easy to make. Singapore is has been widely recognized as an industrial and corporate hub and it was recently ranked by the BERI labour force evaluation measure as among the top 10 Asian countries with motivated workforce, Best Skilled labour and among the world’s top 5 in business conducive labour regulations. In respect to talent rank and preference by Asian expatriates, it is ranked the first in Asia. It therefore goes without saying that RR was likely attracted by Singapore’s seemingly impeccable portfolio, although there are without doubt challenges of investing in Singapore as shall be presently discussed Singapore remain one of Asia’s most attractive and fastest growing investment destinations. 2.4 Cost of doing business and low tax rates In addition, Singapore is a very cost effective place from where to do business given that the cost of acquiring land and office space through lease or even purchase is quite friendly. According to the CBRE real estate review, it costs an average of USD $68 to lease a square foot for an entire year. Taxation is unequivocally one of the key attractions for the investors in Singapore, their tax rates are in comparison to neighbouring countries with similar industrial and geographical portfolio marginally low. Before settling for Singapore and Virginia as the destination for the outsourcing of its fans blades RR had attempted to outsource its production to China and Poland, which are popular outsourcing destinations for many multinationals. However it eventually retreated from this approach and an examination into the tax rates of Singapore easily tells reveals a possible reason why RR like many of its antecedents opted for Singapore. Consider Thailand, India, Malaysia and China, all popular destinations for outsourcing and relocation by western industries, their tax rates are 30%, 34%, 25% and 25% respectively (Brown, 2013). Singapore in contrast only ask for 17% which is a whopping 7% less than its closest competitor, for RR all other factors held constant, the tax rating must have made Singapore the obvious choice. Nevertheless, Singapore’s attractiveness does not end there, they offer companies the advantage of having a comprehensive double tax arrangement with over 60 countries would wide. 3.0 Challenges and Risks Naturally, despite the positive description of Singapore in terms of it conduciveness for investment by RR, it would be naïve to assume that the city does not pose threats or challenges just like any other business environment. By shifting from the home Base in the UK, RR had to make several sacrifices and it is not automatic that these will prove to have been worthwhile. The business had been centrally based in the UK since its founding, as result; it was well integrated into the cultural- social and economic framework. Singapore is however a completely new environment and there are bound to be numerous teething problems many which the firm has based on its current standing transcended largely. However, the firm still faces considerable risk and challenges some, which are universal to any company that outsources its services while others are unique RR’s specific line of business. In addition, the fact that RR has found it necessary to shift camp to Asia and the US is an indication of their desire to limit the costs incurred in the supply and distribution chain, which in the end will have a far-reaching impact on their activities world over. 3.1 Negative publicity One of the biggest challenges facing RR at present in respect to the international supply chain has to do with their reputation after two incidents in the last three years, which have put their credibility to question. In November 2010, an almost brand new Quantas, A380 plane carrying over 400 passengers had to make an emergency landing following an explosion in the engine (Ross and Pasztor, 2013). It took the skills of 5 pilots on board to bring the plane down safely and even then, the pane suffered acute damage on the left wing and hydraulic system (Raghuvansh, 2013). This accident was attributed to RR’s failure in manufacturing of parts and three airliners working the Trent engine were taken out of action for servicing to avoid a similar accident and this caused a great deal of disruption. The incident cost RR around USD $200 million both in direct repair and compensation of the airlines involved for the incident. However even more damaging was the impact on the engine builders association especially in view of the fact that it was proven that RR was responsible for the failure, a fact they also admitted and took responsibility for it (Pasztor and Michaels, 2010). In the aerospace industry forever the margin for error is supposed to lie somewhere between very low and non-existent given that even the tiniest mistake could potentially lead to a catastrophe. To make matters worse, it was further proven that the problem, which was caused by an oil leak from a cracked pipe in the engine could have been detected and remedied on several locations but this never happened owing to a variety of factors key among them lack of adherence to standards and plain incompetence (Ferrari, 2013). In response to the incident and consequent allegation, RR shifted its sourcing of high-pressure intermediate hub assembly to its own manufacturing site in Bernoldswick UK. 3.2 Increase in Product Margins Another important challenge facing RR is the increase of product margins owing to the reduction in the cost of manufacturing and supply chins in the global market. Currently, according to Tony Wood, the head of civil defence and aerospace the industry was making plans to cope with the plans for a radial increase of the product rates for the Trent series while at the same time increasing operating margins. Currently, product margins stand at 11.3% compared to the retrospective figures, which were 18.7%, at RR, the operating margins were 14 percent in 2007 but this changed with the current investment in engine technology designed to promote product capability. 3.3 Ease of new entrants into the business The first two challenges examined herein are cast in the context of the porta 5 business analysis model and although they are based on the company’s excursion in Asia, they irrevocably fall into the scope of international supply chain affairs given that Singapore in particular is quickly becoming the new battle hub between RR and some of its major competitors. As previously mentioned, one of the major international firms that has set up camp in the Seletar valley is its American rival Pratt and Whitney, which recently broke ground and is expected to commence the production of turbine pipes and other airplane parts that are already being supplied or are substitutes to RR. When this happens, there is no doubt that RR will lose some of its business since in its immediate environment the monopoly power it has been enjoying will cease to exist. While the incentives by the government of Singapore have proven to be financially beneficial to RR (Francis, 2011), it is worth noting that they are not by any means exclusive or limited to the firm. According to the porter 5 business analysis model, one of the threats a business can experience is ease of entry of ne firms in the market, in RR’ case. This treat is very real given that the next aerospace firm will opt for Singapore as opposed to the rest of the Asian countries due to the tax incentives as well as friendly business environment (Grant, 2014). The consequences of an easy to enter markets are easily understood as being among others increasing the competition and the firm poses the threat of disruptive technologies of a scenario where a firm with more money may come and try to offer similar services for less. Ultimately, losing its competitive edge is one of the key potential challenges the firm faces in its operations in Singapore’s aerospace hub. 3.4 Increased supplier and buyer power The porter 5 model proposes that when a firms supplies are easily substituted there is a situation of low supplier power which works to the advantage of the firm being analysed, in the sense this s the situation in which RR currently finds itself (Porter, Argyres and McGahan, 2002). By moving near some suppliers and others following it, it is in a position to make demands and to a large extent dictate the prices for which it pays for goods. Nonetheless as stated above, with more firms coming in due to the open business and political environment, RR stands to lose some of its supplier power. The firms that supply it with materials will have the option of either dealing with RR or its rivals and this will force this will compel RR to take a softer stance on supplies given that they can shift their goods to the competition. Ultimately, when the number of suppliers increases, the buyers will have more options from which to choose making them relatively more powerful than they were previously. Over half of the orders for RR are sourced from the East Asia region and in terms of quality and market dominance; it has been virtually a monopoly for quite a few years. 4.0 Recommendations 4.1 Vertical integration Evidently, despite the significant progress, the firm has made in terms of technology and pricing, it is apparent that a small mistake such as the one that caused the Quanta incident could have long term and very damaging impacts on the firm’s reputation. Vertically integrating largely reduces the weakness on supply chains and this makes the final product more reliable and combative in the global market. Plane manufactures such as Boeing Airbus are cognizance of the potential disadvantages a weak supply chain could expose them to and they have often pressured their major suppliers to buy up the smaller ones. At present RR is set to acquire one of it’s the suppliers Huntington, this way it managed to improve its hold on the supply and distribution (Casacchia, 2013). Such a move would prove highly advantageous for RR since although it would be costly in the short run, nevertheless in the long term the benefits would be worthwhile since it would both have a shorter supply chain, ergo saving cost, maintaining efficiency and improving its attractiveness to potential customer. 4.3 Competitive Advantage To create a competitive advantage, RR needs to first carry out and analysis of the competition and then based on this come up with the best strategy with which that can exploit and avoid the areas for potential advantage or disadvantage. To this end it needs to identify the competition on this basis; those that market or supply the same product or those competing for the same “dollars” t. After this step, RR will then require to assess the competition based on; Current profitability Market share growth Liquidity Leadership in technology Leadership in service Overall goals Using this information RR should the identify the potential level of competition from the level of similarity in the various strategies, the more they share the more competition there will be, they should then identify any weakness in the firms strategic management. The next step involves builing a business intelligence system from which the can gather as much pertinent data about the rival firms as possible, finally it picks a competitive strategy based on its position in the market. Given RR’s dominant position in the Singapore market Porter’s Basic competitive market is likely to be effective. This takes the form of three basic steps; 1. Cost Leadership RR should use its vast resources and economies of scale to ensure it is the lowest cost manufacturer, by so doing it will stand a high chance of attaining the highest market share 2. Differentiation The firm should ensure its products come with unique customer benefits in view of the fact that the completion may be making identical ones, these benefits can include better quality or even longer insurance warranties 3. Narrow Focus This technique helps a firm acquire an edge through focusing and specialising in a limited number of specific goods, this can be managed if they ensured specific branches made specific parts they would ultimately achieve the perfection that comes with narrow focused specialization Counter high Supplier and Buyer Power While conceding that the inherent challenges in supply and demand are a part of international business especially because of globalization, there are steps that RR can take to reduce the impact of the new power balance between its suppliers and buyers. For one, it needs must focus on production of high quality goods which will set it apart from the rest of its incumbents, this way it can successfully carver out a competitive advantage not only in Asia but globally. This is however not an easy task and RR must factor in multiple options before they can hope to distinguish themselves especially in view of their recent negative publicity arising from faulty engine parts(Grant, 2014). Creating a competitive advantage will require that they both work closely with supplier and buyers and integrate vertically as much as possible by buying out the smaller supplier or taking over the process themselves. Furthermore, diversification is a key component of achieving a competitive advantage; RR has production facilities in the US Germany, Singapore and the UK headquarters. To improve its global dominance, the firm needs to strategically open even more plants world over especially in areas where they normally outsource for parts so that they may gradually take over the firms in the end or be better placed to supervise and control the process to ensure all the standards of production are adhered to. This way, even when the completion on the global market escalates, RR will still be able to strengthen its market position and stand out in the industry. 4. 4 Strategic Image Management Given the scandal/s resulting from the malfunctioning of parts it has supplied, RR needs to implement; Supply chain risk management (SCRM). This is the process through which risks in the supply chain are identified, analysed and addressed before they can be resolved; in RR’s case, it needs must be very vigilant in its inspections of the firms that supply it with various components. This way it will be better placed to avoid accidents and incidents involving its products, which ultimately end up eroding its credibility as a supplier. The first step that the firm took in response to the incident was to move the production of the affected parts to its UK plant; this is a particularly strategic move in that it allows them a chance to control their production process in house. At the end of the day, the same work ethics and laws may not necessarily bind suppliers, despite their efficiency as the customer. For example, Apple inc. has recently been faced with similar problem where its Chinese parts suppliers have been found to abuse labour laws and sometimes human rights, which have impacted negatively on the tech giant’s image (Ojo, 2010). To mitigate such problems it is incumbent on the firm in question to assume as much control as possible for the manufacture of its most sensitive parts. 5.0 Conclusion By moving its first ever “in house” production plant outside the UK, Rolls Royce has joined many other firms that have recognized that the East, more so Singapore provides a very convenient destination for relocation. Evidently, the costs of labour and production are significantly lower than most other similar destinations not to mentions political stability and government support, which have resulted in the creation of numerous hubs specific to different industries. Nonetheless, the firms still faces myriad challenges as a result of diversifying its supply chain and production key among which is the increase in the competition due to relative ease of access in areas like Singapore. In addition, there is a serious safety concern facing the engine giant in the backdrop of recent engine problems attributed to components it had supplied. This has made clear the need for a vertically integrated and minimized supply chain, which enables the firm to either, directly produce or closely supervise the manufacture of the components it uses in its production process. 6.0 References Brown, K. 16, May, 2013. Rolls-Royce to investigate Singapore engine fire in Singapore. Financial Times. Available at: http://www.ft.com/intl/cms/s/0/eded6e58-7f8d-11e0-b9b0-00144feabdc0.html#axzz2w4VSl2MS Casacchia, C., 2013. Rolls-Royce to Buy Huntington Beach Maker of Engine Parts. Orange County Business Journal, 36(19), pp. 6. Ferrari, B. 2013. Rolls-Royce Continues to Address Extraordinary Supply Chain Business and Service Lifecycle Management Challenges. Available at: http://www.theferrarigroup.com/supply-chain-matters/2013/07/01/rolls-royce-continues-to-address-extrordinary-supply-chain-business-and-service-lifecycle-management-challenges/ Francis, L., 2011. Rolls-Royce Assembly Plant Gets Boost From Singapore Government. Aviation Daily, 385(21), pp. 3. Grant, J.2014. Aerospace manufacturers head to Singapore innovation hub. Aerospace financial times. Available at: http://www.ft.com/intl/cms/s/2/fc571026-8501-11e3-8968-00144feab7de.html#ixzz2tgT5Vas4 Jefferys, S. 2011. Offloading, outsourcing, sub-contracting and social dialogue at the high end of UK manufacturing: a case study of rising order books and restructuring under pressure at Rolls Royce, Sunderland . London Metropolitan University. Mutter, C. 2013. Rolls Royce. Requirements to be an Aerospace Supplier. The PE COI Annual Conference 11/04/2013. Ojo, B., 2010. Foxconn sizzles on Apple patronage. Electronic Engineering Times, (1586), pp. 20. Pasztor, A. and Michaels, D., 2010, Nov 06. World News: Qantas Blames Rolls-Royce For Engine Failure on Jet. Wall Street Journal. Porter, M, Argyres, N and McGahan, A, M. (May, 2002) The Academy of Management Executive (1993-2005), Vol. 16, No. 2, Theme: Achieving Competitive Advantage , pp. 43-52 Raghuvanshi, G. 2013, Sep 15 Rolls-Royce Pushes Focus on SingaporeRegional Director Jonathan Asherson discusses why the company is investing in Singapore. Wall Street Jounal. Available at: http://online.wsj.com/news/articles/SB10001424127887323595004579070744175876558 Rolls-Royce, 2010, Oct 28. ITE and WDA to Enhance Skills and Knowledge in Singapores Aerospace and Marine Industries.. Targeted News Service. Ross, K. and Pasztor, A., 2013, Jun 27. Rolls Concedes Fault in Qantas Accident; Australian probe criticizes Rolls-Royce for Qantas A380 engine explosion in 2010. Wall Street Journal (Online). Syed, S. 2012. Rolls-Royce gears up for Singapore production. BBC News. Available at: http://www.bbc.co.uk/news/business-16789111 Tegtmeier, L.A., 2005. SINGAPORE TECHNOLOGIES AEROSPACE STILL # 1. Overhaul & Maintenance, 11(4), pp. 22. “Average Salary for Country: Singapore”. 2014. Payscale. Available at: http://www.payscale.com/research/SG/Country=Singapore/Salary Read More