Strategies for Supply Chain Management in Emerging Markets - Literature review Example

Strategies for Supply Chain Management in Emerging Markets Student: Professor: Course: Faculty: Institution: Date: Table of Contents Introduction 3 1 Integrated supply chain management 4 2 Outsourced logistics 5 3 Localised production 6 4 Lean and agile supply chain 8 5 Form postponement 10 Conclusion 11 References 12 Introduction The supply chain is a very crucial part of a business as it determines the availability, pricing among other factors of a product to the target customers (Christopher, Peck, & Towill, 2006). It is highly important for businesses to plan for efficient and reliable supply chains in order to control costs, quality and scheduling (Manuj & Mentzer, 2008). A shifting trend in the manufacturing as well as in commerce has seen global companies sourcing for raw materials and labour from the emerging markets (Ramamurti & Jitendra, 2009). Global companies such as Apple Inc and Johnson & Johnson now consider emerging markets as attractive target markets. Some of the emerging markets include China, Brazil, Russia, South Africa and Indonesia. While the emerging markets provide a cheaper and strategic alternative to the global manufacturing businesses, they also present unique supply chain challenges (Khanna & Palepu, 2013). Emerging markets have unpredictable labour markets and political environments (Manners-Bell, Cullen, & Roberson, 2014). Supplier inefficiency, as well as natural factors such as unpredictable weather also constitutes a supply challenge for global businesses (Wedan, 2006; Christopher & Towill, 2000). For Commerce, global operations require efficient communication and logistics systems which are not very effective in emerging markets (Melnyk, Davis, Spekman, & Sandor, 2010). In order to operate profitably and sustainably at the global level, businesses require supply chain strategies that will address supply challenges and risks in the emerging markets (Christopher, Peck, & Towill, 2006). This paper is an in-depth discussion of supply chain management strategies for emerging markets. Global businesses can successfully adopt these strategies to achieve efficiency, minimise risks and realise profitability with their supply chains. 1 Integrated supply chain management Reducing production costs is a primary goal of global textile, technology as well as fast-moving-consumer-goods (FMCG) companies (Melnyk et al, 2010). Emerging markets present a cheaper source of raw materials and skilled labour for such global firms. Interestingly, emerging economies are continuously recording a growing demand for manufactured goods (Borgstrom & Hertz, 2011). It is clear that emerging markets can be the source and also the destination of products and services for global firms. However, there is a critical need for seamless coordination of end-to-end activities of the supply chain in these markets. Coordination can only be effective and efficient if suppliers, businesses and distributors share critical information in real-time (Christopher & Towill, 2000). It is imperative that businesses pursue a strategy geared towards integration of the entire supply chain, to achieve better coordination. Emerging markets such as India and Indonesia have poor infrastructural development (Ramamurti & Jitendra, 2009). Poor road networks and unreliable supply may hamper the efficiency of both the supply and demand side of the supply chain (Qrunfleh & Tarafdar, 2013). With such challenges, it is critical that logistical units within the supply chain share information regarding shipment status and order levels. Companies such as Unilever get real-time information in the Indian market from their representatives on the ground. Unilever representatives send stock level and ordering information to distribution centres through handheld devices (Ramamurti & Jitendra, 2009). For the integrated supply chain system to work, information must be shared by all players in a timely manner. Christopher & Towill (2000) recommend that companies can rely on customised Enterprise Resource Planning systems (ERP) to integrated suppliers, support staff and distributors in the supply chain. Such a system offers real-time information and visibility to coordinate a supply chain in emerging markets with poor infrastructure and unpredictable business environment. Integrated ERP systems should be efficient and simple to implement because only a few logistics firms in emerging markets have adequate experience in managing critical parts of global supply chains (Wedan, 2006). 2 Outsourced logistics Emerging markets continue recording very impressive economic growth trends (The Economist, 2012). The BRIC countries (Brazil, Russia, India and China) are expected to consume at least 50% of all manufactured goods globally by the year 2050 (Goldman Sachs, 2003). With such growing consumer power, the population in the emerging markets will demand better customer service, timely delivery, and flexible response systems (Qrunfleh & Tarafdar, 2013). While this is relatively easier to achieve for established multinationals, it is a difficult task for most businesses considering the unique infrastructural and trade hurdles in emerging markets. These challenges combined with increased consumerism in emerging economies present an opportunity for third-party logistics companies (Manners-Bell et al, 2014). Such companies have a better understanding of the local distribution channels and have developed built-in capacity to navigate through infrastructural hurdles (Wedan, 2006). Wedan (2006), notes that there is a need for businesses to collaborate closely with logistics providers in emerging markets in order to achieve efficiency. With efficiency, the value chain can benefit with timely delivery and cost reduction. Firms can work jointly with logistics providers to optimize processes in the entire supply chain. Practices such as lean network planning have proved to be successful in reducing costs in the supply chain (Qrunfleh & Tarafdar, 2013). It is critical therefore for companies to work with logistics providers that are in a capacity to adopt innovative techniques and strategies in the value chain. In some cases, global companies may form partnership with local entities whereby the former sells to latter who in turn sell to the final consumers (Melnyk et al, 2010). This model is particularly useful in emerging economies where the cost of operation may be prohibitively expensive due to infrastructure or distribution costs. Fast-moving-consumer--goods companies such as Eveready have successfully adopted this model to sell their products in remote parts of India and Africa (Khanna & Palepu, 2013). Evidently, it is operationally prudent to consider the outsourcing strategy in distribution of goods in emerging markets. This is due to the uniqueness of the target markets as well as infrastructural and legal hurdles that exist in emerging economies. Expectedly, it is also costly and time-consuming for global firms to recruit, train and maintain local talents for logistics supply (Manuj & Mentzer, 2008). 3 Localised production Emerging economies such as China and India have achieved more than enough skilled manpower and manufacturing capacity within less than 20 years (The Economist, 2012). India, China and the rest of the emerging economies boast of an abundance of skilled manpower at a relatively cheaper cost as compared to developed economies (Ramamurti & Jitendra, 2009). The emerging economies such as Brazil, Russia and South Africa also have vast mineral resources that constitute principal raw materials in manufacturing industries (Qrunfleh & Tarafdar, 2013). It is also evident that faster knowledge and technology transfer in the information age has enabled emerging economies to catch up quickly with developed economies particularly in the manufacturing and technology sectors (The Economist, 2012). In light of these understanding, it is increasingly becoming logical for multinational companies to establish production and innovation concerns of their businesses in emerging markets. Multinational companies can reduce the time it takes for goods to reach the end consumer from the factory, by moving manufacturing near the target markets, (Ramamurti & Jitendra, 2009). This in turn reduces supply chain risks such as stock-outs, logistical inefficiencies and prohibitive distribution costs (Qrunfleh & Tarafdar, 2013). Shorter supply chains are more flexible in responding to challenges and market dynamics. Complex supply chains that extend from one continent to another do present logistical and management challenges to multinationals particularly in emergent markets with less understood trade and operational systems. Localised manufacturing proves to be critically beneficial to the supply chain in terms of agility (Borgstrom & Hertz, 2011). Governments in emerging markets such as Malaysia and India have developed special industrial zones that encourage foreign direct investment in local manufacturing (The Economist, 2012). Such industrial zones have efficient infrastructure including roads, railway, and cheaper electricity. Government policies in emerging economies have resulted in an oversupply of skilled labour and availability of raw materials cheaply to manufacturers (Goldman Sachs, 2003). Policies in areas such as labour relations and taxation in emerging economies are designed in a way that lowers operational and supply chain risks for multinational companies (Qrunfleh & Tarafdar, 2013). All these factors make it logically strategic for companies to establish manufacturing concerns in the emerging economies. Apart from manufacturing, Multinationals are also establishing activities such as research and development in emerging markets (The Economist, 2012). This is logically imperative since such efforts help the companies to better understand market dynamics in the emerging economies. With adequate market intelligence, global businesses can be able to plan for innovative supply chain practices including distribution plans. Research and development units in emerging markets also complement the supply chain by helping tailor the products to market needs as communicated through distributors and marketers (Borgstrom & Hertz, 2011). Apparently, moving manufacturing and R&D closer to the end buyers is proving to be strategic for multinational companies in terms of increased profitability, improved agility and competitiveness (The Economist, 2012). However, Qrunfleh & Tarafdar (2013) note that the extent of localisation by multinationals should be limited to a level that will not erode the global strength of the brand. Localisation may also cause a multinational company to lose its core capabilities that have been successful globally. Consequently, this may create confusion within the entire company on strategy adoption and implementation. 4 Lean and agile supply chain Emerging markets provide an evolving business environment that borders between predictability and relative uncertainty in some cases (Goldman Sachs, 2003). At the same time, the demographics in emerging markets lack homogeneity in terms of cultural, income and motivation factors, contends Ramamurti & Jitendra (2009). Global firms have in the past decade invested largely in market research to understand demographics and institutional factors that will inform their strategic orientation (Wedan, 2006). “Lean” and “Agile” strategies have emerged as most common strategies adopted by global multinationals in different markets. The agile strategy is the most favoured strategy by multinationals in emerging markets while the lean strategy is more applicable to the developed world (Christopher & Towill, 2000). The concept of a lean supply chain strategy stems from the Toyota Corporations strategy of minimising wastage through scheduling (Wedan, 2006). Lean practices like just-in-time ordering minimise inventory costs and the risks associated with holding too much stock particularly in emerging markets (Qrunfleh & Tarafdar, 2013). According to Christopher, Peck, & Towill (2006) Lean practices for supply chain management are more effective in highly predictable markets. Developed markets have clear customer segmentation and less supply chain disruption. The primary benefit of lean supply chain strategies is achievement of cost efficiency that in turn increases profitability and competitiveness of a firm. Emerging markets do not qualify as ideal for implementation of lean strategies in the supply chain (Qrunfleh & Tarafdar, 2013). Agility strategies focus on making the supply chain more flexible and responsive to changes in the demand and supply side of the business (Qrunfleh & Tarafdar, 2013). Agility allows a business to match the supply with the demand in the market to avoid the risks associated with discrepancy between demand and supply in the market (Melnyk, Davis, Spekman, & Sandor, 2010). Agility is best suited for unpredictable markets. The emerging markets demand very high levels of supply chain agility due to their unpredictable nature (Christopher, Peck, & Towill, 2006). It is notable, however, that unlike lean strategies, agility is not necessarily cost effective in the long run (Qrunfleh & Tarafdar, 2013). There is, therefore, a need to blend the strategies particularly in emerging markets. Emerging markets border between unpredictability and predictability (Manuj & Mentzer, 2008). This creates the need for a hybrid strategy that incorporates both lean and agile concepts in the supply chain. Lean strategies can be applied in cases where the market is well understood and with standard products. Industrial consumers in emerging markets function in an almost similar way like in developed markets (Qrunfleh & Tarafdar, 2013). Such customers can be served cost-efficiently with a supply chain that employs lean principles. Qrunfleh & Tarafdar (2013) categorise retail consumers in emerging markets as less predictable and demand products customised to their needs. Such markets are better suited to a supply chain strategy that tilts more on agility. While lean offers cost efficiency, agility offers flexibility and responsiveness. 5 Form postponement Postponement strategy in the supply chain refers to intentional delay in production resource commitment (Christopher, Peck, & Towill, 2006). This strategy aims at ensuring flexibility and cost reduction. Postponement can be achieved in two different ways; form or time. Form postponement includes activities such as manufacturing and packaging. Time postponement is the actual movement of goods from the producer to the end consumer (Christopher, Peck, & Towill, 2006). Form postponement is more prominent in emerging markets than in developed ones. Form postponement is informed by a number of factors such as product lifecycle, cost of components and extent of product customization (Qrunfleh & Tarafdar, 2013). Form postponement allows businesses to monitor market demand and produce goods in accordance with consumer needs and preferences. This strategy is more effective and beneficial in markets with high unpredictability. Emerging markets have diverse consumer characteristics including income disparity and other socio-demographic factors (Khanna & Palepu, 2013). Such a market poses a significant risk particularly for multinational companies that have achieved success previously in predictable markets (Manuj & Mentzer, 2008). Postponement offers a company the ability to minimise demand side risks such as incompatibility between product features and consumer needs and preferences in emerging markets (Christopher, Peck, & Towill, 2006). Form postponement, however, is an expensive strategy for companies due to the investments made in understanding product design and market characteristics (Qrunfleh & Tarafdar, 2013). This strategy is, therefore, applicable in advanced stages of production when enough market intelligence and product knowledge is available to production and marketing managers. Conclusion Emerging markets have in the past decade presented an excellent opportunity for global firms to manufacture products cheaply and distribute to the rest of the world. Interestingly, economies of emerging countries have improved as a result of increased manufacturing capacity. As a result of economic growth, populations in emerging markets have developed high consumer power due improved incomes. These economies have in turn transformed into target markets for global companies. Despite these positive highlights, emerging markets are faced with challenges such as inadequate talent, poor infrastructure and institutional hurdles. This challenges and heterogeneity of the consumer base demand unique supply chain strategies for businesses. Integration of the entire supply chain offers global multinationals the ability to respond accordingly to market changes. Outsourced logistics may be beneficial for firms as it reduces initial costs and the time it takes to establish in emerging markets. Global firms may also consider localised production in developing markets as it reduces supply chain risks and costs associated transportation and delays. Lean and agile supply chain principles can be applied achieve cost efficiency and flexibility in business operations. Finally, postponement as a strategy can be employed in highly unpredictable emerging markets as it allows companies to monitor demand characteristics and produce according to market needs. References Borgstrom, B., & Hertz, S. (2011). Supply chain strategies: changes in customer order-based production. Journal of Business Logistics , 32 (4), 361-373. Christopher, M., & Towill, D. (2000). Supply chain migration from lean and functional to agile and customised. Supply Chain Management: An International Journal , 5 (4), 206-213. Christopher, M., Peck, H., & Towill, D. (2006). 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