ASIA FOCUS

An evolving landscape

The slowdown that followed the dotcom bust early in the decade promoted Asian companies to pursue - successfully - ways to increase efficiency for all players Focus

High-growth entrepreneurs in Asia increasingly recognise the great impact of product design on their companies' manufacturing performance. Some of them are now coming to appreciate, typically from day-to-day business experience, a similarly great importance of good-quality supply-chain design in the supply-chain co-ordination with their suppliers, manufacturers, distributors, retailers and customers.

This is part of the series that the Bangkok Post has been publishing on various topics such as the "Growth Challenges for Asian Entrepreneurs" series, entitled "Moving up the Value Chain: Building Design and R&D Competences", focused on the challenges that high-growth ventures in Asia face in creating value through building new capabilities, particularly in original product design.

Rapid industrialisation in the past 50 years has placed the leaders of Asian manufacturing at the forefront of implementing modern supply-chain management (SCM). Initiatives such as Just In Time, Total Quality Management and business-process re-engineering had a significant impact on the individual components of supply chains.

They eliminated non-value-adding activities and middlemen, enhanced productivity, streamlined workflows and produced tangible benefits for the majority of supply-chain participants.

Despite the improvements in the regional and global supply chains that Asian industries participated in over the decades, overall the traditional approach to SCM has nonetheless been limited to cost reduction. In many industries facing global competition, with margins rapidly shrinking, there is growing pressure on supply-chain managers to minimise procurement, production and distribution costs.

For instance, the average selling price of a personal computer has been decreasing by 10-15% per year over the past decade. In the automotive industry - for many years now beset by worldwide overcapacity - not even a 5% price reduction is negotiated between a manufacturer and its suppliers.

By contrast, research conducted by INSEAD Professor Enver Yucesan, rooted in discussions with industry players worldwide, including Asia, has put forward a different, highly dynamic and forward-looking perspective on enhancing the supply chain. This approach emphasises that in the fast-evolving Asian region, where new products and distribution channels emerge every day, Asian companies and high-growth entrepreneurs need to review their supply-chain decisions continuously.

Innovative approaches, both strategic and tactical, in supply-chain design and co-ordination, will enable Asian entrepreneurs to shift their focus from reducing costs to creating value and a sustainable competitive advantage through their SCM decisions.

In recent years, a new wave of interest among Asian companies in optimising their supply-chain systems was triggered by the post-dotcom economic downturn of 2001.

The sudden collapse of the technology markets and the resulting slowdown in the US economy saw a sharp drop in the demand for (then-) high-end consumer electronics: PCs, mobile phones and personal digital assistants.

As a result, US technology vendors such as HP and Intel cut their orders for chips and components from Asia. This left many contract manufacturers in Asia with excess capacity and rapidly rising inventory levels, which sometimes reached several quarters' worth of their manufacturing output.

As Asia's IT sector manufactured 70% of the world's components, the reduced global demand led to excess stock amounting to $5 billion each quarter. This inventory build-up in supply channels became one of the biggest issues weighing on Asia's high-tech-manufacturing industry.

As a result, entire national economies were affected. For example, Taiwan - which had for decades positioned itself as a manufacturing network integrator for leading US technology players - in 2001 encountered its first-ever economic recession, with GDP growth falling to an unprecedented minus 1.9%, a stark contrast with the double-digit growth rates of the mid-1980s.

These unforeseen developments revealed a deeper-running imbalance and volatility in the global supply chains, and the high degree of vulnerability that entrepreneurial companies in Asia shouldered. Through the logic of the existing supply-chain systems at the time, the global supply chain had worked well while the electronics and high-tech markets expanded throughout the 1990s.

But during an economic slowdown, Asian manufacturers were largely unable to forecast the sharp drop in orders. Their multinational clients, positioned on top of the supply chain, conveniently, if unintentionally, passed the responsibility for managing excess inventory one level down the chain.

The imbalance has not been limited to supply chains in the technology industries.

For example, research has documented that toy retailers, who achieve the highest sales volumes during the December holiday season, tend to overstate their needs in order to ensure sufficient inventory for this vital sales period.

This, in turn, sends an exaggerated signal to manufacturers (many of them based in Asia, especially China) who may be misguided into increasing production, thinking that there is a great market demand for their products. Another example is the grocery industry, which is renowned for thin profit margins. There is a common practice referred to as forward buying: In up to 80% of transactions between manufacturers and distributors, items are bought in advance of actual requirements to take advantage of reduced purchase prices.

As in the 2001 electronics-industry situation, the inventory is pushed on to the channel ahead of the actual demand. Demand-forecast updating is also commonplace: Manufacturing receives a demand forecast from the marketing department. Just to be on the safe side, the department inflates the forecast by 10% before sending it to suppliers. To be further on the safe side, the supplier revises the forecast upward by another 10%, etc. As the updated forecast travels upstream along the supply chain, the figures that the last supplier sees are totally detached from the market realities that the marketing department tried to capture in its original forecast.

All of these practices serve to distort the market picture. For young companies in Asia that are establishing their place in the global supply-chain ecosystems, this presents a strong disadvantage. The next chapters of this publication will outline some key directions that Asian entrepreneurs can explore in their thinking on participating in their industries' supply chains.

High-growth entrepreneurs can greatly benefit from new approaches to managing the space they occupy in these ecosystems. In particular, it is important that new ideas and best practices in supply-chain optimisation spread beyond Asia's high-tech sector to more traditional industries, and from leading industrial conglomerates to emerging, high-growth companies. (Additionally, opportunities for Asian entrepreneurs to add value in areas beyond the manufacturing of products, by adopting innovative practices in services delivery and customer interaction, were outlined in the previous "Growth Challenges for Asian Entrepreneurs" publication, "Beyond Better Products".)

In recent years, maintaining the supply chain focus on small business development has become important to governments and industry associations. A critical mass of knowledge on innovation opportunities in SCM among these segments of Asian business will go a long way toward improving Asia's weighting in the current balance of global supply-chain systems.

Bangkok Post

Saturday March 31, 2007