unlocking the value of globalisation · 2009-08-13 · 4 deloitte research—unlocking the value of...

A Deloitte Research Global Manufacturing Study

Unlocking the Valueof GlobalisationProfiting from Continuous Optimisation

About Deloitte Research

Deloitte Research, a part of Deloitte Services LP, identifies,analyses, and explains the major issues driving today’s businessdynamics and shaping tomorrow’s global marketplace. Fromprovocative points of view about strategy and organisationalchange to straight talk about economics, regulation andtechnology, Deloitte Research delivers innovative, practicalinsights companies can use to improve their bottom lineperformance. Operating through a network of dedicatedresearch professionals, senior consulting practitioners of thevarious member firms of Deloitte Touche Tohmatsu, academicsand technology specialists, Deloitte Research exhibits deepindustry knowledge, functional understanding, andcommitment to thought leadership. In boardrooms andbusiness journals, Deloitte Research is known for bringing newperspective to real-world concerns.

Table of Contents

Executive Summary ................................................................................. 1

Globalisation and the Paradox of Optimisation ................................... 4The Optimisation Paradox ....................................................................... 4Why Are Companies Falling Behind In OptimisingTheir Global Networks? ........................................................................... 6

Profiting from Continuous Optimisation ............................................... 8Taking a Holistic View ............................................................................. 9Designing the Global Network .............................................................. 11The Role of Competitive Drivers ............................................................ 12Factoring Compliance Drivers into the Network Design ........................ 14Optimisation Infrastructure—The Role of People,Process, and Technology ....................................................................... 16

Conclusion .............................................................................................. 18

Appendix A: Survey Methodology and Respondent Profile ............. 19

Appendix B: Defining Complexity Masters ......................................... 20

Deloitte Research—Unlocking the Value of Globalisation 1

Executive SummaryThe world’s largest companies are constantly on the move,looking for new business opportunities in all corners of theglobe. Many have experienced incredible success. CaterpillarInc. grew to become a global leader in constructionequipment over 80 years, and Dell Computer Corporation wasable to expand from a dorm room hobby to a billion-dollarglobal high technology supplier in just 20 years.

Despite these and many other successes, the fact remains thatmost organisations fail to capture the real value of theirglobalisation efforts. This is the critical finding of our study ofnearly 800 companies around the globe with combinedrevenues of close to US$1 trillion.1

Missing: Full Returns onGlobal NetworksA key discovery of our study is that, rather than take a holisticview in the design and expansion of their global networks—the complex web of suppliers, production and R&D facilities,distribution centres, sales subsidiaries, channel partners, andcustomers, and the flows of goods, services, information, andfinance that link them—most global manufacturers focus onfixing individual pieces of the network. The result: suboptimalimprovements, wasted efforts and lacklustre performance.

The negative impact can be devastating. In many of theglobal organisations we studied, the value loss from sub-optimisation was 50 percent or more of bottom-line profits.Overall, we estimate that more than 80 percent of the mostglobalised businesses in our study have not captured the fullreturns on their global investments.

The Optimisation ParadoxOur finding is, of course, due in large part to the fact thataggressive globalization brings new challenges. Companies,such as Caterpillar, Dell, 3M, Carlsberg, GlaxoSmithKline, andToyota, have left large footprints around the globe. Butdespite rampant globalisation efforts, most companies stillmanage and optimise the use of network assets on a “local”basis. We refer to this phenomenon as the “optimisationparadox.” The problem is pervasive. Our research shows, forexample, that supply chain cost structure is in last placeamong major competitive capabilities in all the industries wehave studied (Figure 1).

In addition, over the last three years, only about one in tencompanies have launched extensive initiatives to optimise thesupply chain network structure.2 As a result, most companiesare struggling to compete on cost, quality, customer service,and innovation offerings against manufacturers thatconstantly redesign their businesses from a global point ofview.

Falling behind on network optimisation further punishes thelaggards because they then face immense costs to catch up.This often requires selling factories, brands, and subsidiaries tocompetitors at bargain prices, reducing staff and losingexperienced personnel, and restructuring business processesand information systems.

Given these challenges, the question we seek to address inthis study is the following: In the face of increasingly complexglobal operations and a fast-changing business environment,how can companies continuously optimise their globalnetworks to minimise the cost of doing business, growrevenue and profits, and manage the associated risks?

Deloitte Research—Unlocking the Value of Globalisation2

Profiting from ContinuousOptimisationTo understand the value of managing global networks from aholistic view, we assessed global companies in two areas: theglobal complexity of their operations (measured by the numberof regions around the world in which they sourced, produced,developed, or sold products), and the strength of theircapabilities for managing their global value chains. Theanalysis shows that manufacturers that manage their globalvalue chains most effectively in very complex environments—we call them “complexity masters”—are as much as 73percent more profitable than companies with less capablevalue chains and/or less global and complex networks.3 Whilethe complexity masters are far from perfect, they haveovercome many of the huge difficulties involved in optimisinga global operation.

Complexity masters understand that every suboptimal networkinvestment implies immense future losses of opportunity. Themajority of the lifetime cost and profit opportunity of abusiness investment is fixed at the network design stage whennew products are developed, new plants are built, and newmarket strategies pursued.4 The ability to optimise a global

network declines dramatically as new investment initiativesmove beyond the design and planning phase. With theescalating number and cost of new initiatives for productlaunches, low-cost sourcing, and new market entry, ensuringearly and ongoing optimisation of the total network hasbecome a cornerstone for success in globalisation (Figure 2.)

Rank

1

2

3

4

5

6

7

8

9

10

All Industries

Product quality

Customer service

Manufacturingflexibility/responsiveness

Product innovation

Manufacturingproductivity & costeffectiveness

Sourcingeffectiveness

Logisticseffectiveness

Manufacturinglead time

Time-to-market

Supply chain coststructure

Automotive

Product quality


Customer service

Product innovation





Time-to-market


ConsumerProduct

Product quality

Customer service

Productinnovation






Time-to-market


DiscreteManufacturing

Product quality


Customer service

Product innovation





Time-to-market


High Tech/Telecom

Equipment

Product quality


Product innovation

Customer service





Time-to-market


Life Sciences

Product quality

Customer service

Product innovation





Time-to-market



Process/Chemicals

Product quality

Customer service


Productinnovation

Manufacturingproductivity &cost effectiveness




Time-to-market


Figure 1. The Optimisation Paradox Is Pervasive Across IndustriesSupply Chain Cost Structure at Bottom of List of Competitive Capabilities

Ranking of Current Capabilities Compared to Primary Competitors

Source: Deloitte Research

Figure 2. Unlocking the Value of the Global NetworkThe Case for Continuous Network Optimisation


Network Investment Phases(for New Initiatives in Product Development,Supply Chain, or Marketing/Sales Operations)

Cost

$€

TimeDesign Implement Operate

Opportunity


Unlocking the Value of GlobalisationBecause of the dramatic changes impacting just about everyglobal manufacturer we have studied, creating the capabilitiesto ensure that existing and new network investments—insourcing opportunities, production locations, productdevelopment, and markets—are holistically and continuouslyoptimised is crucial for unlocking the real value ofglobalisation.

To make continuous optimisation work, managers must keeptwo sets of drivers in mind: competitive drivers andcompliance drivers. Competitive drivers include revenuegrowth and cost management targets, and innovation.Compliance drivers are global and local regulatory constraintsand opportunities imposed by regulatory, taxation and otherissues. In addition, to ensure not just episodic, but alsocontinuous optimisation, managers must holistically build theiroptimisation infrastructure, aligning people and organisationalstructures, business processes, and technology platforms.

� Competitive Drivers: Leading companies factorcompetitive drivers into their global network design. Theypursue new market opportunities by first determining howto leverage the existing value chain—not by automaticallylocating new plants, warehouses, R&D facilities, and salesoffices in regions of promise. While they outsource activitiesand shift to lower-cost manufacturing outside the U.S. andEurope, they do so only after considering the impact on theentire global value chain. Similarly, while they explore R&Dopportunities around the world, they first determine theimplications of setting up a new product developmentcentre on their existing R&D, manufacturing, and marketingoperations.

� Compliance Drivers: Manufacturers aiming to build world-class value chains also heavily consider the impact of globaland local compliance drivers on their network designs. Theyknow that regulatory requirements such as anti-dumpingrules, local content laws, and environmental regulations cansignificantly impact the profits and risk of location decisions.They also know that tax issues such as direct and indirecttaxation can make some countries havens and others horrorsfor plants, warehouses, R&D centres and other operations.

� Optimisation Infrastructure: To enable and sustain globaloptimisation, leading companies are building an optimisationinfrastructure—that is, the necessary complex of people andorganisational, process, and technology underpinnings.Flexible business processes and IT infrastructure are also keyelements that ensure ongoing optimisation. Often thebiggest obstacle to optimisation is organisational silos andthe misalignment of incentives that block executives andemployees from taking a holistic approach to businessopportunities. Even when companies go ahead and pursueglobal optimisation initiatives, these obstacles can easily cutthe bottom-line benefits in half.

Some Pain, Immense GainThe challenges of globalising a company’s business strategies,organisation, processes, and IT infrastructures to pursuecontinuous global optimisation are formidable. Reorganising asupply chain can eliminate many jobs, change reportingrelationships, and force employees to deal with colleagues,suppliers, and customers from multiple cultures and timezones, which can have a huge hidden cost. Organisationaland cultural resistance should be expected. In some cases,struggle for survival is the only force that motivates globalnetwork optimisation. Also, because such optimisation spansmultiple country operations and affects not only operationaldepartments such as marketing and sales, manufacturing, andengineering, but also support functions such as tax, humanresources, and finance, the CEO and the top executive teammust directly oversee the effort to ensure success.

Despite the challenges of optimising a manufacturer’s globalnetwork, the rewards can be immense. Our research showsthat optimising the global network can significantly reducesupply chain costs and risk and boost growth and profitability.With the top-performing global companies achieving profitlevels up to 73 percent higher than their competitors, thechallenges are well worth tackling.


Globalisation and theParadox of OptimisationIn pursuit of new revenue and lower-cost operations,manufacturers around the world have created ever-morecomplex networks of marketing, sales and service, sourcing,manufacturing and distribution, and research anddevelopment activities. However, those who let their globalfootprint grow without continuously determining how thepieces could be rationalised and optimised unwittingly build inhuge redundant costs and lose opportunities for highergrowth and profits.

Over the last two years, we have studied the global operationsof nearly 800 manufacturers in North America, Europe, andAsia-Pacific. These companies come from a range of industriesincluding consumer business, automotive, high tech,diversified industrials, pharmaceuticals, and the chemicalprocess sector. Our research finds that most have made littleprogress in optimising their operations from a globalperspective. Despite launching many improvement initiativesacross their global operations, most are overwhelmed byincreasing operational complexity. The complexity will onlyincrease as companies continue their global expansion efforts.

The Optimisation ParadoxCoordinating product development, supply chain, sales, andmarketing activities that are oceans and time zones apart willbecome even more difficult in the years ahead. The reason iscontinued globalisation and fragmentation of mostcompanies’ operations. The data on this trend is undeniable.For example, over the next three years, more than 50 percentof North American manufacturers plan to enter or expandsourcing and marketing/sales operations in China. More than40 percent say they will enter or expand into markets inCentral and Eastern Europe. And more than 20 percent willinitiate or expand sourcing and manufacturing operations inMexico (Figure 3).

Western European manufacturers are not standing still either.With the eastern expansion of the European Union, morethan 50 percent expect to increase their market activities inCentral and Eastern Europe over the next three years. Nearly40 percent expect to enter or expand their sourcing, andmarketing and sales activities in China.

Such moves cannot help but introduce major inefficienciesinto value chains of global manufacturers. In addition,shrinking product cycles means less time for an increasinglydispersed workforce to collaborate and manage producttransitions in each product cycle. On average, companiesexpect new product share of total revenues to hit 35 percentin 2007, a 66 percent increase from 1998.5


Figure 3. Relentless Globalisation: Top Three GrowthDestinations

Top 3 Future Growth DestinationsPercentage of Companies Planning to Enter or Expand

Operations Over Next Three Years

North WesternAmerican European

Companies Companies

SourcingChina 55% 39%Mexico 23%Other SE Asia 20% 19%Eastern Europe 36%

ManufacturingChina 36% 27%Mexico 22%Western Europe 12%Central Europe 17%Eastern Europe 27%

EngineeringChina 23% 13%India 13%Eastern Europe 10% 14%Central Europe 13%

Marketing/SellingChina 53% 39%Central Europe 40% 51%Eastern Europe 40% 60%

Despite the clear value of optimising the value chain, mostmanufacturers lack the capabilities to do so. Less than a third(30 percent) report a competitive advantage in supply chaincost structure. In comparison, 70 percent say they had betterproduct quality than their primary competitors (Figure 4).Perhaps not surprisingly, over the last three years, they rankedinitiatives to improve the supply chain network structure atthe bottom of their list of improvements (Figure 5 next page).Less than a third had significant (“extensive” or “nearextensive”) initiatives to improve supply chain networkstructure performance over the last three years.

Thus, despite the globalisation of just about everything, mostoptimisation still remains “local.” This is what we refer to asthe “global optimisation paradox.” The paradox and lack ofoptimisation of global and regional networks create a numberof problems.

Entering new markets with new or existing products is fraughtwith challenges. Manufacturers that underestimate the strainon the global network and have limited insight into the truecost of products sold can jeopardise their investments andgrowth plans. Some companies are pursuing opportunities inlow-cost countries such as China without realising that thegains from lower unit costs of products can be eaten up byhuge logistics costs, delays and uncertainty, and regulatory,and tax issues.

Figure 4. Forget Global: Most Optimisation Is LocalFew Companies Have Competitive Advantage in SupplyChain Cost Structure


0%

Product Quality

CustomerService

Flexibility

ManufacturingCost

LogisticsEffectiveness

ManufacturingLead Time

Supply ChainCost Structure

20% 40% 60% 80%

SourcingEffectiveness

Percentage of Companies with Near-Strong orStrong Advantage Compared to Primary Competitors

The case of one U.S.-based multinational highlights suchpitfalls. After spinning off its manufacturing subsidiaries inSingapore, China, and other Asian countries, the firm set up a“commissionaire structure” to sell to European and U.S.markets. This meant, for example, that the European divisionswould be paid in commissions rather than profit from value-added manufacturing activities as in the previous networkstructure. For the purpose of determining duties, however,the cost of goods was calculated on the basis of ownership ofthe products as they entered the European markets. As anagent, the company never owned the goods. Therefore, ithad to pay duties on the sales price rather than themanufacturing cost—an increase of 50 percent. After athree-year-long customs audit, the company determined thatthe miscalculation cost millions of Euros in current and backduties.

Similarly, the logistics department of a Dutch companythought it could save 5 percent in production costs byoutsourcing assembly to China where individual parts werealready produced. It would then import finished assembliesback to the Netherlands. However, the company’s taxdepartment paid the import duties. With limited visibility andcollaboration between the two departments, the companyrealised after a year that its outsourcing effort had actuallyincreased costs by almost 10 percent. While the companycould import parts in this category duty-free, the finalassembly came with a hefty 14 percent duty.



Rank

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4

5

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9

Figure 5. Supply Chain Network Structure Initiatives at Bottom of List in Nearly All Industries

Ranking of Performance Improvement Initiatives Undertaken Over Last Three Years

All Industries

Operations/Manufacturing

Forecasting/Planning

OrderManagement/Customer Service

Sourcing/Procurement

Distribution/Logistics

Sales & Marketing

Engineering

Research &Development

Supply ChainNetwork Structure

Automotive


Engineering






Sales & Marketing


ConsumerProduct






Sales & Marketing



Engineering

DiscreteManufacturing





Sales & Marketing

Engineering




High Tech/Telecom

Equipment





Engineering



Sales & Marketing


Life Sciences







Sales & Marketing


Engineering

Process/Chemicals




Sales &Marketing




Engineering



Why Are Companies FallingBehind In Optimising TheirGlobal Networks?Given the wide range of problems the optimisation paradoxcreates, why is it that most companies have yet to makesignificant efforts to resolve it?

Today, the pace of change in most industries is significantlyfaster than it was 10 to 20 years ago. Shorter product cycles,new and more diverse sources of supply, and ever-morecomplex global networks increase the need for continuouslyoptimising value chain networks.

Our research shows that the average time for allmanufacturers to bring new products to market will reach lessthan 13 months by 2007—down more than 30 percent fromthe 18-month cycle time in 2001. Putting more new productsthrough the “demand” and “supply” chain will further raisecost and complexity—particularly if there are more plants,warehouses, and R&D centres through which those productsmust pass.

Also, as outsourcing of major pieces of manufacturers’ valuechain continues unabated, companies will find it increasinglydifficult to monitor and assess the total network cost andimpact of new initiatives.

In addition, if they are not executed well, mergers andacquisitions can play havoc with existing networks. Financialmarkets increasingly penalise companies that make

acquisitions without harvesting the fruits of consolidation andoptimisation of global networks. Some of the biggestbenefits of mergers and acquisitions involving like companiescome from optimising demand, supply, and productinnovation networks and processes. That was one of themajor benefits expected in the merger of Hewlett-Packard andCompaq.6 Leaving supply chain, product development, salesand marketing offices and other facilities intact after anacquisition ignores the benefits of optimisation.

More complex economic and political environments—changesin regulations, environmental protection, international tradeand investments, currency rate fluctuations, and taxation—compound the problem. This includes recent developmentssuch as increased border controls and security concerns, thecontinued evolution of World Trade Organisation (WTO) rules,the expansion of the European Union, new regulations onenvironmental safety and health, fluctuating currencies, andthe emergence of new global players such as China and India,to name a few.7

Electronics makers in Europe will likely have to spend anestimated US$100 billion over the next decade to comply withnew EU directives on hazardous materials. The directivesbecome operational in 2006.8 Companies in a variety ofindustries that manufacture products with electronics contentsuch as automobiles or lighting equipment will also beaffected by these regulations. The impact will be global:Every company importing relevant products into the EuropeanUnion will have to comply.


To meet these new standards, companies must also prove theycomply at every stage of the value chain, from design andproduction, to service and disposal. This means detailedproduct traceability across the entire global network. Tocomply, companies will need to spend a lot of money tochange current business practices. ORGALIME, a Europeantrade body, predicts European companies will spend up to €15billion in up-front costs to redesign their processes. Thebiggest portion, however, will likely be for retiring products incirculation, a cost estimated to be €40 billion.9

Keeping pace with change on a global scale is a challenge foreven the best companies. Sony realised this when it had torecall 1.3 million Sony Playstation 1 game systems and800,000 accessories because of cadmium levels in peripheralcoupling cables that did not meet environmental standards.10

The global automotive industry is under similar pressure toaddress environmental issues throughout the product lifecycle.Consider the “End of Life Vehicle Directive” (ELV) in Europethat will come into effect by January 1, 2006. Cars will haveto be 85 percent recyclable, increasing to 95 percent by 2015,and up from 75 percent today.11 In addition, to comply withemissions legislation and new fuel efficiency requirements, it isestimated that Ford and GM will need to spend US$400 pervehicle. This could reduce margins between 10 and 15percent by 2015.12 BMW would have to spend more thanUS$600 per vehicle, although this would have less impactbecause of the company’s higher margins. Other companieswould be less affected. Honda, for example, is forecasted toneed only an extra US$24 per vehicle to meet newstandards,13 partly due to a more fuel-efficient vehicle mix.

The global chemicals industry is also a ripe target forenvironmental regulation. If enacted as expected by 2006,new EU legislation—Registration, Evaluation andAuthorisation of Chemicals (REACH)—would force producersto track up to 30,000 of the estimated 100,000 unregulatedchemicals.14 Companies would have to register thesechemicals and prove they are safe. Moreover, the plan is toextend regulatory requirements to customers downstream inthe supply chain, thus affecting nearly every manufacturingindustry.

The impact of the legislation is daunting. While analysts saythe United States government is lobbying hard to weaken orstop the new laws, they predict such efforts will only be astopgap measure.15 As health issues continue to beuncovered, companies in the leading industrial economiesshould expect to see increasing legislation in the near future.

Segregated management of functional, business unit andgeographic divisions of most companies means thatsignificant opportunity areas for improvement—such as globalsupply chain redesign or tax-efficient global intellectualproperty management—are rarely pursued. This silo mentalityis further driven by the often short-term considerations ofcapital markets that companies respond to. Designing andoptimising a network of operations takes time, and mostbenefits accrue over the life of investments.

Rationalising operations in customer-related, productinnovation and supply chain areas from a global, holistic viewis a major undertaking. The internal resistance to shuttingdown operations, changing processes and reportingrelationships, and serving markets in new ways can beimmense. The risk of doing the optimisation wrong can alsobe significant.

Most companies lack fundamental capabilities for monitoring,designing, and effectively restructuring their networks on anongoing basis. For example, fewer than 12 percent of thecompanies in our study say they are highly satisfied with theirinformation on critical metrics such as manufacturing cost,customer service levels, and product profitability (Figure 6).Without this information, it is no wonder that mostmanufacturers improve operations on a “local” basis—i.e.,creating efficiencies one chain link at a time.

Figure 6. Flying Blind: The Challenge of Visibility in ComplexGlobal Networks


0%

ManufacturingCost

Returnon Assets

ProductProfitability

Distribution/Logistics Cost

CustomerProfitability

ScenarioPlanning

10% 20% 30%

Forecast/Demand Plan

Percentage of Respondents that are HighlySatisfied with Information Availability in Area

One might ask: Is it worth it? Should global manufacturerseven consider such wrenching change? The answer is thatthey should, for several reasons. Global expansion isinevitable. Vast new markets await most manufacturers inareas such as China, India, Eastern Europe, and SouthAmerica. This will pressure manufacturers to move theirsupply lines and demand-generating activities quickly. Withthe rapid acceleration in new product introductions and theneed to leverage R&D expenditures on a global scale,companies will face mounting pressure to boost the efficiencyof their global networks—not just every 5 or 10 years, but onan ongoing basis. They must ensure new initiatives arealways aligned with current and future global networkstructures. This will help them minimise or avoid costly futurenetwork changes and gradual loss of competitive position dueto poorly structured operations.

So how can large, global manufacturers overcome the barriersand generate the extraordinary benefits that come fromoptimising their networks? The following chapter willexplain how.


Profiting FromContinuous OptimisationThe optimisation of global networks is not a trivial task.16

However, it is becoming a key capability of the world’s leadingmanufacturers.

In our research, we have identified a small group of globalmanufacturers that has significantly outdistanced thecompetition through superior capabilities for managingcomplex global networks. We call these companies the“complexity masters.” These companies not only have bettercustomer, supply chain, and product development operations,they design their operations more holistically whendetermining where to place and how to managemanufacturing, distribution, R&D, sales, marketing and otheractivities. The result is a more optimised business with abetter balancing of growth goals, cost reductions, and risk.

Comprising just 7 percent of all companies in the analysis, andless than 15 percent of the most global companies (quadrant3 and complexity masters combined), complexity masters are aselect group. With profit levels up to 73 percent higher thantheir competition, higher asset returns, and faster growth, thecomplexity masters outperform their competitors (Figure 7).Compared to the peer group of the most globalised andcomplex companies in quadrant 3, complexity masters arenearly 50 percent more profitable.

Figure 7. Global Complexity and Value Chain Capabilities

Value Chain Capabilities


HighLow

High

GlobalValueChain

Complexity

Quadrant 3

Quadrant 1 Quadrant 2

Complexity Masters

17%

Quadrant 1 level = 100

Percentage PositiveGap in Profit LevelRelative to Quadrant1 Companies(Quadrant 1 Level = 100)

73%

19%Profit Level

By analysing the performance of complexity masters and theleading practices of companies around the world, we are ableto take a closer look at how companies can manageinvestments, capabilities, and practices to optimise their globaloperations. (See appendix B, “Defining Complexity Masters,”for more details on the methodology and profile of thesecompanies.)


Taking a Holistic ViewThe most successful manufacturers optimise their globaloperations holistically (Figure 8). Leading companies such asProcter & Gamble, Toyota, and Dell, are deliberate aboutincluding a broad set of relevant factors (such as customerservice levels, lead time, flexibility, cost, risk, tax, regulatoryissues, and environmental aspects) when making majordecisions on sourcing, manufacturing, or new market entry.As illustrated in Figure 9 in simple terms, factoring in multipleconsiderations is what optimises performance.

Figure 8. Supply Chain Network Structure Matters forCompetitive Differentiation: Complexity Masters Aheadin Optimisation Initiatives



HighLow

High

GlobalValueChain

Complexity

Quadrant 3


Complexity Masters

6%


Percentage Positive Gapin Capability orImplementation LevelRelative to Quadrant 1Companies(Quadrant 1 Level = 100)

17%

13%

Supply Chain NetworkCost Structure Capability

3%

6%

17%

Supply Chain NetworkOptimisation Initiatives

Figure 9. Optimising the Global Network: An Illustration


Compliance Drivers• Exchange rates,

economic andsecurity risks

• Regulatoryconstraints andtaxation issues

Competitive Drivers• New/existing products

and markets• New/existing supply

chains and sources ofsupply

Optimal Global Network

€$

Number of Production Sites

DistributionCost

ProductionCost

Total NetworkCost

Shareholder Value• Cost• Risk

• Profit• Growth

Optimisation Infrastructure (People, Process, Technology)

Crucially, they understand that building these factors into thedesign of the network is key to optimisation. They know thatexcluding any of them (such as R&D, tax, and other regulatoryissues) can expose the firm to higher costs or additional risksfurther down the road. This is equivalent to the process ofdesigning new products. If sourcing and design of the supplychain are not taken into account early in productdevelopment, a manufacturer can lose 70-80 percent of itsfuture cost reduction opportunities in the lifecycle of itsproduct. The reason: Certain product features and designscan make it harder to reduce cost and incorporate newfeatures and functions quickly and inexpensively later. Thisprinciple applies to most other factors as well.

As companies restructure their networks to introduce newproducts, bring in new suppliers, or enter new markets, theoptimal design of the network is bound to change as well.And as each restructuring moves beyond the design andplanning stage, the ability to efficiently optimise the entirenetwork becomes limited. Continuously optimising thenetwork to ensure that each new initiative is designed andimplemented with the overall network structure in mind isnow critical to staying competitive (Figure 10).

Figure 10. The Case for Continuous Network OptimisationWith the escalating number and cost of new initiatives for product launches,low-cost sourcing, and new market entry, ensuring early and continuousoptimisation of the total network is becoming a key success factor


Ability toImpact TotalNetworkCost, Profitand Risk

Time

Low

High

Low

High

ResourcesCommitted

Design Implement Operate

Network Investment Phases (for New Initiatives in Product,Supply Chain, or Marketing/Sales Operations

Doing so requires significant “visibility” into all parts of thevalue chain—a picture that is aided by better technologies andinformation processes. It requires better managementprocesses for decision-making and execution. Finally, itrequires that top management oversees and supportscontinuous network optimisation. It is not surprising, forexample, that complexity masters are up to 50 percent morelikely to have one executive in charge of the overall supplychain than other groups studied. Without the organisational,process, and technology infrastructure to support globaloptimisation, most initiatives will fail.


From our research, it is clear that successful companies aremaking significant investments to ensure continuousoptimisation of their global business by (Figure 11):

� What: They incorporate all relevant competitive (markets,product development, supply chain) and compliance(regulation, taxation, etc.) drivers into optimising majornetwork investment initiatives and restructuring efforts.

� When: They ensure early and constant identification ofcurrent and future opportunities to redesign and optimisethe global network.

� How: They build a network optimisation infrastructure toalign people, organisation incentives and processes to makeit easier to continuously redesign and restructure thenetwork.

– They establish an integrated, flexible technologyinfrastructure to gain visibility and dynamically supportchanges in the network structure.

– They enforce ongoing communication about globaloptimisation goals and opportunities across theorganisation to boost awareness and influence local orfunctional initiatives on new market entry, low-costsourcing, or product development. They realise eachinitiative represents a low-cost opportunity to optimisethe global network.

Figure 11. The Continous Optimisation Model


What?

Multi-Dimensional Optimisation

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When?

Cost

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TimeDesign Implement Operate

Opportunity

OptimiseEarly

How?

OptimiseContinuously

Compliance Drivers• Regulatory Constraints• Taxation Constraints

Competitive Drivers• New Markets• New Supply Chains• New Products and Services

Optimisation InfrastructurePeople, Process, Technology

At one of the world’s largest industrial product manufacturingcompanies, a global network optimisation initiative boostedperformance dramatically. Pressured by competition in anoversupplied market, the company benchmarked its valuechain against those of other companies around the globe.The findings showed that the company lagged behind in anumber of key areas. The manufacturer then traced the rootsof its deficiencies. One factor was its decentralisedoperations. Because of misaligned incentive structures,country executives rarely worked together to reduce costs orimprove operations. Each plant operated largelyindependently and focused on reducing its own costs. Therewas little standardisation from business unit to business unit inbusiness processes, procedures, performance metrics andsoftware applications. Production allocations to plants weresuboptimal. For example, decisions on the product mix ateach plant were based on optimising individual plantutilisation and local business unit profitability rather thanoptimising overall enterprise profitability and total costmanagement, including tax, freight, and inventory costs.

Even after building a leading-edge plant in one of its largestmarkets to reduce costs, the company could not deliver thesavings because it had inadvertently increased lead times tomarkets overseas. With high variability in demand, thecompany quickly realised that increased inventory costsconsumed the unit cost savings it had achieved inmanufacturing. The company went back to the drawing


board. After assessing key value chain functions, it launcheda global initiative to restructure and continuously optimise thebusiness. It included the following actions:

� Streamline organisational, decision-making, and incentivestructures to align managers’ objectives and metrics withcompany goals.

� Realign and standardise supply chain processes and systemson an enterprise-wide basis.

� Consolidate and reorganise factories—including shift ofproduction from higher-cost/higher-tax-rate plants to larger,lower-cost/lower-tax rate, and more strategically locatedplants—and the adoption of lean manufacturing processesto increase productivity and reduce inventory costs.

� Create global sourcing centre to pool purchases by businessunits, gain volume discounts and improve the efficiency;upgrade interfaces and information technologyinfrastructures with trading partners; and identify andimplement outsourcing opportunities.

� Adopt results of global optimisation analysis, includingestablishment of a global freight management centre.

� Improve customer management to enable sales force tofocus on marketing a more profitable mix of products tocustomers around the world.

� Create global shared services capabilities for finance andaccounting, order management, HR, and other headquarteractivities.

The result of the efforts so far has been a stunning 75 percentincrease in profits. How so? Optimisation is enabling thecompany to deliver the same product volume at a significantlylower overall cost base, while ensuring the sale of a moreprofitable product mix.

Despite the success stories, most companies have a long wayto go. In the following we discuss the key design elements ofoptimisation, the challenges and opportunities, and howcompanies are optimising their networks.

Designing the Global NetworkCompanies have struggled for decades to optimally designand restructure their value chain networks.17 Yet, the need fornetwork redesign and restructuring has increased for twoprimary reasons:

1.Competitive Drivers. Not only are the networksthemselves more complex than ever, they are also changingat an unprecedented rate.18 The reasons are many. Productand technology cycles are becoming shorter, time to marketis shrinking, new locations for low-cost sourcing areemerging, and customer demand is growing more fickle bythe day. This forces companies to constantly rethink theoptimal location and configuration of their facilities.

2.Compliance Drivers. Factors such as the complexity andchanges in national regulations, taxation, and internationaltrade and investment regimes (e.g., new WTO rules andadmission of new WTO members such as China) can wreakhavoc with existing network designs.

Indeed, manufacturers are not standing still. Over the nextthree years, most have planned major initiatives to changesources of supply, overhaul manufacturing operations, andenter new markets. In such an environment, it is highlyunlikely that a network designed five or 10 years ago isoptimal today. Yet, few companies are taking advantage ofthe opportunity to optimise global operations. Notsurprisingly, only 5 percent of companies surveyed feel theyhave a big advantage over their primary competitors in supplychain costs. (This contrasts with 18 percent that believe theyare far better in customer service and 27 percent that feelthey have a strong edge in product quality.)

Leading companies, however, are pushing forward with amore comprehensive view of optimisation, including bothcompetitive and compliance drivers. For example, complexitymasters have gained a considerable lead over competitors intheir supply chain cost structure (Figure 12).

Consider the efforts of GlaxoSmithKline to restructure a globalproduction and distribution network hampered by theproliferation of product variations and production complexity.The company moved from a country-based manufacturingapproach to a global approach with fewer plants that arededicated globally to specific parts of a drug’s lifecycle, suchas the ramp-up phase. In total, the annual saving from therestructured global network is about US$500 million a year—the equivalent of the bottom-line impact of a blockbusterdrug.19


Figure 12. Mind the Gap: Supply Chain Cost Structure a Top Competitive Advantage


0%

ManufacturingLead Time

LogisticsEffectiveness

Manufacturing Productivity& Cost Effectiveness

SourcingEffectiveness

Manufacturing Flexibility/Responsiveness

Product Innovation

Product Quality

10% 15% 30% 35%

Time-to-Market

Positive gap in current capabilities—as measured relative to primarycompetitors—between Complexity Masters and all companies.

Percentage based on average ranking on scale from 1 to 5.

25%20%5%

Supply Chain CostStructure

Customer Service

The Role of Competitive DriversWe refer to the strategic and operational variables that mustbe factored into the design of a company’s global value chainnetwork as “competitive drivers.” What are they and why arethey important? For simplicity, we discuss them as they affectthe three broad business areas that comprise manufacturers’value chains:

� Demand chain (marketing, sales, and service)

� Supply chain (sourcing, manufacturing, and logistics)

� Product development (R&D, design, engineering,development, and launch).

Demand Chain: Optimising Marketing, Sales,and Service from a Global PerspectiveCompanies are constantly on the hunt for new growthopportunities—launching new products to expand existingmarkets or entering new markets with existing or newproducts. These efforts, however, put significant strains onthe global network. Bringing supply chains into new marketsnot only increases supply chain complexity and costs, it alsocan create challenges for marketing and sales strategies inother markets. While the initiative may have been “local,”the repercussions on the network are “global.”

New, potentially large markets can appear irresistible. But theincreased global complexity creates significant challenges evenfor the best companies.20 Preparing for the long haul isalmost always a necessity when entering new markets such asChina and India.

For example, with more than a dozen major regions and over2,000 languages and dialects, India is not the unified marketone might think. Similarly, China, the new epicentre of theglobalising economy, consists of more than 60 distinct regionswith varying regulatory, legal, infrastructural, and cultural andlanguage differences.

As global mobile-phone makers Nokia, Motorola, andSamsung have learned, to drive growth and market share inemerging markets, they often must extend distribution to eversmaller and smaller markets. For example, in China today,Nokia is developing relationships with specialty retailers,consumer electronics chains, and smaller, regional, or city-leveldistributors rather than working only with a limited set ofnational distributors. Colin Giles, senior vice president atNokia for customer and market operations in the region, says:“China is so big and diverse that it’s not possible to classify itas a single market. That is what we did three years ago.Today we look at every market as different and we look forthe best distribution or business model to suit that market.” 21


To capture these markets profitably, companies will find thatplanning, persistence, and flexibility are key. From ourresearch, however, it is clear that few companies effectivelybuild and leverage their global network when entering newmarkets. Not surprisingly, for most the major challenge tosupply chain flexibility is forecast error, followed by long leadtimes, product proliferation, and lack of supply chain visibility(Figure 13).

Figure 13. Forecast Error Top Flexibility BarrierForecast Error Is Top Barrier to Flexibility


Top Barriersto Flexibility

1. ForecastError

2. LongLead Times for

PurchasedComponents

3. Product(SKU)

Proliferation

4. Lack ofSupply Chain

Visibility

6. InadequateInformation

Systems

5. CapacityConstraints

These are all fundamental factors in building a profitable,sustainable business. Without strong capabilities in theseareas, global companies can rapidly lose the edge to smaller,national or regional competitors.

Carlsberg, one of the world’s largest beer producers, acquiredPoland’s Okocim to access a valuable brand and expand intonew markets in Central and Eastern Europe. To ensure thefuture potential of the expansion, Carlsberg quickly realisedthat it had to restructure Okocim’s operations. Through anextensive assessment of production, packaging, distribution,sales and marketing operations, the new network designincludes a reduction in production sites from 4 to 3;packaging sites from 12 to 7; and warehouses from 12 to 6.Overall, the network optimisation is expected to reduce totalsupply chain cost 15 percent while positioning the companyfor sales growth.

Supply Chain: The Global Pursuit of LowerManufacturing and Supply CostsSourcing from low-cost countries is the obsession of the dayat multinationals around the world. Pushed by maturingmarkets and price competition from competitors in those low-cost locations, companies in all industries are aggressivelyassessing new locations for sourcing components andmanufacturing goods.

For example, our research suggests that China is at the top ofeveryone’s list for sourcing. Over the next three years, 55percent of North American manufacturers and 39 percent ofWestern European manufacturers plan to enter or expandtheir sourcing in China. While the promises are great, theobstacles for leveraging the opportunities are vast. Considerthe supply chain challenges. Thirty to 45 percent of the costof goods sold is logistics cost—up to double the level inEurope and the United States by some estimates—and thereare few national third-party logistic providers. Road, air, andrail transportation systems have trouble keeping up with therequirements for a 21st-century supply chain. (One sign of theshortfall: Forty to 50 airports are in the planning stage.)22 Inaddition, quality risks are plentiful. One company redirectingsourcing of critical pumps to a Chinese supplier experienced a70 percent defect rate—seven out of 10 pumps failed—with asevere impact on ongoing operations.

Nevertheless, the opportunities for low-cost sourcing andselling to vast and fast-growing markets are too great toignore. Companies in just about all industries need to find away to incorporate emerging economies like China and Indiainto their global network.

Indeed, the importance of taking a holistic view of newsourcing and supply chain opportunities cannot be overstated,as Ingersoll-Rand has found. The global, diversifiedmanufacturer identified US$200 million in potential savings ifit increased purchasing from low-cost countries to 30 percentof its total sourcing expenditures. The company initiallyassumed that transportation, duties, and taxes would addabout 13 percent to the cost of imported materials. But adetailed assessment showed average ranges of 13 to 24percent. Tony Bozzuto, Ingersoll-Rand director of globallogistics pointed out: “We found cases where it was 200percent” if anti-dumping penalties or other special fees wereincluded in the calculation.23

Innovation and Product Lifecycle ManagementDespite having product innovation at the top of their growthagenda, few manufacturers are organising R&D and productlifecycle management operations from a global perspective.24

For example, many companies fail to take advantage ofregulatory and tax issues when deciding where to locate R&Dfacilities, or to consider intellectual property rights in makingsuch decisions. The result is suboptimal investments andleakage of critical product or process technologies. In India,counterfeit products make up 20-30 percent of theautomotive parts market.25 One automotive manufacturerestimates that 50-60 percent of counterfeit products with itstrademark are made in China.26 An inspection of a Chineseauto parts factory found 7,000 sets of counterfeit brake padsdestined for exports.27 Not only does counterfeiting result inrevenue loss, it can also jeopardise the safety of the productand the consumer, and the integrity of the brand. Nokiareported that counterfeit batteries used with its mobilephones could explode.28


From our research, however, it is clear that some companiesare better at guarding and exploiting their product innovationand process techniques. They build closer links between R&D,supply chain, and marketing and sales to improve the globaldesign of their networks and maximise profitability over thelifecycle of products and services. Key action points include:

� Build supply chain considerations into product developmentprocesses early to make it easy and less expensive toupgrade products. Not surprisingly, complexity masters aremuch further ahead in using product data and lifecyclemanagement technologies and processes to design moreflexible product structures (Figure 14).29

� Incorporate intellectual property matters into supply chaindesign initiatives early on to protect patents and manageregulatory and tax issues. After experiencing copyrightinfringements by competitors from China, Invacare, a U.S.-based medical product manufacturer and distributor withUS$1.5 billion dollar in sales, is now including lawyersextensively in the product design process to ensureprotection of intellectual assets.30

� Maximise the value of R&D and intellectual propertythrough better buying, selling, and licensing of technology.3M is one of the most innovative companies in the UnitedStates, with nearly 76 percent of its value in intellectualproperty and intangible assets, by one estimate.31 3M hasbuilt a technology transfer website to license and find newapplications for more than 20,000 of its patentedtechnologies.32

Factoring Compliance Driversinto the Network DesignCompliance drivers are external factors such as regulatory andtaxation issues, which a manufacturer must consider beforedesigning or restructuring a global value chain. Unfortunately,most treat them as an afterthought. Typically, this happenswhen a manufacturer perceives such drivers to be static andaffecting all competitors in similar ways, thereby levelling theplaying field.

But this perception is far from the truth. While it might beeasier to design a network by ignoring complex current andpotential future changes in regulatory and tax regimes, thesefactors have profound impacts on the efficiency andeffectiveness of the value chain. If left out of the equation,they can nullify any benefits from network optimisation. Inaddition, while complex, global and continuous optimisationcan actually make life easier for managers. When they makebusiness decisions in light of what is good for the entireglobal network, they can help their companies avoid majormistakes and wasted efforts.

Regulatory Issues in Global OptimisationFor any global company, complying with regulatory issues isno small burden. It requires dealing with local, national, andinternational regulatory issues on an ongoing basis. Ensuringthat the global network is managed and optimisedappropriately from a regulatory perspective makes the taskeven more challenging.

The list of regulatory issues impacting the design of a globalsupply network is long. They include product traceability, endof life recycling and disposal, labelling, product liability, foodsafety, subsidies, labour laws, and financial reporting issues.Consumer perceptions of regulatory issues also count.Creating the wrong image in the eyes of the consumer can bevery costly, as many consumer product makers have foundover the years.

Failing to account for new regional and national regulatoryissues in the network design can greatly worsen businessperformance. For example, consumer product manufacturershave recently hit barriers to entering or expanding into newproduct markets in Europe due to specific nationalregulations. The European Union is also stepping upenforcement of anti-dumping rules. The EU has increased itsstaff for pursuing anti-dumping cases more than five-fold tohelp EU-based businesses ward off threats from low-costcompetition. This makes it risky for multinational companiesto source from low-cost countries that violate the rules.

Furthermore, local content requirements that reduce taxationand import duties can force companies to rearrange theirsupply lines. The auto import restrictions of the 1980s werestrong drivers in forcing Japanese automakers and suppliers tobuild U.S. assembly plants. In established markets of WesternEurope and North America and emerging markets like China,Russia, and India, governments continue to put such demands

Figure 14. Product Data and Lifecycle Management: TechnologiesAND Processes Matter In Global Complex Networks



HighLow

High

GlobalValueChain

Complexity

Quadrant 3


ComplexityMasters

19%


Percentage PositiveGap in Capability orImplementation LevelRelative to Quadrant 1Companies (Quadrant1 Level = 100)

21%

-17%

Product data/lifecyclemanagement (PDM/PLM)

9%

15%

30%

Use common parts, sub-assemblies, and/or productplatforms

30%

16%

76%

Use formal product life cycleprogramme methodology


on multinationals that want to enter their markets. As Harley-Davidson’s CEO, Jeffrey Bleustein, said recently: “We cannotsell a motorcycle in China unless we are willing tomanufacture it there and, frankly, I don’t think Harley-Davidson with its Americana image and the kinds of qualityand features we put into the motorcycle would have the samecache even in China if it were built in China.” 33

Calculating local content requirements, however, is no easymatter. And designing a network that balances local contentrequirements with future changes can challenge even the bestanalysts. As products and industries evolve, productclassifications can change as well, with significant impact onbusiness design. Take LCD and plasma monitors forcomputers. In the past, customs authorities in the EuropeanUnion assigned them a zero percent duty rate. But given thatsuch screens are now used increasingly in high-definitiontelevision sets, customs authorities recently decided that suchmonitors with video connectors should be classified as TVs,which are levied 14 percent import duties.34

Leading companies are more proactive when factoring inregulatory issues in the design of their global networks. Theynot only consider regulatory constraints as a cost of doingbusiness, they leverage them for competitive advantage.35 Forexample, Toyota, one of the market leaders with its hybridgas-electric engine technology, may boost earnings beforeinterest and taxes (EBIT) 10 percent by 2015, according tosome estimates, due to current and future regulatorydemands for low-pollution vehicles.36 In vehicle part recycling,Toyota and Denso, one of the world’s largest automotivesuppliers, are collaborating with DuPont on a new process—Composite Recycle Technology—to produce parts from 100percent recycled material. Their goal by 2015 is a recyclingrate of 95 percent.37

Managing Taxation from a Global OptimisationPerspectiveBusiness taxation is a touchy subject. Minimise it and risk theire of governments and public opinion. Ignore it and wait forcompetitors with lower tax bases to exploit it to theiradvantage.

How should companies incorporate taxation into theirnetwork designs? Taxation not only must be part of anyglobal reorganisation and optimisation effort, it must beconsidered up front in new initiatives such as productdevelopment, relocation and outsourcing. Yet very fewcompanies effectively consider tax issues when undertakingthese initiatives.

Simply complying with tax regulations around the world—beit direct corporate taxes or indirect taxes (including sales tax,value added tax, customs duties, and environmental taxes)—is a big challenge. Not surprisingly, as customs authoritiesaround the globe move away from paper-based systemstoward 100 percent electronic processing, technology isplaying an increasing role in managing compliance. Withauthorities requiring better compliance and imposing stifferpenalties for non-compliance, companies will need tointegrate customs software into their enterprise resourceplanning (ERP) systems and key supply chain modules, such aswarehouse management and transportation planning. Beingon the forefront of responding to demands like these,complexity masters are ahead in adopting global technologyplatforms, such as advanced planning and scheduling, andtransportation management systems (see Figure 16 furtherbelow).

Corporate tax treatment and tax rates can vary significantlywithin and across countries. For multinationals it matterswhere profits are accrued. It is critical for managers tounderstand the differences—in compliance and reporting, taxrates, treatment, and tax credits—when consideringexpansion, R&D investments, restructuring of existingnetworks, or mergers and acquisitions.

Transfer pricing issues are very important elements in thosedecisions. With intangible assets such as patents, know-how,and brand value becoming major components of the value ofproducts and services, identifying the “right” transfer pricebetween entities under common control is no small task.However, it is critical to designing an optimal network. Overthe last two decades, the value of intangible assets as a shareof total market capitalisation of U.S. companies has nearlydoubled to more than 70 percent.38

To boost growth and attract high-value added activities,dozens of countries offer companies tax credits on R&Dactivities, not only for laboratory research but also for otherinnovations (including process improvements inmanufacturing, production trials, and software integrationissues). For example, new investments in radio-frequencyidentification (RFID) technologies for improving the supplychain may be candidates for R&D tax credits.39 Incorporatingthese tax credits into global supply chain development andrestructuring decisions can have a significant impact on thebottom line.40

This also includes intellectual property (patents, trademarks,trade secrets, trade names, copyrights, etc.), intellectual assets(such as codified knowledge, contracts, permits, licenses, andnon-competes), and intellectual capital (including humancapital, organisational capital, customer capital, distributorrelations, and supplier relations). Different countries treat thevaluation and returns on those assets very differently forregulatory, tax, and other purposes.


While most media discussion is about corporate—or direct—taxation, indirect taxation is often more important. Indirecttaxes are not levied directly on income but rather on on-goingbusiness activity. They can take many forms, such as importduties, anti-dumping levies, safeguard measures,41 value-added taxes (VAT), and goods and services taxes (GST), excise/consumption taxes, agricultural levies, and stamp taxes.Having to deal with the complexities on a global scale,managers can easily become overwhelmed with managingindirect taxes in a holistic, optimal manner.

A U.S.-based pharmaceutical company found this out when itrestructured its European subsidiaries as “commissionaires.”U.S. lawyers told the company there was no risk to theefficiency of its supply chain structure because under U.S. lawa commissioner actually obtains title to the goods and,therefore, the customs duties would be based on the price thecommissioner pays to the seller. This is different, however, incountries of European Union, where the commissioner doesnot obtain title to the imported goods and therefore the saleprice, rather than the purchase price or cost, becomes thebasis for calculation of duties. This significantly increases thebase for calculating duties and the total cost of goods sold.

Despite the increased complexity, however, there aresignificant benefits from taking a comprehensive approach totaxation in network optimisation. From studying the designand restructuring of dozens of global supply chains, we havefound that incorporating global tax issues into restructuringefforts typically can double bottom-line results as compared torestructuring without tax (Figure 15).42

Figure 15. Taking a Holistic View: Building Tax Issues Into Optimisation

Source: Deloitte ResearchNote: Illustrative based on US$1 billion in revenue

120

Baseline

100

80

60

40

20

0Tax Only Supply Chain

OnlySupply Chain/Tax

Optimisation

+21%

+45%

+98%

ProfitsAfterTaxes

(US DollarsMillions)

Optimisation Infrastructure—The Role of People, Process,and TechnologyAs we have shown, optimising a global network can generatesignificant benefits—particularly if all relevant factors aretaken into account early on in the design phase. However,most companies do not have the global infrastructure tosupport the design, implementation, and management of anoptimised network. This includes capable organisationalstructures, business processes, and information systems.

Why is this the case? Most multinationals have grownorganically and through mergers and acquisitions. Enteringnew markets and accessing new sources of supply around theworld often creates new silos of operation. These seldomadopt the same systems and processes of the rest of thecompany because during their creation they were focused onseizing new opportunities. International mergers andacquisitions only exacerbate the problem because they createeven larger constellations of dissimilar global infrastructures.The result is often a spaghetti web of different processes andsystems around the world.

Consider the example of General Motors. In 1996, beforeundertaking a major initiative to streamline supply chain,product development, and order management systems, thegiant automaker found it had more than 7,000 discreteinformation systems. Most of them were legacy, “silos” ofinformation that did not integrate data flow across theenterprise. For example, design engineering used 22 differentengineering systems that hindered collaboration among theglobal product development staffs. Since then, GM hasdramatically overhauled its global infrastructure to reduce oreliminate such problems and is building a platform forcontinuous optimisation of its global network.43 To optimiseits global logistics operations, GM and global logisticscompany CNF have established a joint venture, Vector SCM.44

Started in 2000, Vector SCM has grown rapidly and plans tomanage US$4.8 billion of GM’s US$5.5 billion total logisticsspending worldwide in 2005. Vector SCM has built strongcapabilities for continuously analysing, designing,implementing, managing, and monitoring a global supplychain. This includes a global staff with deep technical skills,and a technology infrastructure that includes global networkoptimisation applications and a multi-terabyte-size datawarehouse for recording and monitoring information onglobal network operations and performance.

Consider the case of a U.S.-based global consumer goodsmanufacturer. To streamline operations and reduce cost, thecompany wanted to centralise purchasing across Europe into apan-European procurement centre. While the cost savingsfrom optimising the supply chain alone would be multi-millions of dollars, when it factored in both direct and indirecttaxation, the company found the bottom-line benefits weretwice as high.


Vector SCM is not only helping GM optimise its existinginvestments, it is also helping the automaker to assess,support, and implement new global sourcing initiatives,logistics networks, and new product introductions. Inaddition, Vector SCM is helping GM expand into new marketssuch as China. With improvements in spending efficiencyranging from the single to double digits, the total impact onthe network is dramatic. It is expected to increase further asVector SCM continues to help GM optimise and restructure itssupply chain.

The organisational and people issues matter, too. Majornetwork restructuring efforts often require expensive staffrelocation. This can be especially counterproductive if themost qualified staff—those with years of experience andspecialised skills—must be replaced. Our case researchsuggests that the constraints imposed by currentorganisational structures, such as the location of regionalheadquarters, can reduce improvement opportunitiessignificantly. A European consumer products business thatreorganised its supply chain had to forego about 50 percentof the benefits from optimisation due to the constraints inrelocating managers. Thus, organisational structure andchange management issues need to be built into ongoingnetwork optimisation efforts up front to avoid wrong choicesand allow for flexibility in the future.

While the cost of instituting a global infrastructure to supportnetwork optimisation is large, the experience of leadingcompanies shows the benefits are worth the effort. Notsurprisingly perhaps, our research shows that complexitymasters are far ahead in creating the systems, methodologies,and processes for more effectively managing global networks(Figure 16). Hong Kong-based apparel maker TAL ApparelGroup has created the technology and process infrastructurefor rapidly developing new designs, fulfilling orders, andreplenishing inventories for leading brands and retailers in theUnited States from factories in China and South-East Asia.45

By collaborating closely with key customers and suppliers, andsynchronising product development, demand and supplyacross the value chain, TAL has grown to become a globalpower house supplying one out of eight dress shirts in theUnited States.

Figure 16. Staying Ahead on the Technology CurveComplexity Masters Lead Their Competitors in Critical Areas Suchas Transportation Management Systems, Advanced Planning andScheduling, and Demand Management



HighLow

High

GlobalValueChain

Complexity

Quadrant 3


ComplexityMasters

14%


Percentage Positive Gapin Implementation LevelRelative to Quadrant 1Companies(Quadrant 1 Level = 100)

24%

Forecasting/demandplanning software

-4%

15%

27%

Advanced planning &scheduling (APS)

18%

16%

37%

10%

47%

16%

1%

eSourcing/eProcurement Transportation managementsystem


ConclusionUnlocking the value of globalisation through continuousnetwork optimisation is important today and will only be moreimportant tomorrow. To effectively optimise their networks,companies must factor in both competitive and compliancedrivers. Without deep insight into operations, includingcurrent and future customers, distributors, and suppliers andin-depth knowledge of the effects of regulatory, tax, andother issues, it will be difficult to consistently make the rightdecisions. To get continuous network optimisation off theground, companies must carefully consider their investment inthe needed people, organisational, process, and technologycapabilities.

Optimisation of the global network can no longer be donejust every three, five or 10 years. With the dramatic changesthat continue to impact global networks, leading companiesare building the capabilities to look holistically at theiroperations on an ongoing basis. This form of continuousnetwork optimisation is the goal—a key competitiveadvantage that can help to substantially differentiate globalbusiness networks. As our research shows, companiesmaking the greatest strides in global optimisation are reapingthe benefits through higher growth, profitability, andshareholder value.


Appendix A: Survey Methodologyand Respondent ProfileThe research on how companies can effectively optimiseglobal networks is based partly on a comprehensive, in-depthexecutive survey with executives at nearly 800 companies orbusiness units based in Asia-Pacific (10 percent), Central andEastern Europe (10 percent), North America (34 percent), andWestern Europe (44 percent of total respondents) (Figure A).

Figure A. Regional Profile


North America34%

Asia Pacific10% Other

2%

Central andEastern Europe

10%

Western Europe44%

Figure B. Industry Profile


High TechnologyTelecommunications

8%

Aerospace andDefense

1%Automotive

13%

GeneralManufacturing

25%

ConsumerProducts

29%

Process/Chemicals

18%

Life Sciences7%

Figure C. Revenue Profile


Over $1 Billion20%

$600 Million-1 Billion

11%

$50-200 Million29% $200-600 Million

28%

< $50 Million13%

Companies from a wide range of industries participated in thestudy including aerospace and defense, automotive, consumerproducts, life sciences, process and chemicals, hightechnology and telecommunications, and generalmanufacturing (including metal fabrication, industrialmachinery, and equipment) (Figure B).

Of all reporting entities, including both entire companies andbusiness units of larger parent companies, about 39 percenthave revenues between US$200 million and US$1 billion, and20 percent have revenues in excess of US$1 billion (Figure C).


Appendix B: Defining ComplexityMastersTo determine the practices of manufacturers that managecomplexity well, we focused on a subset of the total surveypopulation: the more than 300 survey respondents withannual revenues of at least US$200 million.46 We then dividedthe survey population by two dimensions (Figure D):

� Degree of global value chain complexity. This was basedon measuring the geographic diffusion (low or high) of fourvalue chain functions (sourcing, manufacturing,engineering, and marketing/sales operations) across 13geographic regions. We created a global value chaincomplexity index, scoring companies from 1 to 52. Amanufacturer’s score depended on the extent to which itscattered the four value chain activities across the 13geographies.47

� Level of value chain capabilities. This axis gauges therelative competitiveness of each company on 10 value chaincapabilities. We created a universal measure by taking acomposite score of each respondent’s ratings in productinnovation, time to market, sourcing effectiveness, productquality, manufacturing flexibility, manufacturing productivityand cost-effectiveness, manufacturing lead time, logisticseffectiveness, customer service, and supply chain coststructure. Manufacturers scored themselves againstprimary competitors on a 5-point scale (1 equals“significant disadvantage,” 3 is “equal capability,” and 5 is“strong advantage.”) Based on the 10 metrics and the 5-point scale, we then created a value chain capability indexin which a company could score between 10 and 50.

By grouping survey respondents along the two axes, fourgroups result:

� Quadrant 1. Companies with low global value chaincomplexity (scoring below 20 on the global complexityindex) and low-to-medium value chain capabilities (scoringbelow 40 on the value chain capability index). Thesemanufacturers comprise nearly half (49 percent) of thebase.

� Quadrant 2. Companies with low global value chaincomplexity (scoring below 20 on the complexity index) buthigh value chain capabilities (scoring 40 and above on thevalue chain capability index—on average, exceeding thecapabilities of their primary competitors across our 10metrics). Only 7 percent of the respondents fell into thiscategory.

� Quadrant 3. Companies with high complexity (scoring 20and above on the complexity index) but low-to-mediumcapabilities (scoring below 40 on the value chain capabilityindex). This group accounted for about 37 percent of allcompanies.

� Quadrant 4. Companies with high complexity (scoring 20and above on the complexity index) and high capabilities(scoring 40 and above on the value chain capability index).We refer to this group as the “complexity masters.” Just 7percent of the sample fell into this category.

Figure D. The Quadrants of Mastering Complexity



HighLow

High

GlobalValueChain

Complexity

Quadrant 3


Complexity Masters

(37%) (7%)

(49% ofrespondents)

(7%)


Endnotes1 Throughout this study, we use the terms “manufacturer,”

“business unit,” “company,” etc., interchangeably. The focusof the survey research is on the relevant business unit level atwhich strategies are defined and operations are managed. SeeAppendix A and B for more details on the methodology andrespondent profile.

2 In this study, while we often refer to the “optimisation of globalnetworks,” the logic and implications of optimisation applyequally to small companies operating on a regional or nationalbasis.

3 See also Deloitte Research, Mastering Complexity in GlobalManufacturing: Powering Profits and Growth through ValueChain Synchronization (New York and London: Deloitte, 2003).

4 This is not unlike the way companies develop products where avery high share of life time cost—up to 80 percent by someestimates—is locked-in or fixed in the product design phase.For further information, see Deloitte Research, MasteringInnovation: Exploiting Ideas for Profitable Growth (New Yorkand London: Deloitte, 2004).

5 New products are defined as products introduced over the lastthree years. See also Deloitte Research, Mastering Innovation:Exploiting Ideas for Profitable Growth (New York and London:Deloitte, 2004).

6 See Robert J. Bowman, “In a marriage of giants, HP andCompaq successfully merge supply chains,” Global Logistics &Supply Chain Strategies, June 2003.

7 See also Deloitte Research, Prospering in the Secure Economy(New York: Deloitte, 2004).

8 Based on cost estimates from a European trade group,ORGALIME, in reference to EU Directives on Waste fromElectronics and Electrical Equipment (WEEE) and Restriction ofHazardous Substances (RoHS).

9 Based on cost estimates from a European trade group,ORGALIME, in reference to EU Directives on Waste fromElectronics and Electrical Equipment (WEEE) and Restriction ofHazardous Substances (RoHS).

10By some estimates, the company experienced a US$110 millionloss in revenue due to the incident. See “Sony: Dutchauthorities seized PlayStations; cadmium fears,” Dow JonesInternational News, December 4, 2001. See also “Sony faces PSOne dilemma in Europe,” Consumer Electronics, December 10,2001. For more information on Sony’s work on corporate socialresponsibility, see Sony, CSR 2004, http://www.sony.net/SonyInfo/Environment/environment/communication/report/2004/qfhh7c000000lv99-att/CSR2004_E.pdf.

11For details, see “Directive 2000/53/EC Of The EuropeanParliament And Of The Council of 18 September 2000 on end-of life vehicles,” Official Journal of the European Communities,L 269/34, October 21, 2000.

12See Duncan Austin, Niki Rosinski, Amanda Sauer, Colin Le Duc,Changing Drivers: The impact of climate change oncompetitiveness and value creation in the automotive industry(Washington D.C.: World Resources Institute (WRI) andSustainable Asset Management (SAM), 2003). Estimates arebased on WRI’s methodology of assessing the risks and

opportunities of carbon constraints due to increased regulationneeded to achieve emissions reductions and fuel efficiencydemands. The ‘value exposure’ assessment measures risk dueto increased costs from improving fuel efficiency of vehiclesalready sold.

13See Duncan Austin, Niki Rosinski, Amanda Sauer, Colin Le Duc,Changing Drivers: The impact of climate change oncompetitiveness and value creation in the automotive industry(Washington D.C.: World Resources Institute and SustainableAsset Management (SAM), 2003).

14Registration, evaluation and authorisation of chemicals(REACH) was outlined in a February 2001 white paper andsubsequently adopted by the European Commission. See TheCommission of the European Communities, White Paper,“Strategy for a Future Chemicals Policy,” COM(2001) 88 Final,February 27, 2001. For further information, see http://europa.eu.int/comm/environment/chemicals/reach.htm. TheREACH proposal will replace more than 40 existing directivesand regulations with a single, integrated system in which30,000 chemicals would need to be registered. Under thissystem, companies that produce and import chemicals willneed to assess the risks to the human health and theenvironment and take steps to manage any risks identified,thereby shifting the burden of proof for ensuring the safety ofchemicals on the market from public authorities to industry.See Karen Wontner, “Far-reaching proposals,” SupplyManagement, January 8, 2004.

15See Demetri Sevastopulo, “Concern at US efforts on chemicalslaw,” The Financial Times, April 6, 2004.

16On network optimisation, see also an extensive treatment byDavid Simchi-Levi, Philip Kaminsky, and Edith Simchi-Levi,Managing the Supply Chain: The Definitive Guide for theBusiness Professional (New York: McGraw-Hill, 2003).

17See Virginia Postrel, “Operation everything: it stocks yourgrocery store, schedules your favorite team’s games, and helpsplan your vacation. A primer on the most influential academicdiscipline you’ve never heard of,” The Boston Globe, June 27,2004.

18For evidence, see e.g. Deloitte Research, Mastering Complexityin Global Manufacturing: Powering Profits and Growththrough Value Chain Synchronization (New York and London,Deloitte, 2003); and Deloitte Research, The Challenge ofComplexity in Global Manufacturing: Critical Trends in SupplyChain Management (New York and London, Deloitte, 2003).

19See Deloitte Research, Mastering Complexity in GlobalManufacturing: Powering Profits and Growth through ValueChain Synchronization (New York and London, Deloitte, 2003).

20Before the end of the second quarter of 2004, automakers willhave recalled more than 14 million units in North America,exceeding the total of 2003 by 2.5 million, with warrantyexpenses exceeding manufacturers’ annual profits. Source:AMR Research and National Highway Traffic SafetyAdministration (NHTSA). See Kevin Mixer, Joe Souza, andFenella Scott, “Early warning solutions: A transformationroadmap,” AMR Research, June 21, 2004). Narishiko Shirouzuand Sebastian Moffet, “As Toyota closes in on GM, qualityconcerns also grow,” Wall Street Journal, August 4, 2004.


21See Phil Tinari, “Hung up: Multinational cell phone makersfigured they knew best how to sell their products. Then theygot to China,” Wall Street Journal, September 27, 2004.

22 See also Deloitte Research, The World’s Factory: China Entersthe 21st Century (New York: Deloitte, 2003).

23 See Merrill Douglas, “The total cost of global sourcing:Ingersoll-Rand scopes out the full cost of sourcing fromdifferent overseas suppliers,” LIT Toolkit, February 2003.

24 For more evidence of this “innovation paradox,” see DeloitteResearch, Mastering Innovation: Exploiting Ideas for ProfitableGrowth (New York: Deloitte, 2004).

25 See “Spurious automobile parts industry turning ‘organised’,”India Business Insight, December 5, 2003.

26 See Tim Trainer, “Counterfeiting and theft of tangibleintellectual property: challenges and solutions,” InternationalAnti Counterfeiting Coalition Inc., Washington DC, March2004.

27 See Joann Muller, “Stolen cars,” Forbes, February 16, 2004.

28 See “Bogus batteries pose safety threat,” The Vancouver Sun,December 12, 2003.

29 For more details, see Deloitte Research, Mastering Innovation:Exploiting Ideas for Profitable Growth (New York and London:Deloitte, 2004).

30 See also Eric Sherman, “Taking intellectual property seriously:there’s more at stake in protecting and selling your IP than youmay think,” Chief Executive, Vol. 203, November 2004.

31 See Gordon V. Smith, and Russell L. Parr, Valuation ofIntellectual Property and Intangible Assets, 3rd Edition (NewYork: John Wiley & Sons, 2000).

32 Source: 3M Annual Report 2003.

33 See “Let’s have a level playing field: Not even Harley-Davidsoncan penetrate China’s market”, Manufacturing and TechnologyNews, April 2, 2004.

34 For a discussion, see “EU customs distinction between plasmamonitors and televisions under discussion,” TDC Trade, March19, 2004. http://www.tdctrade.com/alert/eu0405.htm. Seealso Jennifer L Schenker, “EU may redefine the computerscreen,” International Herald Tribune, May 20, 2004.

35 See also “HP, Dell, IBM and Leading Suppliers ReleaseElectronics Industry Code of Conduct; Global Supply ChainStandards Promote Socially Responsible Business Practices,”Business Wire, October 21, 2004.

36 See Duncan Austin, Niki Rosinski, Amanda Sauer, Colin Le Duc,Changing Drivers: The Impact Of Climate Change OnCompetitiveness And Value Creation In The AutomotiveIndustry (Washington D.C.: World Resources Institute (WRI)and Sustainable Asset Management (SAM), 2003). See also“The Drivers: How to Navigate the Auto Industry,” DeutscheBank AG, July 31, 2002, for a discussion of the strategicimplications of Toyota’s leadership in environmentaltechnology.

37 See Duncan Austin, Niki Rosinski, Amanda Sauer, Colin Le Duc,Changing Drivers: The Impact Of Climate Change OnCompetitiveness And Value Creation In The AutomotiveIndustry (Washington D.C.: World Resources Institute (WRI)and Sustainable Asset Management (SAM), 2003).

38 Kevin G. Rivette and David Kline, “Discovering new value inintellectual property,” Harvard Business Review, January-February 2000.

39 See e.g. Larry Shutzberg, RFID in the Consumer Goods SupplyChain: Mandated Compliance or Remarkable Innovation?,Industry White Paper, October 2004. http://www.packagingdigest.com/newsite/Online/RFID_IWP.pdf

40 See e.g. “Dupont Canada Develops Breakthrough Product atHalf the Cost Thanks to Canada’s R&D Tax Credits,” AdvancedMaterials Draft Paper, Canadian Chemical ProducersAssociation, September 10, 2002, Calgary, Alberta, Canada.

41 A World Trade Organisation (WTO) member may take a“safeguard” action (i.e., restrict imports of a producttemporarily) to protect a specific domestic industry from anincrease in imports of any product which is causing, or which isthreatening to cause, serious injury to the industry. For furtherdetails, see http://www.wto.org/english/tratop_e/safeg_e/safeg_e.htm.

42 Though restructuring of the network considering bothoperational and taxation drivers can actually increase acompany’s total direct taxes, other factors will offset this result:Total profits before taxes increase faster and the net profitsafter taxes are higher, thus reducing the effective tax rate forthe company. Note: The effective tax rate is calculated as totalincome taxes paid as a percentage of total taxable incomebefore taxes.

43 From P. Koudal, H. Lee, B. Peleg, P. Rajwat, S. Whang, and R.Tully, “General Motors: Building a Digital Loyalty NetworkThrough Demand and Supply Chain Integration,” StanfordCase Study, January 1, 2003. See also Deloitte Research andStanford Global Supply Chain Management Forum, IntegratingDemand and Supply Chains in the Global Automotive Industry:Building a Digital Loyalty Network at General Motors (NewYork: Deloitte, 2003). For further information, see LaurieSullivan, “Business integration - car maker takes globalapproach,” Computing, September 30, 2004.

44 Based on research by Stanford Global Supply ChainManagement Forum and Deloitte Research.

45 Based on forthcoming case study by Deloitte Research aroundTAL Apparel Group.

46 For more on the complexity masters, see Deloitte Research,Mastering Complexity in Global Manufacturing: PoweringProfits and Growth through Value Chain Synchronization (NewYork and London: Deloitte, 2003). See also Deloitte Research,Mastering Innovation: Exploiting Ideas for Profitable Growth(New York: Deloitte, 2004).

47 The 13 countries/regions are: Australia/New Zealand, China,India, Japan, Korea, Other Southeast Asia, Western Europe,Central Europe, Eastern Europe, Africa, United States/Canada,Mexico/Central America, and South America.

Deloitte Research—Unlocking the Value of Globalisation 2323Deloitte Research—Unlocking the Value of Globalisation

Recent Thought Leadership� Mastering Innovation: Exploiting Ideas for Profitable

Growth

� Globalization Divided? Global Investment Trends of U.S.Manufacturers

� Mastering Complexity in Global Manufacturing:Powering Profits and Growth Through Value ChainSynchronization

� Prospering in the Secure Economy

� The Challenge of Complexity in GlobalManufacturing: Critical Trends in Supply ChainManagement

� Profiting From Continuous Differentiation in theGlobal Chemicals Industry

� The World’s Factory: China Enters the 21st Century

� Integrating Demand and Supply Chains in the GlobalAutomotive Industry

� The High-Tech Industry and the RelationshipPortfolio: A Strategic Approach to Dynamic Partnering

� Global Manufacturing 100

� Performance Amid Uncertainty in GlobalManufacturing: Competing Today and Positioning forTomorrow

� Digital Loyalty Networks: e-Differentiated Supply Chainand Customer Management

� Making Customer Loyalty Real: Lessons From LeadingManufacturers

Please visit www.deloitte.com/research for ourlatest thought leadership or contact us at:[email protected].

For more information about Deloitte Research, please contactthe Global Director, Ajit Kambil, Deloitte Services LP, at+1 617 437 3636 or via Email: [email protected].

AuthorPeter KoudalDirectorDeloitte ResearchDeloitte Services LPTel: +1 212 436 2647Email: [email protected]

AcknowledgmentsDeloitte Research is grateful for the contributions,comments, and suggestions received for this global studyfrom Scott Akman, Deloitte Consulting LLP (United States);Darin Buelow, Deloitte Consulting LLP (United States); BradCartan; Deloitte & Touche LLP (Canada); Gary Coleman,Deloitte Consulting LLP (United States); Mark S. Davis,Deloitte Consulting LLP (United States); Richard Eagles,Deloitte Consulting LLP (United States); Chuck Edwards,Deloitte Consulting LLP (United States); Doug Engel, Deloitte& Touche USA LLP (United States); Jeff Glueck, DeloitteConsulting LLP (United States); Juliet Glassroth, DeloitteServices LP (United States); Kevin Gromley, DeloitteConsulting LLP (United States); Craig Hanson, DeloitteConsulting LLP (United States); Jim Harms, DeloitteConsulting LLP (United States); Katherine Heires, DeloitteResearch, Deloitte Services LP (United States); MaureenHughes, Deloitte Consultancy BV (The Netherlands); Marinusde Jager, Deloitte Belastingadviseurs BV (Deloitte TaxLawyers B.V.) (The Netherlands); John Kamauff, DeloitteConsulting LLP (United States); Ajit Kambil, DeloitteResearch, Deloitte Services LP (United States); Gary R.Kilponen, Deloitte Consulting LLP (United States); ArkadiuszKotlicki, Deloitte & Touche Sp. z o.o. (Poland); KumarKandaswami, Deloitte Touche Tohmatsu India Private Limited(India); Mimi Lee, Deloitte Touche Tohmatsu (United States);Michael Marrero, Deloitte Consulting LLP (United States);Thompson McDaniel, Central European University GraduateSchool of Business (Hungary); Rick O’Connor, DeloitteConsulting LLP (United States); Verlee Prybyloski, DeloitteTouche Tohmatsu (United States); Tushar Rajwat, DeloitteResearch, Deloitte Services LP (United States); RobinSimpson, Deloitte & Touche LLP (United Kingdom); JosephSlota, Deloitte Consulting LLP (United States); Nadine Trinh,Deloitte Research, Deloitte Services LP (United States); WimVaessen, Deloitte Consulting GmbH (Germany); YirongWang, Deloitte Consulting (Shanghai Pudong) Co. Ltd(China); Horst Weber, Deloitte Consulting GmbH (Germany);Bruce Westbrook, Deloitte Consulting LLP (United States);Stefan Westdijk, Deloitte Consultancy B.V. (TheNetherlands); and Claire Wood, Deloitte & Touche LLP(United Kingdom).

ISBN 1-892383-29-2

24

For More InformationFor more information, contact a member of the DeloitteTouche Tohmatsu global manufacturing leadership team.

GlobalGary ColemanDeloitte Consulting LLP (United States)Tel: +1 212 492 4119Email: [email protected]

Katsuaki TakiguchiTohmatsu & Co. (Japan)Tel: +81 3 6213 3631Email: [email protected]

AmericasDoug EngelDeloitte & Touche USA LLP (United States)Tel: +1 312 946 2399Email: [email protected]

Asia PacificTed LeeDeloitte Touche Tohmatsu CPA Ltd (China)Tel: +86 21 6141 2288Email: [email protected]

Europe, Middle East and AfricaWim VaessenDeloitte Consulting GmbH (Germany)Tel: +49 (0) 211 8772 3411Email: [email protected]

Visit our Web site at www.deloitte.com/manufacturing tolearn more about the Deloitte Global Benchmark Program.

Deloitte Research—Unlocking the Value of Globalisation

About Deloitte

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