Cross-Border Supply Chain Management in Asia Masato Abe Economic Affairs Officer Trade and Investment Division United Nations ESCAP.

Cross-Border Supply Chain Management in Asia

Masato AbeEconomic Affairs Officer

Trade and Investment DivisionUnited Nations ESCAP

About ESCAP

• United Nations Economic and Social Commission for Asia and the Pacific– 58 regional members & associated members

• Policy advocacy, analytical work & technical assistance for regional socioeconomic development

• Headquarters in Bangkok– Nine branches

My background

• B2B• Automotive, electronics and high-tech

industries in Asia, North American and Europe

• Supply chain management– Logistics– Procurement and supplier development– Planning– Sales operations

Objectives

• Present corporate strategies and business practices related to cross-border supply chain management using a case study, which covers four Asian countries at the different development stage

• Present theoretical background of the development of cross-border supply chains

• Discuss the direction of the development of cross-border supply chains

A case study: M Group Inc

• Home Country J

• B2B– Direct sales and manufacturing

• Standardized components and tools for metal press dies, injection moulding and assembly lines– More than 1.2 million items

Line of business

M Group Inc (continued)

• More than 20,000 customers worldwide– Automobile assemblers, electronic appliance

manufacturers and high tech companies as well as their suppliers

• More than 4,000 employees worldwide– About 200-250 employees during the 1980s

• Sophisticated supply chain management– In-house ERP (IBM System 36) and EDI with

suppliers developed in the mid 1980s

Annual sales• Annual turnover: yen 89.1 billion in 2009 (equivalent to 89.1 billion in 2009 (equivalent to approximately US$ 1 billion)approximately US$ 1 billion)• Net income: Yen 3.8 billion (4.3% of annual turnover)• More than 25% of sale to foreign customers

Bubble burst

Dot.com Crisis

Ball guide postfor large sized press dies

The product

• A standardized metal die component for automotive and electronic sectors

• A long-time best selling product of M Group Inc.

• No seasonable demand fluctuation (average 7,500 units / month)

• Sold through an internet ordering system linking to the ERP system

• Sales price: @US$ 100• Weight: @5 kg

Three phases of development

• First Phase: 1980s– Direct exports

• Second Phase: 1990s– International procurement– Host country supply chains

• Third phase: 2000s– Regional / multilateral supply chains

Four countries   Country J Country T Country L Country V

Income High Lower middle Low Lower middle

Population 130 million 70 million 10 million 90 million

Ease of doing business ranking 2011 15 20 170 80

Starting a Business 98 95 93 100

Dealing with Construction Permits 44 12 115 62

Employing Workers 59 19 163 n/a

Registering Property 15 72 152 43

Getting Credit 16 12 182 15

Protecting Investors 112 91 116 173

Paying Taxes 24 12 170 124

Trading Across Borders 19 25 110 63

Enforcing Contracts 1 46 183 31

Closing a Business 1 48 183 124

2010 Corruption Perception Index 17 78 154 116

Sources: Transparency International (2010); World Bank (2010)

Phase I: 1980sDirect exports

• Foreign exchange volatility: Plaza Accord in 1985

• Customers’ international expansion with increased FDI outflows

• Both markets and production bases– North America– Europe– South-East Asia FDI & export driven

development strategies

• Less than 1 % of sales to foreign customers

DistributionCentre J

Cus

tom

ers

Country L Country T

Home Country J

Country V

100Km

Supplier J

Phase 1: 1980s

Customers

1.5 months by ocean

1 week by air

Discussion

• What was the advantage of direct export strategy?

• What risk should the M Group Inc consider?

Challenges

• Less international experience

• High transportation costs– Price vs weight– Inadequate volume for ocean shipping

• Quality vs price issue

• No delivery tracking system– Unreliable delivery– Heavily relied on forwarders

Phase II: 1990sHost country supply chains

• Globalization

• Internationalization of M Group Inc

• Recession in Home Country J– Cost cutting pressure

• Emerging economies (NIES; Asian Tigers; China)– Expanding customer base at Country T– Lower labour cost

DistributionCentre J

Cus

tom

ers

Country L Country T

Home Country J

100Km

1 month by ocean100km

Supplier J

Supplier T

5 days by air

Phase 2: 1990s

Customers

DistributionCentre T

Country V

Discussion

• What factors should M Group Inc assess to justify international procurement?

Challenges under Phase II

• High inventory (carrying) cost– Ocean shipping– Long lead time (tripled)– Unreliable delivery– Large order quantity– Large inventory and warehouse space

Inventory management

0

500 Min Buffer

Order line7500

15500

Time

Inve

ntor

y

2-monthinventory

Lead time1 month

Lead time1 month

Max

Unfilled order

0.5 month delay

Challenges under Phase II

• High administrative cost– Order processing cost (fax & email; no EDI)– Communication (phone and fax)– Site visits– Import procedures (documentation)– No transport tracking system– Less flexibility

• Customs clearance (Country T)– Slow but can make it predictable

Challenges (continued)

• Unstable quality– Urgent shipment by air and/or hand-carry

• Supplier development– Engineering consultation– Training– Incentives– Relationship development (trust and

cooperation)

International Procurement:Outcomes

• Considerable cost down in terms of CIF value

• Cost up in terms of supply chain management (total cost analysis) at the beginning

• Stabilized relationship over time

• Gained experience

Phase IIIRegional supply chains

• New emerging economies in Asia– China, India and others– Customers’ movements to Country V

• Country L’s trade and investment liberalization– Improved road infrastructure – Logistical linkage between Countries T and V– Special economic / export processing zones

• Increased cost cutting pressure– Weak demand in Home Country J– Intensified competition at the global level– Dot.com burst in 2001 and global economic crisis in

2008

DistributionCentre J

Supplier L

Cus

tom

ers

600km

Country L Country T

Home Country J

Country V

DistributionCentre V

1 month by ocean

1200km

100km

Supplier T

5 days by air

Phase 3: 2000s

Customers

DistributionCentre T

Customers

Discussion

• What impact do you see if customs clearance at the borders of Country L (or Country V) were totally unreliable?

• Is there any option for M Group Inc to take to mitigate the impact?

Cross-border procedures

• Documents preparation

• Customs clearance and technical control

• Ports and terminal handling

• Inland transportation and handling

Documents for border trade

• Export– Export license Packing list – Pre-shipment inspection

clean report of findings – Technical standard/health

certificate Bill of lading Certificate of origin Commercial invoice – Customs export declaration

• Import– Technical standard/health

certificate Certificate of origin Commercial invoice – Customs import declaration – Customs transit document – Import license Packing list Bill of lading – Cargo release order

Cross-border costs

Indicators OECD Country J Country T County L Country V

Documents to export (number) 4 4 4 9 6

Time to export (days) 11 10 13 48 22

Cost to export (US$ per container) 1,059 1,010 625 1,860 555

Documents to import (number) 5 5 3 10 8

Time to import (days) 11 11 13 50 21

Cost to import (US$ per container) 1,106 1,060 795 2,040 645

Source: World Bank (2010)

Present Status

• Maintain business with Supplier L, but no increment

• Establish dual production lines in both Countries T and L

• Consider investment, jointly with Supplier L, in a special economic zone of Country L

• Test delivery to Distribution Centre V• Commit the development of regional

supply chains

Cross-Border Supply Chains: Drivers

• Globalization– Policy Liberalization

• Trade, investment, capital & finance, HR

– Multilateral and regional free trade agreements

– Technological innovation• Transportation and ICT

– Increasing competition• Pressures for low cost and high quality• Low labour cost

Drivers (continued)

• New management strategies and techniques– EDI, ERP, JIT, lean manufacturing, TCM,

SCM, etc

• Willingness to be internationalized

Cross-border supply chains: Objectives

• Foreign market penetration • QDC (quality, delivery and cost)• Speed, effectiveness and flexibility• Local supplier development• Local content requirement• Strategic focus and outsourcing non-core

functions• Access to expertise / technology• Long-term security• Customer’s request

Models• Export model

• Foreign market penetration model

• Offshore manufacturing model

• Mixed model

• Flying geese model

Models (continued)

• Export model– No operations in importing countries

• Foreign market penetration model– Marketing and distribution in importing

countries

Models (continued)

• Offshore manufacturing model– Production in host countries (low cost labour

and/or natural resources)– Marketing and distribution in both home and

host countries– e.g. footwear sector in Viet Nam

Models (continued)

• Mixed model– Offshore manufacturing– Marketing in home and host countries– Export to third countries– e.g. Japanese auto assemblers in Thailand

Flying geese model

Source: GRIPS

• Catching-up process of industrialization of latecomer economies (Akamatsu 1962)– from import to production and export– from simple to more sophisticated product– from advanced to developing countries

FDI flows

0

500

1000

1500

2000

2500

2003 2004 2005 2006 2007 2008 2009

South-East Europe and the CIS Africa Middle East

Latin America and the Caribbean Asia and the Pacific Developed Economies

Source: ESCAP based on data from UNCTAD (2010)

Risks

• Fluctuating foreign exchange rates– How high is operating exposures within supply

chains, which cover various countries?

• Linking all partners with ERP– Adequate ICT infrastructure?– Relationship with partners?– Cost involved?– HR?

Risks

• Growing environmental concerns– Proximity to markets, production facilities vs

supplies– Green transportation– Customer services vs SC efficiency vs

environmental smartness

Future direction

• Development of regional supply chains with less developed economies– Supply side capacity building– Technology transfer– Policy changes required (cross-border trade

facilitation)

• Region-wide approach to reduce transaction costs– e.g. ASEAN connectivity initiative

• Pro business environment

Masato Abe, Ph.D.Economic Affairs OfficerPrivate Sector and Development SectionTrade and Investment DivisionUnited Nations Economic and Social Commission for Asia and the Pacific (ESCAP)Bangkok, ThailandEmail: [email protected]