The Future-Ready Organization - Accenture...Nov 02, 2015  · The Future-Ready Organization Building on ASEAN’s economic integration to optimize supply chains . 2. 3 Introduction

The Future-Ready OrganizationBuilding on ASEAN’s economic integration to optimize supply chains

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Introduction

ASEAN is among the world’s fastest growing regions, characterized by increasing internationalization as a result of foreign direct investment inflows and outflows. The region’s rapidly growing consumer class, which underscores the market potential, is projected to grow to 175M consumers by 2020.1 Consumer spending will double, reaching USD 2.3 T,2 and ASEAN is on track to be the world’s sixth largest economy by 2020, surpassing the $3 trillion GDP mark.3 The ASEAN Economic Community (AEC), which brings together

ten member states in Southeast Asia,4 will be a growth multiplier for the region. The International Labor Organization (ILO) and Asian Development Bank (ADB) project that the economic integration will increase GDP by 7 percent over the next decade relative to a baseline without AEC.5

The AEC formalizes the region’s aspirations to create a highly competitive single market that promotes equitable economic development and facilitates integration of the region into the global community. The AEC blueprint outlines specific measures to be achieved by the end of 2015.6 Reaching these goals requires progress on many fronts – dismantling trade barriers, enabling freer flows of capital and investments, and building ASEAN-wide infrastructure in energy, transport and technology (see Figure 1).

Proposed AEC policies will create many opportunities for businesses in ASEAN to fuel business growth and improve operations through freer trade, improved access to material inputs, increased viability of lower-cost manufacturing locations, and greater access to talent. This paper identifies the AEC measures that are likely to have the biggest impact on supply chain management.

Figure 1: Four pillars of the ASEAN Economic Community 2015

Single Market and Production Base

Competitive Economic Region

Equitable Economic Development

Integration into the Global Economy

Free flow of:• Goods • Services• Investments• Skilled labor• Capital

• Consumer protection • Intellectual property rights• ASEAN-wide transport,

energy, information and mining infrastructure

• SME development• Cooperation and mutual

assistance to narrow the development gap across ASEAN

• ASEAN integration and global economic integration

ASEAN Economic Community

Source: ASEAN Secretariat

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Growth and global recognition of the ASEAN region depends upon increasing dependable trade both within and outside ASEAN. Dependable trade – fulfilling and shipping product orders accurately and on time at predictable costs – requires advanced supply chain capabilities and more efficient operations. Enhancing connectivity in ASEAN through trade is at the core of the economic integration. Measures impacting trade, transport and operations can be found in three of the four pillars of AEC (see Figure 1).

Single Market and Production BaseEstablishing a single market and production base can be achieved by decreasing tariffs, increasing standardization of regulations and procedures such as those governing rules of origin (ROO), and coordinating customs processes to expedite customs clearance and material/product information flows. While many countries are undertaking some or all of these measures, adoption varies significantly across ASEAN member states. Clear progress is being made in the ASEAN-6,7 particularly in eliminating tariffs and simplifying customs with the national single window. Cambodia, Laos, Myanmar and Vietnam have yet to participate in these initiatives (see Figure 2).

Competitive Economic Region The ASEAN region is gaining momentum and more recognition, yet it is also fragmented, geographically and logistically. Some member states have built advanced infrastructure, such as the deepwater ports in Thailand and Malaysia and Singapore’s airport. But, being truly competitive as a region requires an efficient and integrated ASEAN transport network to ensure continuous and efficient movement of goods. Supporting this goal are AEC initiatives to create unified aviation and maritime shipping networks, build efficient overland links such as the Singapore-Kunming link, and complete various ASEAN highway network projects.

Source: Accenture analysis based on data from the ASEAN Secretariat

Figure 2: ASEAN’s progress against trade and customs initiatives

AEC – connecting markets, enhancing trade

Common Effective Preferential TariffTariffs reductions on products on inclusion list

ROO pilot(Self-certification of rules of origin)

National Single Window ASEAN Single Window(pilot participation)

Singapore

Malaysia

Thailand

Indonesia

Philippines

Brunei

Vietnam

Lao

Cambodia

Myanmar

Average tariff reduced to ~2.6% No participation

Participation pending

In early stages of NSW implementation

NSW not developed enough to participate in ASW pilot

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Integration into the Global EconomyMember states are looking to enhance participation in global networks through completion of ASEAN-centric Free Trade Agreements (FTAs) that reduce tariffs and transaction costs. The ASEAN-6 members already have FTAs in place that reduce effective tariff rates on goods to zero, while the remaining member states are working toward this goal by 2020.

In summary, the AEC measures will improve trade and access to materials and facilitate use of lower-cost manufacturing locations – which will make doing business easier.

Integration challengesWhile progress toward AEC goals looks promising, many objectives will not be met by the December 2015 deadline. For example, tariff exclusion lists to protect sensitive goods, such rice and sugar, are still in place across ASEAN. More importantly, little progress has been made in the elimination of non-tariff barriers, such as quotas or transport restrictions, which are critical to moving toward a true free trade region.

Furthermore, significant gaps remain in building the region’s transport infrastructure. Many highway upgrades remain unfunded, resulting in gaps linking routes or reliance on poor quality, single-lane roads. Railways are an efficient and low-cost means of transport, yet the Singapore-Kunming rail project won’t be completed until 2020. Most countries will need three to five years to integrate major infrastructure enhancements, which require not only time but also funding. The ASEAN Infrastructure Fund aims to bring USD 4 billion in funding to the region by 2020, but to date has raised only a fraction of that amount.

Finally, member states are progressing at their own pace in ratifying AEC measures – which sometimes take a back seat to national priorities. For example, Indonesia has not adopted the ASEAN open skies protocol to facilitate regional air traffic flow. The ASEAN Secretariat has no governmental authority to enforce contracts or impose strict deadlines. Should a member state’s actions run contrary to AEC’s proposed measures, it is up to ASEAN member states to hash out differences, figure out funding or adjust priorities. The culture of consensus that is a hallmark of negotiation in the ASEAN Secretariat means that progress on AEC measures can be slow and agreements on deadlines and details difficult to achieve.

Consequently, December 2015 will be just the first major milestone in a longer journey toward regional integration. Even with uneven progress, however, the intent to come together as a region is clear, as is ASEAN’s signal to world markets that the region is aligning around an agenda of increased connectedness for higher growth and global competitiveness.

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Business leaders are optimistic and are taking action We surveyed business leaders to get a first-hand perspective on ASEAN integration and its potential for the region.Not surprisingly, many executives have little confidence that AEC’s measures will be implemented by the specified deadlines. However, they also express strong enthusiasm that the AEC initiatives will open markets in which to sell their goods and services and position ASEAN as a destination for investment. In fact, 64 percent of executives surveyed believe AEC will have a positive impact on their company. Local companies are most optimistic about AEC’s potential to position them for growth (see Figure 3).

Given the market opportunity and momentum behind integration, regional expansion is high on the agenda for

businesses in ASEAN. We found that businesses of all sizes (local, ASEAN-based multi-national corporations, and global MNCs) expect to expand their footprint within the region. Singaporean and Malaysian firms will have the most extensive presence, operating in an average of 5.2 and 5 ASEAN countries, respectively. However, Indonesian firms will experience the biggest jump from an average of 2.5 countries in 2014 to 3.8 countries by 2017 (Figure 4). Local markets will become more saturated as MNCs’ commitment to ASEAN deepens and local companies move beyond their borders.

As companies extend their regional footprint, they will also be investing in capabilities to capitalize on the opportunities in ASEAN. Regional competition will intensify. The region’s incumbents may have an advantage in understanding local market intricacies, but those will erode as agile MNCs bring global best practices into the region. As a result, local companies are investing significantly

in building capabilities to bolster their position against expanding MNCs. Sixty percent of local companies anticipate greater competition and 65 percent foresee a faster pace of change in their industry.

Businesses are not waiting for AEC initiatives to take hold before improving their operating models and supply chains – nor should they. Our survey revealed that over 70 percent of companies are creating new business and operating models to tap into the region, a figure that will rise to 80 percent in three years’ time (see Figure 5).

Companies are also developing new sourcing strategies and digitizing their supply chains. Global and ASEAN-based MNCs lead in this area (77 percent have made changes), yet 65 percent of local companies will follow suit in the next few years (up from just 38 percent today). Similarly, close to 70 percent of MNCs will digitize their supply chains in three years’ time, with local companies catching up quickly.

Figure 3: Enthusiasm for AEC’s objectives and impact is high, particularly among local companies

Source: Accenture AEC Executive Survey 2014

Global MNC 49%

ASEAN-based MNC 60%

Local company 75%

Thailand 65%

Singapore 46%

Philippines 78%

Malaysia 51%

Indonesia 79%

ASEAN 64%

I expect the overall impact of AEC will be positive for my company (% respondents who agree)

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Figure 4: ASEAN footprint now vs. 2017, by country base (number of countries present)

Figure 5: Actions companies are taking in response to AEC (today vs. 2017)

Source: Accenture AEC Executive Survey 2014

Source: Accenture AEC Executive Survey 2014

Indonesia

3.8

2.5

Malaysia

5.0

4.4

Philippines

3.8

3.5

All respondents

4.4 countries

3.7 countries

Singapore

5.2

4.4

Thailand

4.0

3.7

Country presence 2014 Country presence 2017

Relocating my company’s production closer to its markets within ASEAN

Developing new manufacturing strategies based on ASEAN countries’ competitive advantage

Enhancing digitization of my company’s supply chain

Developing new sourcing strategies in ASEAN

Developing new business or operating models

Today In 3 years time

71%

57%

54%

47%

38%

81%

70%

69%

59%

48%

Currently, what actions is your company taking in response to AEC? (% respondents who agree)

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Supply chain challenges

Realizing the opportunities made possible by AEC policies will not be easy for supply chain leaders in ASEAN. Companies will need to understand how to decode AEC measures, secure talent in an increasingly competitive landscape, and contend with ongoing political instability.

Decoding AEC measures Decoding and complying with AEC measures present a hurdle for many companies. We found that 61 percent of businesses anticipate more compliance mandates, with 80 percent of local companies citing compliance as an issue. For example, complying with rules of origin requires certifying ASEAN content of 40 percent or more to receive the lowered intra-ASEAN tariffs. Demonstrating this compliance involves extensive documentation including invoices and other evidence for each input used in the final product. Some executives are chafing at these requirements, which can involve documenting hundreds of invoices to prove that content is locally procured. However, the self-certification pilot now in place should reduce those requirements for authorized exports.

Yet, the benefits of optimizing regional supply chains (in the case of MNCs) or expanding regionally (in the case of local companies) will outweigh the added administrative costs for most companies. For example, both Toyota and IndoFoods are using Indonesia as a base from which to grow within ASEAN as well as streamline operations.8

Securing talentCompanies will also need to secure job-ready talent for their evolving supply chains. MNCs of all sizes have traditionally used expatriates to fill gaps in supply chain teams. Many are now realizing that skilled local talent offers several advantages over international professionals, including the ability to respond faster and with greater flexibility to find alternate suppliers and leverage personal relationships in crisis situations. For example, when flooding hit Thailand in late 2011, a supply chain leader in Malaysia was able to gain access to materials on a priority basis due to the personal relationship he had built over the years with a key supplier.9

There’s one major problem, however, for companies looking toward local talent: the size and scale of local supply chain and logistics talent is not growing, and a supply chain career is not highly desired by young graduates. Nearly seven in 10 executives believe that AEC measures will increase competition for skilled talent with the right combination of strategic skills and technical expertise needed to manage complex operations.

Managing uncertaintyMany emerging economies struggle with institutional instability or lack of flexibility. Thailand’s political crisis, for example, has resulted in the manufacturing sector shrinking over the last few years and auto manufacturers such as Honda and Toyota reconsidering their investment strategy in the country. Honda delayed opening a new plant while layoffs in the auto sector have continued, increasing economic instability in the market.10 Indonesia’s historic leadership in coal mining has allowed it to influence energy prices and economic development throughout the region. The government is tightening controls, increasing export duties and royalties, to ensure it has enough coal to meet growing domestic demand for coal-based energy. These moves will increase the cost of coal across ASEAN.11

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Preparing for the future

Now is the right time for companies to fundamentally reassess how to optimize their supply chains across ASEAN, in order to lay the groundwork for performing as regional rather than local or national companies. To build the operational and supply chain capabilities they need now and in the future, we recommend that companies focus on five important areas:

Develop regional strategic sourcing content Enabled by lower regional tariffs, better infrastructure and more efficient customs and trade processes, companies will be in a position to improve their sourcing strategies. Over the next few years, we expect to see supply chain leaders move away from treating ASEAN as a series of distinct markets toward optimizing the supplier base and capabilities at a regional level, based on the unique competitive advantages of ASEAN countries. Our survey also indicates the shift away from a global/local model of content development toward a global/regional model.

As shown in Figure 5, 70 percent of companies say they plan to develop regional sourcing strategies over the next three years, with companies in Malaysia, the Philippines and Singapore leading the way and local companies evolving fastest. This evolution will underscore the need and competition for expertise in sourcing, logistics, and supply chain management.

Specific tactics companies could consider to develop regional strategic sourcing content include the following:

• Assess existing sourcing strategies, beginning with a diagnostic of the current supplier base to determine where new opportunities are emerging across ASEAN particularly in the CMLV markets.

• Invest in understanding tariff reductions in order to determine where rates deliver clear advantages.

• Conduct a comprehensive cost scenario analysis to evaluate everything from materials, to transport costs to inventory-related charges to truly optimize cost basis and free up capital.

Review regional product development and manufacturing strategies Advancement of AEC measures opens up new considerations for manufacturers. Lower barriers to cross-border trade create new supply options and improve the viability of lower-cost manufacturing locations. Taking a regional view of manufacturing will enable companies to seek economies of scale through capacity consolidation as well as to enhance regional risk management approaches. Our survey found that 59 percent of companies operating in ASEAN plan to review their manufacturing strategies based on market-specific competitive advantages over the next few years, with almost 80 percent of companies in Indonesia undertaking such an effort. Global companies are seeing an upside in locating in ASEAN. For example, a multi-national dairy cooperative, which has 40 percent its global sales in ASEAN, saw the ASEAN FTA which eliminates tariffs on most dairy trade as a golden opportunity for profitable growth. This company constructed its first manufacturing facility in West Java to achieve better growth of its consumer brands in the region.

Companies should also consider harmonizing regional product and quality standards to increase economies of scale and reach consumers more profitably. Moving toward ASEAN-wide products and reducing the number of market-specific SKUs would allow manufactures to drive down the cost per unit as products find their way to more consumers.

For either manufacturing consolidation or product rationalization to make sense, companies will need to reconcile business growth strategies (e.g., targeting high-growth markets) with manufacturing realities and logistical constraints in ASEAN, even as those realities change quickly. This will help them maintain the optimal product portfolio and location of production facilities.

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Redesign and optimize regional networks to increase speed to market Upgrades to customs processing and regional transport infrastructure will also make it easier to get the right product to the right place at the right time. Customs policies that reduce waiting time at the borders will improve time to market and ensure free flow of materials and products across the network. Regional infrastructure improvements will open transport corridors and improve the efficiency and options available to logistics service providers. At the same time, consumer demand across ASEAN is growing at a quick pace, requiring supply chain responses as nodes of demand and growth areas shift.

Given the changing regional forces, supply chain leaders should consider redesigning their current regional transport network. Companies should evaluate their current capabilities to serve demand across ASEAN today as well as projected demand growth – ensuring the ability to meet service levels, cost requirements and inventory flows. Those that have reliable, efficient networks will reap the rewards of providing just the right amount of inventory to outlets or even being first to market.

Establish a supply chain control tower Taking steps to optimize regional supply chains while simultaneously decoding AEC’s measures, addressing regional talent shortages, managing regional risks, and building a holistic view of the region can appear overwhelming. Companies can achieve these overarching goals more easily by transitioning from country-centric supply chains to a centralized supply chain organization – one that serves the ASEAN region as a whole.

The “control tower” approach would enable companies to build an integrated regional framework to support decision-making and improve regional supply chain performance, with an eye toward broader regional business objectives. Sharing capabilities and resources would also help address the talent shortages expected across the region and make the best use of available talent. Additional benefits of a supply chain control tower include the following:

• Centralized analytics, real-time visibility and alert monitoring, enabling continuous improvement in process execution;

• Integrated supply chain processes and tools across silos, enhancing collaboration; and

• Enhanced agility to allocate available supply profitably with changing market demands

Use digital to sense regional demand Companies will need to adapt regional planning and fulfillment and routes to market to effectively meet rapidly shifting consumer demand patterns. Companies should consider investing in digitally driven methods to more efficiently predict demand and shape forecasts. Digital solutions that compile and analyze more demand signals – from geospatial patterns to specific channels – allow companies to generate more accurate forecasts and set procurement, production and distribution schedules accordingly.

Embedding analytics into operations can also improve visibility into customer demand locally and across the region. ASEAN’s fast-growing markets and technology-savvy consumers are ripe for companies that can harness the power of digital platforms for product promotions and customer engagement. Investing in the right digital capabilities, from analytics to supply chain automation, can help companies learn more about their customers’ needs, gather product feedback and swiftly make adjustments to accelerate growth.

Conclusion

Companies should not wait for AEC integration to begin to regionalize their operations and build the processes and capabilities needed to manage and optimize extended supply chains. The investments they make now will prepare them to take advantage of the growth, standardization, and fluidity of trade and labor the ASEAN business community aspires to.

At the same time, companies can also take steps to influence ASEAN member states and policymakers to improve the impact of AEC. Such advocacy includes educating governments on the benefits of reducing non-tariff barriers to enhance the efficiency of regional transport and logistics. Business leaders can also seek to influence governments on prioritizing investments in transport infrastructure.

Is your company ready to seize the opportunities of ASEAN economic integration? More sophisticated and agile operating capabilities are critical to taking advantage of an integrated economy, reliable infrastructure, and standardized trade agreements. Investing now can help companies capture the opportunities of an ASEAN single market.

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References1. Accenture analysis based on data from Euromonitor. We defined the consuming class based on individuals who earn more than US$3,500 annually – a minimum wage benchmark used by governments in the region.

2. Ibid.

3. Accenture analysis based on data from IHS Global Insights 2013

4. Member states are: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam

5. “ASEAN Community 2015: Managing integration for better jobs and shared prosperity”, International Labor Organization and Asian Development Bank, August 2014

6. ASEAN Secretariat, http://www.asean.org/communities/asean-economic-community

7. ASEAN-6 is comprised of Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand

8. “Indonesia looks appealing to car makers amid Thai political turmoil”, Wall Street Journal, 16 Jun 2014. “Feeding the world’s craving for instant noodles”, Get Up Read Up, 23 May 2013. “IndoFoods forms new Singapore subsidiary”, Jakarta Post, 17 Apr 2012

9. “Supply Chain Matters: The Asian Battleground”, Spencer Stuart, May 2012

10. “Coup won’t drive car firms from Thailand, but rivals beckon”, Reuters, 29 May 2014

11. “Coal Mining News: Indonesia Plans to Raise Coal Royalties in March”, Indonesia Investments, 25 March 2015, http://www.indonesia-investments.com/news/todays-headlines/coal-mining-news-indonesia-plans-to-raise-coal-royalties-in-march/item5342

About our researchAccenture’s perspectives presented here derive from several sources. These include a survey carried out by Kadence, a market research agency that compiled views of 200 senior executives of businesses operating in ASEAN, including large local companies, ASEAN-based companies with international operations and global MNCs with local operations. The survey explored their interpretations of and enthusiasm for AEC policy measures, and summarized their companies’ prospective responses to AEC policy and other changes in the ASEAN region. The survey was targeted at 40 respondents each in Indonesia, Malaysia, Philippines, Thailand, and Singapore.

In addition, Accenture conducted in-depth study of the AEC policy and developed more than 20 case studies of various companies to analyse how companies are preparing to take advantage of AEC measures and evolve their organizations over the next few years to be future-ready.

Accenture also continues to invest in original research focused on the economic climate and expanding business opportunities in ASEAN. Recent publications include ASEAN’s limited time offer: One hundred million new consumers to win and a $770 billion reason to move now, The Future-ready Organization: Reinventing Work in ASEAN, and Catching the ASEAN Wave all of which can be downloaded now.

Authors of this studyAlison Kennedy Managing Director Accenture Strategy, ASEAN

Lim Yin Sern Managing Director Accenture Strategy, ASEAN

Arika Allen Senior Manager Accenture Strategy, Singapore

Umang Goyal Senior Manager, Operations Accenture Strategy, ASEAN

The authors would also like to thank the following for their insights and assistance:

Thanks to Sarah Conrick, Sharad Parashar and Surendra Raj.

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