Asia meets supply chain challenges

Supply chain management is gaining momentum in Asia as companies seek to satisfy customers and ensure profitable growth. Stanford''s Lee explains.
Hau Lee is a long way from Stanford Graduate School of Business, where he is a professor of operations, information and technology. Under the guise of a mild mannered professor, he has come to Hong Kong to help unleash onto Asia, the next new thing - supply chain management (SCM). 

Supply chain management is, of course, not exactly new, but it has been given more than just a new coat of paint as an issue for Asian companies. This is because globalization, the internet, changing technologies, and product diversification have all contributed to a complex, sometimes distinctly un-manageable supply chain in Asia.

Creating value

But why are Asian companies not taking SCM seriously enough? Traditionally, Lee says, Asia has been a supply base for European countries and America, where the final assembly of products takes place. This means many Asian countries have not had to deal with myriad suppliers or distributors. But things are changing fast.

As Asia becomes more technologically advanced, Asian companies are assembling final products and taking on the complexities that follow. "Asian countries are no longer the followers in SCM, but innovators," Lee says.

He cites global telecommunications company Lucent as an example. The company built, customized and distributed telecommunications switches from Oklahoma City, and sourced its materials from North America. As the telecommunications market in Asia took off, Lucent started to source materials from competitive Asian suppliers. This meant Lucent was importing materials from Asia, assembling in Oklahoma, and shipping the switches back to a booming Asian market. Lucent executives used to joke about the situation - if only the switches could earn frequent flyer points…

Then Lucent's Taiwanese supplier and factory had an idea. The company had the technology and the expertise to finish the product themselves, which meant the switches were made and customized in Asia, for Asia, but without the lengthy logistics process. The results spoke for themselves. In 1998, Taiwan deregulated the telecommunications industry, and Lucent won 100% of the market, beating off rivals Siemens and Alcatel.

"The lessons which can be learnt from this are these: Companies need to respond to changing demand, changing environment, changing supply base. Secondly, Asian companies can be innovators in SCM, and thirdly, SCM is not just about cutting cost. It is about creating value out of the chain," says Lee.

Message to the CFO

How do the benefits of good SCM make the transition from the backroom to the boardroom? Firstly, CEOs and CFOs must recognize the potential impact of SCM on all areas of financial performance - growth, profitability and capital utilization, and not just as a cost efficiency strategy. The correlation between share value and SCM is not tenuous. Lee has another story to illustrate the point.

Christmas 1994 for mobile phone maker Motorola was a disaster. Due to bad SCM, the company underestimated demand and ran out of mobile phones. Its distributors were fuming, and so were customers. Christmas 1995 - Motorola, eager not to repeat the mistakes of the previous year, manufactured three times the stock. Again, Motorola did not communicate with their distributors, who over-ordered in anticipation of scarce stock. The result was the highest sales that Motorola had ever encountered. The stock market reacted and Motorola's share prices shot through the roof in that quarter. But in the next quarter, Motorola announced a huge drop in sales and profits as distributors were saddled with excess Christmas stock and the market supply readjusted itself. The mobile phone company's share price dived. Investors saw Motorola as an unstable stock.

"It took Motorola a long time to recover," sighs Lee, almost tut-tutting. "A misaligned supply chain and misaligned flow of information can distort shareholder value. This is my message to CFOs: you can only fool people that one time."

Private companies are not immune - Lee warns that supply chain performance is becoming a topic of scrutiny by venture capital companies.

Banks in the supply chain

SCM is about managing the information, material and financial flows of the company. Banks are crucial in the third element as they are the enablers of payment, settlement, and providers of finance and trust. But Lee thinks that there is a "lack of understanding" and synergy between the finance functions and information and material flows in many companies. The internet, however, could change this. The potential is there for a marriage of procurement, exchange of information, logistics and financial settlement on a single seamless platform, online. However, Lee believes that financial settlement link is "still missing".

ERPs – the weak link

Enterprise resource planning (ERP) systems can be a marvel for companies managing their supply chains. They can work out a sales forecast, the components needed to meet that demand, monitor the company's inventory status, and keep a track of receivables and payables, just to name a few.

But Lee believes that there are limits to the system and close attention needs to be paid to the supply chain. "There is a mis-belief that ERP systems will take care of everything," he says, "But they lack intelligent business planning." Furthermore, because of the high cost of installing and implementing the system, especially on a global basis, companies typically run out of money, and in some cases enthusiasm, before the process is complete. The high cost of ERP systems has largely prevented small and medium enterprises (SMEs) from implementing such systems.

"The whole supply chain needs more or less equal partners," Lee says. If the SME supplier is unable to do its part, the supply chain becomes weak. "The weakest member of the supply chain can define the whole supply chain," he adds.

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