Tuesday, June 5, 2007

Global Logistics: Thinking beyond BRIC

Business dialogue around low-cost-country sourcing and emerging markets has become almost ubiquitous. But many of those conversations are limited to the BRIC countries: Brazil, Russia, India, and China. That’s unfortunate, since a great many opportunities also exist in Central and Eastern Europe (CEE).

In fact, Accenture’s recent research initiative on global operations found that emerging CEE markets are coveted by more companies than those of any country with the exception of China and India. Among European executives, Central and Eastern Europe was cited as the second most important emerging market next to China.

Why Central and Eastern Europe? One good reason is that most CEE countries are now part of the European Union. Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia joined in 2004. Bulgaria and Rumania were admitted in early 2007 and admittance of Turkey is pending. For companies outside the region, EU accession means new market and offshoring opportunities—as well as more freedom to conduct barrier-free business.

Central and Eastern European companies are also working hard to update their facilities, seeking to match Western levels of unit cost, quality and product availability, and thus make their businesses more sustainable and attractive to Western buyers. Even with these upgrades, CEE wages remain far lower than in Western Europe, and it could be 20 years before the gap closes completely.

Other potential advantages for non-CEE companies include more potential transportation modes and fewer problems with language and culture. Distance-related savings can also be a factor since, compared to Asia, the back-and-forth movement of parts and finished goods between CEE and Western Europe involves about one-tenth the distance. However, distance-related cost differences are not always as significant as one might suppose. Careful study is critical.

Barriers and challenges
While the reasons above are promising for those looking to the region as a source of new sales and sourcing opportunities, the road to Central and Eastern Europe can still be a bumpy ride. In fact, many companies may find that the time is not yet right to factor this region into their global strategies. They may, for example, discover that the advantages of EU accession, lower wages, and shorter distances are offset by lingering problems with intra-country transport. Cabotage is still prohibited for the 12 recently joined EU countries. This limits outsiders’ ability to formulate pan-European Union strategies now—when opportunities to secure competitive advantage are greatest.

To make their CEE programs work, most companies will need the help of third-party services providers. Unfortunately, the availability and performance of third parties in Central and Eastern Europe is inconsistent. In a recent survey, only 25 percent of Western European respondents characterized the performance of their offshored logistics services as high or very high in terms of reliability, quality, lead times, and customer service. And only 29 percent stated that their 3PL-related savings exceeded 10 percent.

It’s also worth noting that the CEE remains an agglomeration of a dozen countries, most with their own taxation system, regulations, language, and socio-cultural idiosyncrasies. There are even variations in their receptiveness to outside business. For example, companies in Slovakia, Romania, and Slovenia tend to be more interested in sourcing partnerships with Western Europe than those in Hungary and the Czech Republic. Accenture also has observed that state-owned enterprises (holdovers from the communist epoch) are less hungry for trade than public or privately held corporations. Fortunately, the number of state-owned enterprises is falling rapidly.

Making the choice
Deciding to source parts from, or expand sales, into Central and Eastern Europe is no less complicated than it is for any extra-national region. First and foremost, the choice must be made in light of a larger global operations strategy that integrates product development, sourcing, manufacturing, transportation, storage, sales and operations planning, and provision of after-sale services. Key components of the strategy will be formal programs for analyzing and redesigning supply chain networks, aligning (and potentially flattening or centralizing) the organization, and assessing the need for, and potential value of third parties.

Most important, however, is the recalculation of each affected item’s total cost of ownership. Like any such expansion, penetration of Central and Eastern Europe could result in supply chain cost increases that negate anticipated savings. In order of impact, the supply chain cost categories most affected by an offshoring decision tend to be:

- Aligning logistics, manufacturing, and assembly.
- Redesigning and maintaining the extended network over time.
- Compensating for changes in lead times and higher raw-material inventories.
- Transportation/distribution network restructuring and optimization.
- Exception handling.
- Ensuring supply chain flexibility to accommodate shifts in demand.

Given these factors, any sound global strategy should include a detailed total cost of ownership analysis that goes beyond calculating the acquired cost of materials and components..

An exceptional global strategy will also acknowledge Central and Eastern Europe’s potential to help meet an organization’s changing sourcing needs, provide new markets for its products and services, and widen its path in the race to high performance.

Reference: Article originally published in Logisticsmanagement written by Patrick M. Byrne, the managing partner of the Accenture Supply Chain Management practice, which helps clients improve their performance through supply chain strategy, sourcing and procurement, supply chain planning, manufacturing and design, fulfillment, and service management. Based in Reston, Va., he can be reached at pat.byrne@accenture.com


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