Surfs up or is it a Tsunami?

Globalization – a wave to ride or a tidal wave of massive destruction?

Globalization is changing traditional business practices and for many companies the changes are of tidal wave proportions. In North America many senior managers are having nightmares of their products are drowning in a flood of low-cost import competition. The company’s or its divisions’ survival is at stake and if the company does not learn to ride the wave it will be crushed by the sheer force of the wave and render its organization uncompetitive and obsolete.

In early December 2005 I attended a supply chain summit and met with many manufacturing divisions of Fortune 500 companies that are facing the threat of globalization and the commoditization of their products. Each in its own way was experiencing a tsunami like wave in their business brought on by the rapid influx of competitive products manufactured in low-cost countries. The question that was implied but not fully articulated by each of the companies was how to respond to a competitive situation that literally turned its business on its head and threatened its very existence.

How real is their concern? Do they have time to respond or will they be swamped and weighed down by events and washed away by the influx of inexpensive products manufactured in low cost countries? What are their options? Who will survive?

The answer to these questions lies in recent history. Industries have been moving to global sourcing for years. The North American apparel and textile manufacturing industry has all but vanished in a period of 10 years. The traditional big 3 North American auto manufacturers are floundering and the historical global leader – General Motors – will in all probability lose its number one status in 2006 and has acknowledged that in order to survive it cannot continue to defend that role against its more agile and adaptable Japanese competitors – Toyota, Honda and possibly Nissan. Big steel is being overwhelmed by high quality, low cost competition from Korea, China and Japan and depends on life support by its government. Ditto the apparel, textile, footwear, electronics, consumer packaged goods, etc. industries.

Scenario: A major North American manufacturer of barbecues, located outside of Toronto, Ontario has seen its ability to compete against low-cost imports from China greatly compromised. The company’s costs relative to the imports are roughly 40% greater and their quality advantage is no longer appreciated. The market is moving rapidly to low cost imported cast-iron aluminum barbecues from the traditional domestically produced, higher cost cast iron barbecues. To make matters worse, its traditional customers have now moved to directly sourcing and importing the barbecues from China further pressuring the manufacturer. It is committed to its committed workforce and instinctively wants to resist the move to low cost sourcing of finished barbecues. Its very survival is at stake.

Scenario: A major supplier to the automotive aftermarket located in Michigan recently sold approximately $1.0 billion of glass and paints manufactured in their North American facilities. Protected for years by high tariffs and counter-vailing duties the company was able to compete successfully against low-cost glass from China. Several years ago the dumping duties were removed and the company’s business model literally changed overnight. In order to survive the company quickly expanded its fledgling sourcing group to purchase the majority of its glass from low cost sourcing countries. The result of the tectonic shift was a complete change in its competitive environment. Its margins were quickly eroded; its quality advantage evaporated and its major competition was now import/distributors not glass manufacturers. The company recognizes that it is on steep learning and execution curve to catch up to its non-asset based import-distribution competition in order to survive. Time is of the essence for this division.

Scenario: In 2003 a leading U.S. manufacturer of home furniture located in North Carolina was manufacturing 80% of its products in the United States. By 2005 it had shifted its sourcing to low-cost producing countries and imported 80% of its product line. Although it benefited from lower costs it found that its margins had been eroded so that now it was marginally profitable. It recognizes that its business model and competitive position has changed but does not fully understand the drivers that will allow the company to return to the levels of profitability it previously experienced.

In each case the competitive environment apparently shifted in a matter of months. The competitive comfort that each company had as a manufacturer shifted dramatically and their new paradigm threatens the very existence of the organization. The new model strips their previous competitive advantage –design and manufacturing excellence – and positions them in a business environment where they have little core competency and equally deficient execution and management capability. These companies each recognize that they are in serious trouble and if they don’t respond to the new challenges that they face in global commerce execution they will go the way of the dinosaur.

Without exception each company that I met with (and there were 10) all had the same fundamental problems:
The ERP systems designed to support their manufacturing and financial business are grossly inadequate in supporting their global commerce requirements.
Their business processes are designed for manufacturing and not global sourcing/distribution.
The competency of the organization lacks the expertise and experience in the area of global sourcing, logistics and importing.
Costs visibility is immature and doesn’t provide the necessary granularity to understand the best procurement strategy or true cost of goods.
Lack of visibility into outsourced partners reduces the organization’s ability to control the supply chain and negatively impacts inventory levels.
They are making costly errors and don’t understand what is required to resolve them.

Each company is wrestling with the problems it faces and is working through their own challenges. Some are embracing the new paradigm while others resist. Some are looking strategically at globalization and others continued to respond tactically to the shifting environment.

The good news is that those companies that are moving strategically understand that their business model has switched from a four-wall centric view where manufacturing drove their strategic competitive advantage to a “four-corners of the world” approach where managing the global supply chain dominates the battle for strategic competitive advantage.

So what do companies have to do to execute an efficient global commerce strategy?

Firstly, it is critical that senior management understand the magnitude of the threat that globalization presents to their companies. Secondly, it is vital to create a sustainable strategy to respond to the threat and actively support the initiatives to develop the capabilities and infrastructure for the new paradigm. It is important to recognize that the new model is about designing lean, flexible global supply chain networks that include both domestic manufacturing and global sourcing and provide the organization the agility to move quickly in response to global conditions of supply.

Whatever the level of global competition companies are currently experiencing, creating lean global commerce organizations is critical for profitability in the new paradigm where margins are much thinner, supply chains much longer, more complex and highly risky, and mistakes much more costly and harder to correct. Finally, creating an organization that thrives on constant and accelerating change is vital because the organization is required to adapt to continuous monstrous tidal-changes in the business current as the tectonic plates underlying global commerce shift.

Globalization is a challenge and an opportunity. The options for companies that are experiencing sustainable global competition are to develop workable strategies and processes to survive and thrive or die. Being global is not an option for many companies. Developing a comprehensive global strategy is critical to remain viable.

Surf up or is it a Tsunami? In this case it all depends on how you respond to the opportunity that globalization provides.