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Forgotten Keys to Enhanced Global Operations
Here are some of the lesser known ways that companies are discovering to achieve high performance global operations.
There have been many articles discussing requirements for enhancing global operations. This edition of LQ provides additional insight regarding some of the critical operating details. In my editorial for this edition, I want to focus on some lesser known keys that firms are discovering as critical for achieving high performance global operations. The traditional requirements for enhancing global operations focus on understanding the operations and political environment in the regions you are entering, identifying the total costs to support global operations, and acquiring or contracting for expertise in documentation and institutional relationships. Our research and discussions with senior supply chain executives has suggested two other capabilities are critical as well. These include the ability to develop a global operations calendar and the capability to manage global complexity. These are described and discussed in this editorial.
One of the first challenges in coordinating global operations is to establish and obtain agreement on a global operations calendar. While it is difficult enough to operate domestically when there are four or five time zones, global operations requires coordination of up to 24 time zones, as well as cultural differences in operating periods (e.g., days, weeks, and months). With the time zone and work day differences, it is important to establish a common understanding of operating periods in terms of what are the relevant periods for forecasts, closing dates for order acceptance, defined periods to support sales and operations planning, and specific delivery requirements to support financial and Sarbanes-Oxley reporting. While firms that have supported global operations for years have understood this requirement and developed a specific calendar, firms that are just beginning to operate globally often attempt to use their domestic calendar when they operate globally. This leads to confusion and a lack of coordination. The requirement is that the firm define specific operating periods and then define the cut-offs for each time zone. While it might be useful to have one standard time (e.g., GMT), that may not be realistic for either cultural or legal reasons. For example, it may be necessary to get product through Customs in terms of local time to be able to count the delivery as a monthly sale. The requirement is that firm desiring to operate globally must define the specific days and times for the transfer of integrated planning data to support global supply chain planning.
The second of the not so obvious keys to global operations is the ability to manage complexity. Complexity management is the collective set of decisions, supporting processes, value systems, and initiatives pertaining to determining and implementing the most effective product portfolio (i.e., mix of product variants, feature sets, component choices, etc.). Complexity management focuses on the ability to manage the trade-offs between maintaining standardized products and processes to support domestic operations and allowing for product and process variations to support global operations. For domestic operations, it is easier (although not always easy), to establish product and process standards due to the relatively few market, cultural, legal, and technical standard differences. While new product development and marketing will often add new product variations to better satisfy the needs of target segments, at least the differences in the standards noted above are not as significant.
Domestically, increasing the variation in products can take advantage of new technology or allow the product to better meet market segment requirements. The result is increased revenue. however, while it may be less apparent, increased variation also typically increases supply chain cost as well. In addition to increased product development cost, supply chain costs increase because of reduced economies of scale for production, transportation, and handling, as well as increased inventory due to demand variation. Increased variation also increases the potential for order taking and order fulfillment errors.
Global operations drive even more variation due to cultural, legal, and technology differences. This variation comes in the form of variants in components, production processes, packaging, labeling, and shipping requirements. Not only does this variation increase complexity in the procurement and production processes, it substantially increases complexity related to life cycle product support. With different product variations available around the globe, the firm must be able to determine which version of parts is necessary to repair or maintain products in the field.
Given this environment, a not-so-obvious key to effective global operations is the capability for complexity management. Unlike many other types of logistics and supply chain expertise (warehousing, transportation, and customs brokering), complexity management capability expertise is very difficult to outsource. Decisions regarding new product design and development strategies and requirements for global market segmentation represent a core competency to most firms, so they are best maintained as internal activities. Critical activities for complexity management include: 1) Developing a complexity strategy; 2) Developing metrics to monitor complexity; and 3) instituting the governance structure to control complexity. A firm, particularly one evolving toward global operations, must create a strategy with respect to how it is going to balance the trade-off between complexity and commonality. A firm that elects to go global by customizing product to meet the unique requirements of each region is deciding to go for the increased revenue due to customization while hoping that the supply chain costs don't consume too much of the profit margin. A firm that elects to go global with a more standardized product would likely obtain less revenue while minimizing the costs related to complexity. The customization strategy likely requires more investment in product development, manufacturing, sourcing, and inventory due to fewer scale economies. The standardization strategy offers better scale economies but may not be as attractive to global customers. It is important that firms decide on their strategy prior to going global rather so that they aren't caught in the middle with increased complexity without the corresponding management capabilities.
Once the firm has decided upon a strategy, the second activity is to identify some metrics to monitor complexity. Examples of these metrics include:
It is important to have the metrics to make sure that the firm's commonality/complexity strategy stays on track.
Finally, a firm must institute a governance structure to monitor, control, and guide global product decisions. The governance structure needs to have representation from marketing, product development, finance, as well as supply chain. Marketing must bring the customer perspective in terms of local market opportunities and feature requirements. Marketing also has the responsibility to develop credible estimates regarding how increased product variations and features will influence revenues. Product development must balance the opportunities offered by new technologies with the need to focus and maintain the capabilities related to existing core technologies. The finance function must be involved to insure that the revenue and cost assumptions are credible. While these functions are commonly involved in global product decisions, it is particularly important to also involve supply chain when evaluating product decisions in a global environment. The supply chain input is important to provide valid estimates regarding how increased product complexity will impact the costs related to design, sourcing, production, inventory, and life cycle support. In addition to having the correct representation, the governance structure must have defined processes to complete global product decision reviews, appropriate sign-off responsibilities and procedures, authority to regularly review results to hold the market and development teams accountable.
It is well known that global operations increases complexity in terms of distance and documentation because these involve the obvious activities related to transportation and legal. Less obvious and well known are the activities required to support global activities related to product development and inventory planning. Global operations substantially increases the complexity related to both of these activities. However, it is not easy to identify the impact of such complexity as most of the cost elements are indirect. Even though the costs are typically indirect, firms increasing their global footprint will begin to see their costs related to product development, sourcing, production, inventory management, and product life cycle support begin to climb relative to revenues unless they determine appropriate calendar and commonality strategies prior to initiating global operations. When evaluating the potential for "going global," make sure that your firm considers the "less visible" costs related to planning and complexity.