Going Global

Strategies that go beyond the basics are shared by Mirko Matrich, Sean Monahan and Sumit Chandra, all with A.T. Kearney

Supply chain globalisation is the natural outcome of today’s expanding consumer markets as companies struggle to meet the dynamic needs of growing markets and new consumer segments. Despite the risks caused by economic and political uncertainties, global supply chains are the wave of the future. Companies that make key decisions early – about entering new markets, balancing risks and opportunities and managing costs and complexity – are more apt to remain leaders in their industries.

Economic and political developments continue to pose challenges for global supply chains. With the value of the U.S. dollar at its lowest in a decade, there is more demand for cheaper U.S. imports, particularly in growing economies such as China, India, the Middle East and Russia. At the same time, a shift to more protectionist trade policies by the United States could spur retaliatory actions from foreign countries, while U.S. corporations become attractive investment buyout targets for sovereign wealth funds from countries such as China, Saudi Arabia and the United Arab Emirates. This trend may be accelerated further with the current financial sector crisis in the United States. Although the resolution path is unclear, one thing is apparent – economies are more interconnected than ever before and any policy shift will have an impact on the flow of investment and ultimately on the way companies conduct business around the world.

Meeting demands

Between 2003 and 2007, six nations entered the ranks of the world’s top 10 destinations for retail investment (see figure 1). The order among the top four nations – India, Russia, China and Vietnam – was shuffled somewhat as India moved from fifth to first; Russia from first to second; China stayed in third and Vietnam moved from ninth to fourth.

Pushed upward by rising living standards and burgeoning populations, more than 75 per cent of the world’s citizens are “medium-low income” consumers. With purchasing power parity of up to US$10,000, they constitute the majority in Eastern Europe, the Middle East and Central Asia.

Making products affordable for this market requires a low-margin, high-volume strategy and the efficient use of relatively modest amounts of working capital.

One approach companies employ to attract these customers is to reduce packaging size and thus reduce the price per unit. For example, in India, Hindustan Unilever sells five billion pieces of penny candy a year, earning revenues of US$50 million.

Yet another strategy is to recognise and serve the unique needs of a large, untapped and growing sub segment of an existing market. We can use the Muslim market to illustrate this point. By 2020, Muslims will account for 30 per cent of the world’s population, compared to 20 per cent today and 12 per cent of global consumption, up from eight per cent today. Muslim consumers are not just in Muslim countries but are spread across the world, with more than half in Asia. Even the U.S. Muslim market, small by comparison, represents US$107 billion in spending power. Sharia and Halal compliance is important to Muslim consumers, yet only a small amount of this US$560 billion market is being addressed by major multinational companies.

SUCCESS

A successful supply chain globalisation strategy depends on the following:

Identifying real opportunities

It is not enough to understand the global landscape, companies must also have a plan in place for recognising whether to enter a new market and how to capture emerging opportunities. For example, Carrefour Group operates 15,000 stores in 30 countries in Europe, Latin America and Asia, using four formats: hypermarkets, supermarkets, hard discount and convenience stores. Carrefour was early to recognise the potential of the “Greenfield” Chinese market. It entered China in 1995 and by 2006, its 112 Chinese hypermarkets and 275 discount stores reported annual sales of approximately US$4.5 billion. Today it is the only foreign retailer among China’s top 10. In contrast, Tesco, a competing international grocer, was slow to enter China’s developing market. Entering in 2004, Tesco’s sales in 56 hypermarkets were approximately US$1.1 billion by 2006.

Balancing risks and rewards

Doing business in global markets requires balancing risks and costs against potential benefits. Managing global price and supply risks with hedges are not limited to certain industries or spending categories. For example, the metals industry has used hedging tactics for over a century to address price volatility, a practice now being adopted by consumer packaged goods companies.

Maintaining flexibility

As mentioned earlier, every segment of the supply chain must be flexible enough to shift quickly to identify and capture new opportunities. And every potential opportunity must be measured against a matrix of quantitative and qualitative factors – from local tax and regulatory costs to labour force availability to freight costs to the economic and political risks within the market’s national boundaries. Although supply chain principles can be pretty basic, execution strategies are not – they often involve navigating through the complexities of the global supply chain in areas of sourcing, manufacturing and delivering across geographies. In developing markets, logistics has to be up and running quickly, while in developed markets companies are more focused on optimising an existing network.

Costs and complexity

Cost visibility is imperative for companies operating across borders. They must be aware of what drives supply chain costs within each function and then tailor the overall supply chain strategy to achieve success in each market. When all costs are visible across the global supply chain, the company is in a better position to accurately assess and evaluate the impact of possible trade-offs.