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Unlocking the Value of Globalization    [Date Added : 02/27/2005 ]
While many companies have grown from small local enterprises to become global leaders in their industries, more than 80 percent of them fail to capture the full returns of their global investments, according to a new study conducted by Deloitte Research for Deloitte Touche Tohmatsu (DTT).

The new report reveals that rather than taking a holistic, global view of their businesses, most global manufacturers focus on addressing the individual pieces of their far-flung global network - the complex web of suppliers, production and R&D facilities, distribution centers, sales subsidiaries, channel partners and customers, and the flow of goods, services, information and finance that link them - that comprise their supply chain.

The negative impact of failing to take a holistic, global view of the business can be devastating," says Gary Coleman, DTT Global Manufacturing Industry Leader. "The result for a company is often sub-optimal improvements, wasted resources and frequently lackluster performance. Many of the global organizations that were studied realize a value loss from sub optimization of 50 percent or more of bottom-line profits."

In its study, Unlocking the Value of Globalization: Profiting from Continuous Optimization, Deloitte Research analyzed data from the nearly 800 companies - Asia-Pacific (10 percent), Central and Eastern Europe (10 percent), North America (34 percent) and Western Europe (44 percent) - in DTT's global benchmarking survey. These companies represent multiple industries, including aerospace and defense, automotive, industrial and consumer products, life sciences, process, paper, chemicals, high technology and telecommunications equipment, and annual revenues range from less than US $50 million to over US $1billion. Together, they represent about US $1 trillion in revenues.

Only about one in ten companies has undertaken significant efforts to optimize its global networks over the past three years. "So it is not surprising," says Coleman, "that supply chain cost structure is in last place among competitive capabilities in all of the industries we have studied."

Optimizing Global Investments Can Lead to Dramatic Profit Improvement

According to the study, the few manufacturers that have continuously invested resources to improve their global supply chain network as a whole - less than 15 percent of the most global companies studied - have been rewarded with significantly improved operational performance and profit levels that are 50 percent higher than those of their global peers. In one case covered extensively in the study, a leading industrial products manufacturer gained a staggering 75 percent annual profit improvement by pursuing continuous optimization through improved customer service and lower overall cost base.

"Optimizing a global operation is not an easy task," Coleman says. "Leading manufacturers have mastered this capability by building an optimization infrastructure to align people and organizational structures, business processes and technology platforms. They factor competitive drivers such as revenue growth, cost management targets, infrastructure and product innovation into their global network design."

Other critical factors include global and local compliance drivers, such as local regulations and tax issues, and organizational issues.

"People issues are critical," Coleman adds. "Often the biggest obstacle to optimizing networks is the role of the existing organization and incentive structures in the global organization. We observed a large company that had to forgo about 50 of the improvement opportunities they could have realized from global optimization because of people and organizational issues. This clearly affects future profitability - the linchpin of shareholder valuation."

Unlocking the Value of Globalization

According to the study, as companies expand around the world, creating the capabilities to ensure that existing and new investments are holistically and continuously optimized is crucial for unlocking the true value of globalization. Both competitive and compliance drivers must be considered. Competitive drivers include revenue growth, cost management targets and innovation. Compliance drivers include regulation, tax issues, and intellectual property protection. Failure to consider these drivers during global expansion can carry a high price tag.

For example, one company outsourced its global manufacturing operations to reduce costs, but ended up with a higher cost structure because of the impact of regulations and duties. The study estimates that taking tax into consideration when optimizing a global supply chain, the bottom-line profit improvement is nearly 100 percent higher than if tax considerations are excluded.

Access to information on key metrics is important to enable decisions to be made. However, fewer than 12 percent of the companies studied were highly satisfied with the data they had relating to critical measures of performance, such as product profitability (9 percent), manufacturing cost (12 percent), distribution and logistics cost (6 percent), and customer profitability (4 percent).

It is crucial that the CEO and the top executive team take the lead - successful optimization involves not only operational units, such as manufacturing, sales and product development, but also tax, human resources and legal departments across multiple countries. The vast majority of those manufacturers that are successfully optimizing their networks in a holistic fashion have one top executive in charge of the overall supply chain.
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