| Fall 2007 |
Manufacturing/Distribution Advisor
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Doing Business in a Flat World
On a visit to India in 2004, New York Times editor Thomas
Friedman found companies in Bangalore preparing U.S. tax returns,
reading X-rays from U.S. hospitals, tracing luggage lost between U.S.
cities and writing code for U.S. software developers. "Globalization,"
Friedman realized, "had entered a whole new phase."
These companies were able to compete internationally by virtue of certain
technological trends: widespread broadband connectivity, declining costs of
computing and the rise of tools like e-mail, Google and collaboration software.
Taken together, these developments enable cooperation, research and remote
development on a scale never before possible.
A Bangalore businessman told Friedman that his companies now compete with
firms in the developed world "on a level playing field," and the newspaperman
extended the metaphor. The entire globe, he said, is being similarly leveled.
His 2005 bestseller The World Is Flat is still an international
bestseller.
Government Policy
Friedman's outlook is generally accepted, and its implications for the U.S.
economy are structural and profound. To advance American interests overall, he
calls on government to promote freer trade, investment in science, portable
benefits for employees and subsidized post-secondary education. Government can't
guarantee employment, he says, but it can help workers remain employable.
While government programs are beyond the scope of this article, what can
individual inventory-based companies do to compete successfully in the flat
world? Flexibility and openness to change are a big part of the answer.
Specialization and Innovation
As the decline of the domestic textile industry demonstrates, U.S. companies
are less and less able to compete with foreign manufacturers in areas of
low-cost commodity production. But the U.S. economy is still hugely productive—with just five percent of the world's population, it produces a quarter of all
goods and services. And U.S. companies have a significant edge in high-end
manufacturing.
To a Wal-Mart shopper it may appear that China has taken over world
manufacturing. But Wal-Mart shopping carts don't carry high-end U.S.-made goods
like specialty clothing, not to mention precision surgical lasers or CNC lathes.
U.S. companies that develop specialized products or innovative processes have a
competitive advantage.
That competitive advantage has been eroded by China's failure to enforce
intellectual property protections, which has discouraged some innovation by U.S.
companies. (Why invest in research and development if new products and processes
will be stolen?) But that's turning around. As Chinese companies develop their
own intellectual assets, the Chinese government is showing a new interest in
patent law, lowering one of the barriers to innovation.
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What Flattened the World?
Among the factors that have helped to level the global playing field,
these 10 stand out:
- The fall of the Soviet Union rebalanced the world toward free markets.
- Over-investment in fiber-optic cables wired the world. Some players
went under, but not before they had created massive worldwide capacity in
broadband connectivity.
- Workflow software enabled fast transactions among distant companies,
employees, vendors and customers.
- Open-source programming reduced the price of computing, as exemplified
by the collaborative development of the Linux operating system.
- Outsourcing lowered production costs and simultaneously saved some
third-world economies, including India's. The outsourcing trend was
accelerated when the dot-com bust and stock market crash of the early 21st
century sent companies rushing to cut costs.
- Offshore contract manufacturing laid the basis for China's economic
rise.
- Advanced supply-chain networks like Wal-Mart's linked suppliers,
retailers and customers with increased efficiency and precision.
- Big logistics players like UPS and FedEx introduced "insourcing,"
taking over supply-chain tasks for companies of
all sizes.
- Search software, like Google, brought the Internet into everyone's
"supply chain of knowledge."
- Wireless and mobile technologies opened the gates to collaboration
anywhere, any time.
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Expanded Markets
Barriers to entry into world markets also are dropping for U.S. companies.
One such area is Latin America, a large and growing market whose every need
cannot be met by overseas manufacturers. The continent's proximity offers big
opportunities for U.S. firms to sell their products.
China and India are both rapidly building infrastructure, presenting large
markets for U.S. industries. The Commerce Department identifies aerospace,
medical, mining, power transmission and telecommunications equipment on its list
of best prospects for market expansion.
The world is not yet completely flat, however. Selling in foreign markets is
complex, particularly with regard to taxation and regulation. Tax treaties
between the U.S. and other countries serve mainly to prevent double taxation,
but they are not uniform.
A U.S. company that wants to market abroad must do its homework and learn the
terrain. Even the most mundane shipping documents can be unfamiliar ground for
many manufacturers, not to mention more complex export licensing for
technologies.
Networking with other companies that have succeeded abroad can help. So can
other available resources, such as the Department of Commerce's Export
Assistance Centers. Don't neglect to call in expert help when you need it.
Leveraging the Foreign Advantage
Foreign operations hold the key to survival for some companies.
While foreign companies often are able to undercut U.S. competitors due to
their lower labor costs, U.S. companies can leverage that advantage as well.
Chinese-made products seem to dominate many U.S. markets—but about half of
those products are produced by American-owned plants in China.
Opening a manufacturing facility abroad can be complex and expensive. Joint
ventures or other partnerships with foreign firms can ease the way, but finding
strong partners with knowledge of local labor markets and trade issues is
critical.
Specialty Manufacturing Brings Challenges—and Opportunities
Above, we examined today's "flat world," in which manufacturers face intense
price competition from huge rivals, low-cost foreign labor or both.
Some companies, by developing specialized products or innovative processes,
have entered higher-end markets, raised their prices and avoided direct
competition with low-cost players.
The experience of a Southeastern manufacturer illustrates such a
transformation. It required substantial changes and opened up new opportunities.
In this case, it also presented the manufacturer with a new downstream
obligation—and an opportunity to protect its customer's brand.
Relentless Commoditization
The company was a long-time supplier of pressure-sensitive materials to the
printing and packaging industries. Over time it had found itself competing with
rivals 20 times larger, which sold their low-price products online, in reverse
auctions and in discount office supply stores.
The company began charting a different course. It would supply specialized
products and differentiate itself as a complement to the big players, not a
direct competitor. It reexamined its markets to find areas where its expertise
and equipment could deliver unique value.
One such area was tamper-evident packaging, which is widely used to guarantee
the integrity of a medical or food product from the factory to the end user.
Culture Shift
The company's challenge was to begin recasting operations along specialty
lines. Smaller, smarter and faster became the new value proposition, and it required a
profound shift in the organization's culture.
Long runs, short turns, waste-reduction crusades and low pricing strategies
had to yield to shorter runs, longer turns, devotion to quality and higher
pricing. Instead of diving into e-commerce, the company would go another way—making total customer support, not market share, its top priority.
Such a turn can't be made on a dime. The company didn't tell its
bread-and-butter customers "Now we're only interested in your specialty areas."
Instead, it undertook a gradual shift in its product mix. Now the specialty side
of the business generates around 40 percent of revenue.
Brand Protection
The new specialty course presented another opportunity: The company could
offer additional value by helping the end customer protect its own brand. This
kind of brand protection refers not to patents and trademarks, but to the
integrity of the supply chain.
Pharmaceutical companies, for example, have a special need to guard their
supply lines closely. One in seven drugs are counterfeited, and if a fake one
causes death or disease, the producers of the genuine article have much to lose.
Food companies, including pet-food producers, have a similar stake.
Supply-Chain Alliance
With added experience, this manufacturer was soon able to proclaim itself an
expert. It initiated an alliance in the industry devoted to brand protection,
which provides the brand owner with supply-chain authentication and
certification.
The company recruited upstream and downstream for the alliance. Meanwhile, it
found some of its suppliers and customers were willing to undertake more
specialized production themselves.
So in addition to its physical products, the company now offers its customers
brand-protection leadership—a combination that is proving to be successful.
Could your company move into or increase its specialty lines? If you'd like
to look at the business consequences of such a move, please contact our firm.
Editor's Note: Bober, Markey, Fedorovich
& Company frequently works with clients on matters such as
this. Please call your partner / manager contact if you would like assistance in this area.
Manufacturing/Distribution Advisor is produced quarterly by Bober, Markey, Fedorovich & Company's
Manufacturing/Distribution
Services Team. If you would like additional information about the services that we can provide to manufacturers and wholesale distributors, please call or email our team leader, James E. Merklin, CPA, M.Acc. at (330) 762-9785 or
jimm@bobermarkey.com.
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