The New Age of Innovation

The capability to leverage global resources will demand new levels of visibility and agility in managing logistics of physical goods and resources (globally) to meet unique demands of customers

Let us start with a well-known example. Access to global resources requires the capability to tap into a complex web of resources, expeditiously, and at the best global price. Li& Fung, a premium global trading group covering high-volume, time-sensitive goods including fashion accessories, furnishings, handicrafts, and home products, is a good illustration of process innovation through analytics. Li & Fung started as a pure trading company, sourcing its products from China for exports. However, within a decade Li & Fung had put in place a global network for managing supply chains for a large number of retailers in Europe and the United States. Unlike the traditional trading business model, Li & Fung does not own any production facility or large warehouses. As stated by Victor Fung, the CEO:

Everybody thinks that a trading company is just taking an order from the right hand and giving it to the left hand. The idea is that, maybe foreigners don’t know which factory to go to, so you perform an introductory role, maybe a quality control role, and there it stops. . . . Whenever we go in, we don’t just give them [the suppliers] an order and hope that they know what to do. We hand-hold them through the whole process. That’s why we say we almost are a virtual factory. . . . It is the way we orchestrate the production, come up with samples, and feed them information. All that is going way, way beyond that original matching function.

Li & Fung manages a large number of quality-conscious, cost-effective producers who can effectively deliver orders on time for customers such as JCPenney. More recently, the company identified the need to expand in locations near Europe and the United States to cut lead time for delivering physical goods. The overall business model of Li&Fung is based on the “end-to-end business process knowledge”—that is, from the point-of-sales data emanating from a specific branch of JCPenney in the United States (for example, how many white shirts, cotton, size 16 inches/32 to 33 inches, pattern XYZ) to its ability to replenish the inventory in that location through articulating its supplier network in maybe three countries.

The complexity of the company’s supplier network demands a capacity to manage information regarding regulatory restrictions across countries, managing the skill base of its suppliers and hiring in specific locations, and finally, integrating all this information to provide a seamless one-stop shop for its customers. The insights derived through the company’s accumulated data on various markets and individual supplier capabilities enable the company to deliver unique value. This system cannot function without a detailed, constantly updated understanding of all the suppliers—capacities, capabilities, costs, skills, and distances. This also demands a detailed understanding of the customers’ needs—urgency, quality, locations for delivery, and profitability. R = G must start with this level of visibility to all variables that can impact the appropriate resource configuration—“plant A in Thailand to serve JCPenney in Dallas for this order”—decisions.

In an R = G world, establishing the visibility to the entire chain is a good first step. Schneider Electric is the world’s largest manufacturer of electrical distribution systems and components. The company has a healthy growth rate; sales are U.S. $8.8 billion, and it has 70,000 employees in 130 countries. Schneider’s purchasing organization procures for four leading markets (each worth U.S. $1 billion): raw materials and means of production, fabricated metallic and plastic components, electronic and electrical devices, and nonproduction services. The global purchasing operation works with these four markets and a total of 33 commodity groups and multiple country organizations. The complexity of a supply chain such as this makes business analytics a necessity to effectively compete. Many large companies operate such supply chains without full visibility, and the consequences are obvious as they expose their supply chain to unknown global sources. For example, Serge Vanborre, a senior manager at Schneider Electric’s purchasing headquarters, says, “We want to know who is buying what from whom. We want to know the global purchases, be able to do an analysis in order to repartition our purchases and verify if the supplier policies are followed.”

A well-known example of visibility in a global supply chain is exhibited by leading logistics firms such as UPS and FedEx. For example, Atlanta-based UPS moves over 15 million packages around the world in a day, and it provides complete visibility to the end consumer on each and every packet. FedEx recently integrated the software systems of its ground, air, and freight businesses to provide full visibility to all of its customers and employees for the 6 million plus packages it handles every day.

Similarly, in one of the largest radio frequency identification device (RFID) projects implemented so far, Unisys has created full visibility for the global supply chain of the U.S. Department of Defense (DOD). Prior to this new system, the department operated three different supply chains for the army, navy, and air force with minimal integration. Furthermore, there was almost no visibility. In contrast, the new system connects global suppliers with 30 centers of DOD to any location in the world from Taiwan to Tacoma, providing complete visibility through RFID tags. As a result, when the military runs out of spare parts for a tank in Iraq, it has the capacity to locate the floating warehouse in the nearest ship instead of having to source the parts from the nearest depot, which in the past has often been far away.

Similarly, Homeland Security demands that it know where the cargo shipments that reach U.S. ports have been. So far, this has been an elusive goal. For example, a Sara Lee innerwear shipment manufactured in Pakistan and loaded in a container at Karachi can travel through a feeder ship to Mumbai, India, and then to Sri Lanka, through the Suez Canal, to Nova Scotia, and finally to New York. The items in the ship are invisible during their circuitous course of travel in the sea for almost a month!

by C.K. Prahalad and M.S. Krishnan, Via The New Age of Innovation: Driving Cocreated Value Through Global Networks (2008)