Executive Briefings

Globalization: Separating Facts from Emotions     

The world is no longer flat; in fact, it's coming to an end. The sky is falling because of globalization and its failings. Have you read the headlines?

"The China Misconnection"
"Globalization Comes Under Siege"
"Transport Costs Drive Manufacturing Back to U.S."
"Will High Oil Prices Reverse Globalization?"
"Will Sourcing Transport Costs Reverse Globalization?"

Have you heard the China scare tactics?

Quality and recalls
Counterfeiting and intellectual property
Environmental issues and fuel costs
Elimination of value-added tax (VAT)
New labor laws
Inflation and Chinese currency appreciation
Greater scrutiny of the supply chain by government agencies

Some folks are concluding that globalization is no longer relevant, and we can build walls around North America and live happily ever after. But let's take a step back and consider a few issues.

Of course, globalization drives major change, which leads to controversy. But change and contention do not mean evil. We need to stop acting on our emotions, and instead allow good business judgment to drive our understanding, decisions and acceptance of change.

Right up front, we need to understand that the discussion is not about China or "China-ization." It is about globalization. Globalization is not about where you source or sell products. It is about maximizing a company's profits by capturing global market share and optimizing the worldwide supply chain. Independent of what the latest publications or the U.S. presidential candidates claim, globalization is neither good nor bad--it just is.

Being for or against globalization is like being for or against breathing. If you are against it, you (or your company) die. If you are for it, you (or your company) will live, but what is the point?

Globalization exists, and we have three choices:
(1) fail to accept and then die
(2) embrace globalization, but execute poorly and fail
(3) embrace globalization, execute well and thrive.
I recommend the third choice.

So where do you begin? A good starting point is to understand the facts about globalization and separate them from the emotional standpoints. The remainder of this article will address the large-scale globalization issues that must be grasped in order for organizations to harness the power of globalization.

Globalization is not about every country around the globe. Eighty-seven percent of the world gross domestic product (GDP) is:

Europe (36%)
North America (31%)
Asia (20%), with Asia enjoying the fastest growing GDP.

The top nine countries of the world are in Europe, North America and Asia, and account for 66% of the world's GDP:

United States (26%)
Japan (8%)
Germany 6%)
China (6%)
United Kingdom (5%)
France (5%)
Italy (4%)
Spain (3%)
Canada (3%)

Very similar statistics exist for global construction spend (CS). Eighty-five percent of the global CS is in:

Europe (30%)
North America (23%)
Asia (32%), and the fastest growing CS is in Asia.

The same top nine countries for GDP also make up the top nine countries for CS. By 2016, Asia, Europe and North America will make up 89% of the global CS, with Asia being the largest at 45%.

Therefore, for practical purposes, the answer to "Where is globalization?" is North America, Europe and Asia. A global strategy must include these countries on these continents. Other locations may be worth considering, but only as additions to the base global strategy developed for these top three.

What about the costs of globalization? The costs of doing business globally are different than the costs of doing business domestically. In fact, the costs of global business are, and will continue to be, dynamic. Currently, the constant chasing of low-cost countries (LCCs) is killing companies that do not understand total delivered cost (TDC). The cost of making the product in China, Vietnam or Alabama is insignificant; it is the TDC to the ultimate consumer that is important.

There will be some changes in the best sources of products as globalization evolves, but these decisions need to be made in the context of TDC. For example, last year with the new labor laws and subsequent increases in labor costs, China was able to force some low paying, undesirable manufacturing into other countries.

This is exactly what the Chinese government wanted, so that they could keep higher paying, more desirable manufacturing within China. These types of shifts in strategy by the Chinese government, which affect the dynamics, need to be understood and monitored.

However, the wholesale return of manufacturing back to the United States because of fuel costs is naive. First of all, the capacity of U.S. manufacturing is no longer here. Second, the skills are gone. Third, the capital required to recreate this business is not available. Fourth, the fuel costs need to be understood better. And finally, even with $200/barrel for oil, the U.S. is not the LCC that begets the lowest TDC.

For instance, note the relative fuel consumption by. Ocean transportation fuel consumption is the lowest of all modes, and in fact, it requires less fuel to get product from Shanghai to Los Angeles by ocean freight than from Memphis to Los Angeles by truck. It also requires less fuel to go from Shanghai to New York by ship than from Mexico City to New York by truck. In a similar way,

As for questions on costs, they can be answered based on TDC with the expectation that manufacturing for global markets, for the foreseeable future, will continue to be done outside of the United States.

What about the quality of globalization? I find that the people who have the most to say about quality in China are the ones who have never sourced a product from China. The reality is that you can purchase poor quality from China; however, you can also purchase high quality from China.

China and all of Asia are like most of the world: If you are only interested in low price, there is probably someone who can sell you lower quality products at a lower price. To say "You get what you pay for" sounds unsophisticated, but nevertheless, it is true.

Yet price is not the only factor that can cause a buyer to end up with low quality products. Much of the time, it is all about relationships. Make sure you are successfully managing your relationships with your suppliers. Keep in mind that there are supplier relationship management tools available to help build a bond and create "touch points" between the supplier and the buyer, even with long-distance relationships.

If you fail to specify what you really desire and fail to invest in the relationship, it should not be surprising to learn that you are disappointed with the quality you have purchased. To the contrary, if you invest in the relationship, invest the time to fully communicate your desires, and are willing to pay a fair price, my experience is that your quality expectations can be fully met by LCCs.

What about the markets for globalization? The markets for globalization are huge. In its annual Fortune 500 list, Fortune magazine writes, "Globalization is a fact of life for the Fortune 500." Fortune classifies 32 of the Fortune top 44 companies that report foreign revenue and concludes:

Nine companies do 50-75% of their revenue outside the United States. This includes:

Exxon Mobile--72.2% foreign revenue
Hewlett-Packard--66.6% foreign revenue
Dow Chemical--65.9% foreign revenue
Proctor & Gamble--58.2% foreign revenue
Ford Motor--54.8% foreign revenue

Nine companies do 25-50% of their revenue outside the United States. A few of these companies are:

General Electric--49.0% foreign revenue
Johnson & Johnson--46.9% foreign revenue
General Motors--44.2% foreign revenue
Boeing--40.7% foreign revenue
Dell--38.9% foreign revenue

Fourteen companies do 0-25% of their revenue outside the United States, including:

Wal-Mart--23.9% foreign revenue
Costco--20.0% foreign revenue
Home Depot--8.7% foreign revenue
Marathon Oil--8.7% foreign revenue

The market for globalization is not just for the large corporation, however. Typically, the percentage of foreign revenue is consistent for both large and small companies. Yet what may be more important than the percentage of revenue going outside the United States is the impact that globalization has on a company's bottom line.

For example, a study by the American Chamber of Shanghai, China (AmCham) divided firms into two categories:

U.S. firms that source less than 35% of their materials from China
U.S. firms that source more than 35% of their materials from China

In the study, the average profitability of firms that sourced more than 35% had more than double the profitability of firms that sourced less than 35% from China. Therefore on average, increasing the amount you buy globally has a very positive impact on profitability.

In addition, AmCham conducted a study of firms that only sourced materials from China versus the firms that both sourced and sold materials to and from China. They found that the average profitability of firms that apply dual objectives (source and sell) had profitability, on average, of 160%-plus above the companies that only sourced from China. Clearly, the markets for globalization are successful for both large and small organizations. The more global you become, the greater your profitability will grow.

What about the supply chains of globalization? It is wise to view the full length of the supply chain all the way from "Plan" to "Sell." The major steps are 'Plan-Buy-Make-Move-Store-Sell."

"Plan" includes business strategy, supply chain strategy, demand planning and sourcing.
"Buy" involves inventory management, purchasing and procurement.
"Make" is all phases of manufacturing, assembly and packaging.
"Move" includes customs, domestic transportation, global transportation, security and visibility.
"Store" comprises the receiving, storing, picking, packaging and shipping of products.
"Sell" includes merchandising, store operations, direct-to-consumer management, price optimization and replenishment.

Compared to a domestic supply chain, it is clear that a global supply chain is both considerably more complex as well as much longer in time and distance. The Supply Chain Consortium, a leading source for supply chain benchmarking and best practices knowledge, notes an average of 66 days for an order to reach its final destination when shipped from an Asian supplier to a West Coast port, and on to its final location.

But here is the key question: Isn't it true that a longer, more complex supply chain has more costs, more risks and more opportunities for problems than a simpler supply chain? The answer would seem to be obvious; however, it is not at all. The answer is: If the level of sophistication in planning and executing the supply chain is on a par with the complexity of the supply chain, the cost, risk and potential for disruption can be significantly less than when compared to a "simple" supply chain that is poorly planned and executed.

Given the issues of fuel cost, the elimination of China's VAT, the new China labor laws, inflation, etc., this insightful comparison is even more significant than ever. Globalization is not for companies that lack the experience and ability to globally plan and execute complex supply chains. So, it is imperative for your company to embrace globalization armed with more sophisticated supply chain planning and execution.

Conclusion: Globalization is North America, Europe and Asia. Without these top three, your supply chain is just not a global supply chain. With the dynamic nature of global businesses, it is important to pay attention to the GDP, TDC and LCC. These numbers will guide you in the right direction and help you ascertain the future for your supply chain. In a more localized financial perspective, always remember that "you get what you pay for." Take time to ensure that you are communicating with your sources and focus on your supplier relationships to get what you need.

Most of the companies that are succeeding already have revenues in foreign countries, and you have a big opportunity to increase your revenues by venturing in the global market.

Finally, keep an open mind about your supply chain. Don't maintain the old ways of doing business. "Plan-Buy-Make-Move-Store-Sell" to remain competitive. Most importantly, make sure your supply chain planning and execution are sophisticated.

Remember that there are four types of organizations:

Type 1: Organizations that deliver a local service (dentist, landscaper, realtor)
Type 2: Organizations that deal with products and avoid globalization
Type 3: Organizations that deal with products and naively pursue globalization
Type 4: Organizations that deal with products and intelligently pursue globalization

Type 1 and Type 4 organizations will be successful, while Type 2 and Type 3 will be out of business in a few years.

There is an abundance of misinformation in the marketplace today. It is essential to understand the challenges and opportunities of globalization and establish a business and supply chain strategy to aggressively move forward with globalization based on facts. Globalization is here to stay. Let's separate the facts from the emotions and get on with it.

ABOUT THE AUTHOR: James A. Tompkins, Ph.D., is President and CEO of Tompkins Associates, which designs and integrates global end-to-end solutions for supply chains. For more than 30 years, his practical expertise and leadership have helped hundreds of companies worldwide achieve supply chain excellence. He has written or contributed to more than 25 business books on leadership, global business and supply chain strategies. Tompkins works closely with companies to ensure that their supply chains fully support their mission and business plans, as well as support future growth. Tompkins Associates has headquarters in Raleigh, NC, U.S., with offices in Asia, Europe and Canada.
http://www.tompkinsinc.com

The world is no longer flat; in fact, it's coming to an end. The sky is falling because of globalization and its failings. Have you read the headlines?

"The China Misconnection"
"Globalization Comes Under Siege"
"Transport Costs Drive Manufacturing Back to U.S."
"Will High Oil Prices Reverse Globalization?"
"Will Sourcing Transport Costs Reverse Globalization?"

Have you heard the China scare tactics?

Quality and recalls
Counterfeiting and intellectual property
Environmental issues and fuel costs
Elimination of value-added tax (VAT)
New labor laws
Inflation and Chinese currency appreciation
Greater scrutiny of the supply chain by government agencies

Some folks are concluding that globalization is no longer relevant, and we can build walls around North America and live happily ever after. But let's take a step back and consider a few issues.

Of course, globalization drives major change, which leads to controversy. But change and contention do not mean evil. We need to stop acting on our emotions, and instead allow good business judgment to drive our understanding, decisions and acceptance of change.

Right up front, we need to understand that the discussion is not about China or "China-ization." It is about globalization. Globalization is not about where you source or sell products. It is about maximizing a company's profits by capturing global market share and optimizing the worldwide supply chain. Independent of what the latest publications or the U.S. presidential candidates claim, globalization is neither good nor bad--it just is.

Being for or against globalization is like being for or against breathing. If you are against it, you (or your company) die. If you are for it, you (or your company) will live, but what is the point?

Globalization exists, and we have three choices:
(1) fail to accept and then die
(2) embrace globalization, but execute poorly and fail
(3) embrace globalization, execute well and thrive.
I recommend the third choice.

So where do you begin? A good starting point is to understand the facts about globalization and separate them from the emotional standpoints. The remainder of this article will address the large-scale globalization issues that must be grasped in order for organizations to harness the power of globalization.

Globalization is not about every country around the globe. Eighty-seven percent of the world gross domestic product (GDP) is:

Europe (36%)
North America (31%)
Asia (20%), with Asia enjoying the fastest growing GDP.

The top nine countries of the world are in Europe, North America and Asia, and account for 66% of the world's GDP:

United States (26%)
Japan (8%)
Germany 6%)
China (6%)
United Kingdom (5%)
France (5%)
Italy (4%)
Spain (3%)
Canada (3%)

Very similar statistics exist for global construction spend (CS). Eighty-five percent of the global CS is in:

Europe (30%)
North America (23%)
Asia (32%), and the fastest growing CS is in Asia.

The same top nine countries for GDP also make up the top nine countries for CS. By 2016, Asia, Europe and North America will make up 89% of the global CS, with Asia being the largest at 45%.

Therefore, for practical purposes, the answer to "Where is globalization?" is North America, Europe and Asia. A global strategy must include these countries on these continents. Other locations may be worth considering, but only as additions to the base global strategy developed for these top three.

What about the costs of globalization? The costs of doing business globally are different than the costs of doing business domestically. In fact, the costs of global business are, and will continue to be, dynamic. Currently, the constant chasing of low-cost countries (LCCs) is killing companies that do not understand total delivered cost (TDC). The cost of making the product in China, Vietnam or Alabama is insignificant; it is the TDC to the ultimate consumer that is important.

There will be some changes in the best sources of products as globalization evolves, but these decisions need to be made in the context of TDC. For example, last year with the new labor laws and subsequent increases in labor costs, China was able to force some low paying, undesirable manufacturing into other countries.

This is exactly what the Chinese government wanted, so that they could keep higher paying, more desirable manufacturing within China. These types of shifts in strategy by the Chinese government, which affect the dynamics, need to be understood and monitored.

However, the wholesale return of manufacturing back to the United States because of fuel costs is naive. First of all, the capacity of U.S. manufacturing is no longer here. Second, the skills are gone. Third, the capital required to recreate this business is not available. Fourth, the fuel costs need to be understood better. And finally, even with $200/barrel for oil, the U.S. is not the LCC that begets the lowest TDC.

For instance, note the relative fuel consumption by. Ocean transportation fuel consumption is the lowest of all modes, and in fact, it requires less fuel to get product from Shanghai to Los Angeles by ocean freight than from Memphis to Los Angeles by truck. It also requires less fuel to go from Shanghai to New York by ship than from Mexico City to New York by truck. In a similar way,

As for questions on costs, they can be answered based on TDC with the expectation that manufacturing for global markets, for the foreseeable future, will continue to be done outside of the United States.

What about the quality of globalization? I find that the people who have the most to say about quality in China are the ones who have never sourced a product from China. The reality is that you can purchase poor quality from China; however, you can also purchase high quality from China.

China and all of Asia are like most of the world: If you are only interested in low price, there is probably someone who can sell you lower quality products at a lower price. To say "You get what you pay for" sounds unsophisticated, but nevertheless, it is true.

Yet price is not the only factor that can cause a buyer to end up with low quality products. Much of the time, it is all about relationships. Make sure you are successfully managing your relationships with your suppliers. Keep in mind that there are supplier relationship management tools available to help build a bond and create "touch points" between the supplier and the buyer, even with long-distance relationships.

If you fail to specify what you really desire and fail to invest in the relationship, it should not be surprising to learn that you are disappointed with the quality you have purchased. To the contrary, if you invest in the relationship, invest the time to fully communicate your desires, and are willing to pay a fair price, my experience is that your quality expectations can be fully met by LCCs.

What about the markets for globalization? The markets for globalization are huge. In its annual Fortune 500 list, Fortune magazine writes, "Globalization is a fact of life for the Fortune 500." Fortune classifies 32 of the Fortune top 44 companies that report foreign revenue and concludes:

Nine companies do 50-75% of their revenue outside the United States. This includes:

Exxon Mobile--72.2% foreign revenue
Hewlett-Packard--66.6% foreign revenue
Dow Chemical--65.9% foreign revenue
Proctor & Gamble--58.2% foreign revenue
Ford Motor--54.8% foreign revenue

Nine companies do 25-50% of their revenue outside the United States. A few of these companies are:

General Electric--49.0% foreign revenue
Johnson & Johnson--46.9% foreign revenue
General Motors--44.2% foreign revenue
Boeing--40.7% foreign revenue
Dell--38.9% foreign revenue

Fourteen companies do 0-25% of their revenue outside the United States, including:

Wal-Mart--23.9% foreign revenue
Costco--20.0% foreign revenue
Home Depot--8.7% foreign revenue
Marathon Oil--8.7% foreign revenue

The market for globalization is not just for the large corporation, however. Typically, the percentage of foreign revenue is consistent for both large and small companies. Yet what may be more important than the percentage of revenue going outside the United States is the impact that globalization has on a company's bottom line.

For example, a study by the American Chamber of Shanghai, China (AmCham) divided firms into two categories:

U.S. firms that source less than 35% of their materials from China
U.S. firms that source more than 35% of their materials from China

In the study, the average profitability of firms that sourced more than 35% had more than double the profitability of firms that sourced less than 35% from China. Therefore on average, increasing the amount you buy globally has a very positive impact on profitability.

In addition, AmCham conducted a study of firms that only sourced materials from China versus the firms that both sourced and sold materials to and from China. They found that the average profitability of firms that apply dual objectives (source and sell) had profitability, on average, of 160%-plus above the companies that only sourced from China. Clearly, the markets for globalization are successful for both large and small organizations. The more global you become, the greater your profitability will grow.

What about the supply chains of globalization? It is wise to view the full length of the supply chain all the way from "Plan" to "Sell." The major steps are 'Plan-Buy-Make-Move-Store-Sell."

"Plan" includes business strategy, supply chain strategy, demand planning and sourcing.
"Buy" involves inventory management, purchasing and procurement.
"Make" is all phases of manufacturing, assembly and packaging.
"Move" includes customs, domestic transportation, global transportation, security and visibility.
"Store" comprises the receiving, storing, picking, packaging and shipping of products.
"Sell" includes merchandising, store operations, direct-to-consumer management, price optimization and replenishment.

Compared to a domestic supply chain, it is clear that a global supply chain is both considerably more complex as well as much longer in time and distance. The Supply Chain Consortium, a leading source for supply chain benchmarking and best practices knowledge, notes an average of 66 days for an order to reach its final destination when shipped from an Asian supplier to a West Coast port, and on to its final location.

But here is the key question: Isn't it true that a longer, more complex supply chain has more costs, more risks and more opportunities for problems than a simpler supply chain? The answer would seem to be obvious; however, it is not at all. The answer is: If the level of sophistication in planning and executing the supply chain is on a par with the complexity of the supply chain, the cost, risk and potential for disruption can be significantly less than when compared to a "simple" supply chain that is poorly planned and executed.

Given the issues of fuel cost, the elimination of China's VAT, the new China labor laws, inflation, etc., this insightful comparison is even more significant than ever. Globalization is not for companies that lack the experience and ability to globally plan and execute complex supply chains. So, it is imperative for your company to embrace globalization armed with more sophisticated supply chain planning and execution.

Conclusion: Globalization is North America, Europe and Asia. Without these top three, your supply chain is just not a global supply chain. With the dynamic nature of global businesses, it is important to pay attention to the GDP, TDC and LCC. These numbers will guide you in the right direction and help you ascertain the future for your supply chain. In a more localized financial perspective, always remember that "you get what you pay for." Take time to ensure that you are communicating with your sources and focus on your supplier relationships to get what you need.

Most of the companies that are succeeding already have revenues in foreign countries, and you have a big opportunity to increase your revenues by venturing in the global market.

Finally, keep an open mind about your supply chain. Don't maintain the old ways of doing business. "Plan-Buy-Make-Move-Store-Sell" to remain competitive. Most importantly, make sure your supply chain planning and execution are sophisticated.

Remember that there are four types of organizations:

Type 1: Organizations that deliver a local service (dentist, landscaper, realtor)
Type 2: Organizations that deal with products and avoid globalization
Type 3: Organizations that deal with products and naively pursue globalization
Type 4: Organizations that deal with products and intelligently pursue globalization

Type 1 and Type 4 organizations will be successful, while Type 2 and Type 3 will be out of business in a few years.

There is an abundance of misinformation in the marketplace today. It is essential to understand the challenges and opportunities of globalization and establish a business and supply chain strategy to aggressively move forward with globalization based on facts. Globalization is here to stay. Let's separate the facts from the emotions and get on with it.

ABOUT THE AUTHOR: James A. Tompkins, Ph.D., is President and CEO of Tompkins Associates, which designs and integrates global end-to-end solutions for supply chains. For more than 30 years, his practical expertise and leadership have helped hundreds of companies worldwide achieve supply chain excellence. He has written or contributed to more than 25 business books on leadership, global business and supply chain strategies. Tompkins works closely with companies to ensure that their supply chains fully support their mission and business plans, as well as support future growth. Tompkins Associates has headquarters in Raleigh, NC, U.S., with offices in Asia, Europe and Canada.
http://www.tompkinsinc.com