By Tim Foster, Managing Director of Asia Pacific, Chainalytics
Trade blocs and intergovernmental alliances like NAFTA and the Eurozone have the power to alter the landscape of regional, interregional and global trade dramatically. The impacts of these agreements can be swift and powerful, ushering in change that runs the gamut from political and economic to cultural. Unprepared multinationals operating supply chains inside these trade blocs typically feel the effects of these changes quickly; but there are big rewards for manufacturers, distributors, and retailers that make smart decisions and plan early in the process for supply chain changes before the effects of trade impacts are felt.
The ASEAN Economic Community (AEC), consists of ten countries in Southeast Asia: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. The AEC now is now fast tracking its plans to implement economic integration initiatives to merge member countries into a single trade market before the end of 2015. When this effort ultimately takes off, the AEC will instantly become the eighth largest economy in the world. Though most US companies do not anticipate AEC’s goals will be met until 2020 or later, the supply chain implications of the AEC’s ambitious goals are massive enough to warrant taking a second look at refreshing supply chain networks in the region and start planning for optimised distribution and service sooner rather than later. As the region continues its acceleration away from low cost production centres toward developing consumer markets, supply chains can expect to be faced with additional complexity meeting these new demands. Strategies most likely to yield positive net results for companies operating within the AEC region are those structured around the most likely scenarios, but containing enough agility and responsiveness built in to account for factors that can not be predicted with great accuracy.
Understanding demand and buying behaviours When analysing demand in the ASEAN market, it is important to understand that this region can never be looked at as a single market, no matter how economically or logistically integrated it becomes. In fact, each country in ASEAN is a collection of several distinct markets. Consider that over 100 languages are spoken in the Philippines, and the Burmese government recognises 135 different ethnic groups living within Myanmar’s borders. These vast differences in culture, lifestyle, and language translate directly into unique consumer markets that are often quite disparate. Each ASEAN nation represents a diversity of cultures, religions, languages, art, geography, and correspondingly — demand signals. Individual demand segments have their own growth and profit potential, and recognising these nuances is key to designing an optimised value chain with the distribution networks to serve them. In some instances, historic data is available to guide the way; in others, demand forecasting that has no real foundation to build off of. Availability of useful demand data also varies between products and depends on a data collecting organisation’s technical diligence and expertise.
The explosion in mobile communication and digitisation is accelerating in ASEAN nations. This new flow of data is generating demographic, psychographic and behavioral information that can be interpreted and analysed to paint a more granular picture than ever before on emerging and expanding portfolio trends. In many cases, market intelligence is going from zero to 60 in record time.
A key step to prioritising unique demand segments lies in calculating the actual cost to serve. An array of factors like urban concentration, last mile transportation options, and existing infrastructure conditions dramatically affect tabulation of this cost. A true cost to serve must be accurately analysed with as much transaction-level detail as is available to provide a factual foundation for informed decisions to be made regarding market selection and optimal network design. The most effective supply chain strategies are derived from aggregate data that is dissected to identify the cost of serving each individual within each target market with as much confidence as possible.
Deconstructing the value chain
Multinational supply chain managers in ASEAN nations are managing an increasingly complex suite of supply chains, each complicated by varying terrain, infrastructures and consumer preferences. Deconstructing each regional chain into its component parts and determining where value is added validates each link; those whose value can not be explicitly justified should be questioned and compared against alternatives.
For example, a traditional manufacturer wholsaler- distributer-retailer value chain can be examined at every stop. Can the physical fulfillment role a wholesaler plays be outsourced to a logistics provider? How much would it cost to do so? If that cost is less than the margins withheld by wholesalers, savings can be achieved by assigning the function to a third party logistics provider (3PL). Any supply chain component that does not add financial or service value should be thoroughly evaluated and justified or rationalised.
Rural areas typically rely on traditional distribution center style supply chains, but in some cases opportunities exist for manufacturers to serve markets directly. The combination of demand forecasting and supply chain segmentation reveal opportunities to cut waste and reduce costs and/or increase service levels. Emerging markets like those in much of the ASEAN region must be evaluated frequently to uncover inefficiencies that can develop as the markets mature and settle into their grooves. The right key performance indicators (KPIs) will expose disruptive grooves before they evolve into ruts. Optimizing value chains requires challenging existing norms in a proactive way — there is no reward for Monday morning quarterbacking.
Navigating compliance bottlenecks Despite plans to reduce barriers to free trade in the region, various policies of protectionism are likely to remain in place in several nations. As governments and private investors build infrastructure to take advantage of new opportunities in the region, expect to see individual nations pass regulations designed to protect those investments. A recent example of this is Indonesia’s controversial draft law that would require any smartphone or tablet sold in the country to contain a minimum of 40 per cent components produced within the country. Though most experts agree this will simply create a black market for mobile devices, companies that want to capitalise on this market would face significant supply chain complexity. The growth and allure of these markets demands a deep inspection of their political climates and flexibility in supply chains that can adapt to measures like this when they occur. Particularly challenging is the pace at which non-tariff protection measures are developing and the rapid evolution of import/export processes. There is momentum toward requiring companies to regulate their own declarations in the region, but some governmental audit teams are diligent and penalties for breaches can be severe. This puts the onus of understanding and complying with all active requirements directly on theses companies and adapting with regulations as they change over time. Rigid supply chains will quickly buckle in this fluid environment. There are discrepancies between what national leaders and company executives think is possible in the AEC; but there is no doubt that the faces of markets in Southeast Asia are evolving rapidly and efforts to integrate trade within the region will impact supply chains there. Whether looking to ASEAN nations for new markets or considering a supply chain “refresh” to ensure rapid adaptation, the changes on the horizon will demand the flexibility to deal smoothly with the ebb and flow of trade developments as they unfold.
