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Global manufacturers enhance supply chain networks for efficiency and innovation
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Wednesday, July 10, 2013

Global manufacturers are putting their supply chains at the centre of their business strategies to serve as the foundation for operational efficiency and collaborative innovation, according to KPMG’s 4th annual Global Manufacturing Outlook 2013 - Competitive Advantage- Enhancing Supply Chain Networks for Efficiency and Innovation. Ironically though, nearly half of global manufacturers currently do not have visibility of their supply chain beyond ‘Tier 1’ suppliers.

Only 9 percent of the 335 respondents of the KPMG survey say they have complete visibility of their supply chains, and a similarly small percentage say they are able to assess the impact of an unplanned supply chain disruption within hours; 36 percent said it would take between 1 and 6 days to address the impact.

“Obtaining real-time visibility across all tiers in the supply chain can significantly increase speed to market, reduce capital expenditures and manage risk,” says Jeff Dobbs, KPMG’s Global Chair, Diversified Industrials and a partner with KPMG in the United States.

“Moving toward a demand-driven supply chain is probably the single most important step a global manufacturer can take today. The winners will be the ones who can network real-time across their entire supply chains, reducing the information lag that costs companies significant time and money.”

Forty-four percent of respondents overall say they use e-mail, fax and mail as the means to communicate issues about demand in the supply chain. In companies with revenues of US$5 billion and larger, 40 percent of respondents use web-based partner portals to share information about demand.

“This may not be surprising given that much of the supply chain technology is outdated,” Dobbs commented.

Focus on cost reduction, growth and innovation

As the supply chain takes centre stage in the business strategies of global manufacturers, executives continue to eye tepid economic growth with subdued optimism: reducing cost structures (51 percent) again leads the ranking as a priority, followed by sales growth (36 percent) and improving risk controls (36 percent).

To keep costs down, over 40 percent say they will exit unprofitable product lines or business units. To manage risk, 58 percent plan to regionalise or localise their supply chains.

China and the US remain the top sourcing locations, but the report shows that many will keep sourcing closer to their major markets over the next 2 years. Nearly 90 percent of US respondents will increase sourcing in the US followed by Canada (18 percent) and China tied with the UK at 13 percent. In China, 85 percent plan to increase sourcing in China, 32 percent in Hong Kong and 6 percent in the US.

On the growth front, a third of all companies, and 47 percent of larger companies (over US$5 billion in revenue), are looking to mergers and acquisitions; 44 percent say they will invest in Greenfield opportunities in growth markets.

“In line with the global outlook mergers and acquisition activities are becoming a preferred means to invest in Africa’s manufacturing markets. It was surprising that Africa, given the emerging middle class on the continent, where there is expected to be 500 million new consumers over the next 15 years, was not as prominent as one would have expected in this latest issue of the Global Manufacturing Outlook. Africa represents a massive potential growth front where the market is hungry for consumer and manufactured goods” says Nick Southon, KPMG’s Africa Diversified Industrial Sector Lead Partner.

Manufacturers maintain that investment in R&D is essential for growth: 42 percent of respondents expect to invest 4 percent or more of revenue in R&D and innovation over the next 24 months which is 15 percentage points higher than the level being invested currently, according to the findings. Sixty-eight percent of respondents say their R&D will largely be incremental, with a focus on enhancing existing products and lines, 31 percent plan to invest in breakthrough innovation.

Innovation borne out of the supply ‘network’

The KPMG 2013 report points out that the classic reference to a global manufacturer’s suppliers as a ‘chain’ is giving way to the growing view of a supply ‘network’ where collaboration and innovation can thrive. “As companies step up investment in innovation, whether in search of breakthrough R&D or incremental improvements to existing products and services, they are increasingly looking to their supply network for ideas,” Dobbs commented.

Just over half of respondents (51 percent) say that partnerships with suppliers will define the direction of innovation, and over the next 2 years, 57 percent expect at least 10 percent of their revenues to come from innovations.

Yet paradoxically, the biggest challenges manufacturers say they have with regard to innovation is aligning it to the business strategy (34 percent), and the complexity in collaborating with suppliers and partners (32 percent).

“Supply chain partners will play a critical a role in a manufacturer’s innovation strategy as part of their investment in R&D,” KPMG’s Dobbs said. “Mitigating the challenges of collaborating with partners is complex; close familiarity with who your suppliers are and how they operate will certainly help optimise performance.”

KPMG’s Dobbs said he believes notable shifts in the way companies are redefining and investing is indicative that manufacturing is on the verge of a “hyper-innovation era.” 

“The sector may appear to be slowly evolving, but it is on the cusp of explosive change in the next 3 to 5 years. The prolonged stage of intense competition, modest growth and a hyper-focus on cost reduction has made a number of global manufacturers exceptionally fit.” 

“With new data technologies proliferating to enhance partnering, shared efficiencies and visibility, we’ll start seeing some breakthrough and disruptive innovation in manufacturing – not only to the products but also to the process.”

Southon concludes by saying; “One thing we know for sure, the volatility that has been experienced both globally and to a lesser extent in Africa will continue. The strategies, relationships, partnerships and tools to compete in the ever-changing environment need to become much more sophisticated. The determination of the right innovation business model will be critical to stay competitive in the mature markets and to capitalise on growth opportunities in the emerging world.”



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