Globalization and Proximity
Sourcing has become increasingly independent of location. The days of a supplier matching prices with a few local rivals are disappearing, and many SMEs now compete with a multitude of suppliers worldwide. Increased global demand for customized products flows throughout integrated chains, requiring flexibility, responsiveness, and the ability to customize. As OEMs compete on a global basis, their supply chains must support them with global capabilities. This support can take the form of overseas factories, warehouses, and distribution centers; the production of parts with metric dimensions; certification to international standards; learning to work effectively with other cultures; the use of communications systems that transcend global distances; and the use of modern transportation methods. SMEs may also have to expand their own supply chains internationally, procuring goods and services wherever they can be most competitively obtained. For example, Fusion Lighting, an SME in Rockville, Maryland, procures power supplies from Sweden, die castings from Taiwan, magnetrons, from Japan, and reflectors from Germany and then ships finished lighting products to OEM customers in the United States, Japan, and Sweden. The custom die castings from Taiwan, although equal in cost, delivery, and quality to those made in the United States, are produced using tooling that cost one-half the going price in the United States.
SMEs seeking to expand into foreign markets should carefully analyze the full costs, risks, and benefits of such a strategy. Political requirements regarding local content, sales ventures, and repatriation of funds,
as well as the risks associated with fluctuating currency exchange rates, can have significant effects on competitiveness and profitability.
One of the key differences between traditional supply chains and highly integrated supply chains is the degree of proximity between members and the resulting differences in the efficiency of joint operations. Geographic and cultural proximity traditionally provided business advantages for SMEs, many of whom served only local customers and had to compete only against other local suppliers. Globalization, electronic communications, and modern shipping capabilities now enable suppliers from all over the world to compete for local business. Large suppliers can typically afford proximity capabilities that SMEs cannot, including plant sites near their customers and skills in dealing with different cultures. To remain competitive, SMEs may have to improve their organizational, cultural, and geographic proximity to serve an increasingly widespread customer base.
Organizational proximity can take several forms, including membership in joint project teams or the placement of employees in one another's facilities. Cultural proximity, which typically evolves over time, can be achieved through the adoption of common business practices, jargon, ethical standards, and language. Cultural proximity is especially important for doing business with customers from different countries and cultures. The dividends of cultural proximity can include repeat business, loyalty, and assistance in problem solving during times of crisis.
Geographic proximity may involve locating supplier facilities adjacent to OEM operations. For example, long-term relations between beverage producers and container manufacturers led container suppliers to locate their fabrication plants adjacent to breweries. Cans are drawn, finished, and moved on conveyors through a common wall into the brewery where they are filled, sealed, packed, and shipped, all without human contact.
Proximity in an international supply chain can require investments in metric dimensioning, compliance with international standards, and participation in international trade fairs, such as the one held annually in Hanover, Germany. Partnerships with foreign companies can be used by SMEs to obtain cost-effective access to foreign markets and sources of supply. Effective international participation requires knowledge of the ways of doing business in other countries and cultures. International consultants can sometimes fill these gaps, but management must be appropriately trained, especially for face-to-face communications and negotiations. Training programs, such as the Massachusetts Institute of
Technology (MIT) Japan Effectiveness Training course, can be helpful in this regard.
The Internet and the Web are great equalizers in proximity and global presence, providing equal opportunities for suppliers large and small, foreign and domestic. A presence on the Web is becoming increasingly important for many SMEs because it can deliver the corporate message to a global audience and increase business opportunities. It can also increase risk, however. Advertising the latest capabilities, product features, and prices informs both customers and competitors. Requests for product samples may come from potential customers or, either directly or through third parties, from low-cost competitors in countries with scant regard for intellectual property rights.
Because most SMEs are not in a position to locate plants near each of their customers, they must find other ways to deal with the issues of proximity. Some of the problems of distance can be overcome by means of electronic systems, such as e-mail, electronic data exchange, and video conferencing, which can provide some of the benefits of proximity at lower cost. Supply chains in the computer industry, for instance, are typically geographically scattered and have little organizational or cultural proximity, but they do have close electronic proximity. However, no matter how advanced the communications system, true geographic proximity always provides an advantage because there is no substitute for face-to-face contact. "Take the look in the customer's eye when you tell him a new price," says Thomas W. Malone of the MIT Sloan School of Management. "That's very useful information" (Washington Post, March 6, 1999).
Recommendation. Because Internet technologies and modern transportation capabilities enable suppliers from low-wage areas to compete effectively with U.S. small and medium-sized manufacturing enterprises (SMEs), pressure on SMEs to improve their cultural, organizational, and geographic proximity to their customers and suppliers has increased. Even SMEs with limited resources can respond to some of these challenges at low cost through increased cultural education and use of the Internet and Worldwide Web.