Cracking Emerging Markets, Part 1: The Challenges
Nick Ostdick - September 08, 2016
For OEMs, expansion into new or emerging markets can be both a blessing and a curse. While expansion into new pools of customers means growth, increased profitability, and an enhanced global footprint, it also means great uncertainty and complexity in terms of navigating the nuances and needs of each new market. No two markets are the same and manufacturers must devote time, resources, and talent to understanding what differentiates each new market - this means not only understanding the benefits of expansion, but also the challenges.
In a recent entry, we discussed the automotive supply chain’s migration to Mexico as the newest hot spot for manufacturing and distribution. Burgeoning infrastructure, free trade agreements, and government incentives have made Mexico a value-added location for OEMs looking to expand and growth their operations on a global level. However, Mexico also presents manufacturers with several high-level difficulties in establishing operations there, especially when it comes to resource procurement, personnel and labor, and remnants of aging and outdated rail and chassis networks.
Expansion and growth in new markets is never a one-size-fits all proposition, but at the same time OEMS can learn a lot from expansion in Mexico in terms of the big-picture hurdles they face when establishing new production lines and facilities. In this, the first part of our series on emerging markets, we’ll explore a few of the main pain points of growth and expansion in new markets and OEMs can create best practices to overcome these challenges for a more streamlined global production network.
Whether it’s aging or non-existent infrastructure, the geographical makeup of a region, freight costs and investment, or partnering with local transportation providers versus existing carriers, transportation is a major concern when establishing operations in a new market. Orders are only as good as the reliability of delivery to customers, and OEMs must take into account the subtleties of transportation logistics within each market to ensure on-time delivery in good order. For example, a market with substandard rail lines could force an OEM to rely more heavily on chassis transport, which means a greater focus on fuel prices, route efficiency, and volume of product for each load. In addition, companies must decide whether localization of this service is a value-added proposition rather than relying on an external carrier who might offer a more competitive cost structure, but who may not be as familiar with the region.
Transportation management systems (TMS) can go a long way in providing in-transit visibility as to the location and status of shipments, however, companies must view transportation as part of their larger production strategy - the ease, cost, and efficieny of freight can very well dictate the levels at which a manufacturer can engage in planned production programs.
Imagine a company’s production network consists of a facility in Germany and a new hub in an emerging market. The facility in Germany supplies the new facility with component parts essential for production. However, a bottleneck in the flow of this product from Germany to the new market results in an overall disruption that reverberates throughout the company’s entire value chain. How does this company react? What measures do they take to overcome this bottleneck? What plans do they put in place to remain agile and responsive? These are the questions manufacturers must address when expanding into new markets - How can we ensure continued production in the event of bottlenecks in our overall supply stream? The solution to this concern can range from inventory management - establishing enough buffer stock at the new facility to weather any disruptions - to once again operating on a localized model and partnering with regional suppliers to help bolster supply.
Either way, the sourcing of materials and resources a critical aspect of expansion companies must consider as they grow in new markets.
As we just discussed, the issue of inventory management - whether it’s component parts necessary for planned production or the volume of product manufactured in the new market - in large part because demand planning, forecasting, and modeling based on historical data just isn’t available. How can an OEM utilize such data if they’ve never before operated in this market and thus don’t know how aspects like transportation and materials will come into play? As such, adjustments and modifications to inventory to prevent overages and shortages may be a regular function of supply planners and managers as OEMs begin production and accumulate data specific to that market.
While solutions like BOM management, Plan for Every Part, and other inventory optimization technologies can help companies gain visibility into their current supply situation, the complexity of lean, agile inventory management can be a significant pain point for OEMs operating in new markets in the short and mid-term future.
Check back in the coming weeks for parts II and III of our series on the automotive supply chain in emerging markets and how manufacturers can leverage best practices for success in these new markets.