Out-Law News 3 min. read

Tech businesses need 'flexible, scalable, cost-effective and risk tolerant' supply chains to grow

The shortening of technology product lifecycles is driving a need for businesses to reconfigure their supply chains, especially when operating in emerging markets such as China, according to a new report.

A new white paper published by US-based logistics company Exel said that the rise of the middle classes in emerging countries as well as urbanisation provides technology companies with opportunities to grow their business.

However, it identified a number of supply chain issues that those companies need to address to realise their potential in those markets.

"To prosper they must do three things at once: be prepared to fulfil rapidly growing and highly volatile demand patterns; operate in a very complex environment caused by inadequate infrastructure and complex and highly divergent regulatory requirements; hedge their bets regarding inventory carrying decisions both to ensure supply and avoid obsolescence," the report said.

"To capitalise on this opportunity, the sector must create supply chains that are flexible, scalable, cost-effective and risk tolerant," it said.

Specialist in manufacturing supply chain contracting Jayne Hussey of Pinsent Masons, the law firm behind Out-Law.com, said that the risk of disruption in the supply chain is a one potential barrier to the growth of technology companies. She said the businesses need a supply chain management strategy to recognise the risks and put measures in place to address them.

"Too many businesses leave themselves exposed to significant business risk by imposing general contractual obligations on business continuity on their main, direct suppliers only," Hussey said. "However, many businesses are as reliant on smaller suppliers further down the supply chain yet do not have clear visibility of their reliance on them or have proper controls over them."

"Businesses need to mitigate the risks associated with disruption at every point in the supply chain as increasingly disruption occurs lower down the chain. The implementation of an effective supply chain management strategy at all tiers should be a pressing issue for manufacturers. A robust strategy can deliver a competitive advantage by allowing a business to reach key suppliers in advance of their competitors," she said.

In their paper, authors Lisa Harrington, a University of Maryland academic, and Dr Jan Thido Karlshaus, vice president of DHL Supply Chain's global technology sector, said that technology companies cannot adopt a 'one size fits all' supply chain solution if they want to achieve their growth potential internationally.

"It is essential that technology companies tailor their supply chain solutions to the specific challenges of the individual markets," they said. "For instance, transport infrastructure is severely lacking in Brazil but well established in key parts of China. Bureaucracy can be extremely difficult to overcome in markets such as India and Nigeria, whereas problematic customs systems are the major issue in Brazil."

"Companies must recognise that there are often vastly different supply chain requirements depending on which customer groups are being served. These unique consumer challenges require companies operating in emerging markets to create a supply chain that can not only be tailored to local policy, infrastructure and demand, but can also leverage the benefits of standardising core supply chain elements in order to avoid duplication and achieve overall cost-effectiveness," the report said.

The technology companies were also urged to manage the risks they face by being flexible in how they test different markets for demand for their products. The measures adopted must be able to be scaled up quickly, in a way that has been "vetted in advance", to ensure that the companies can meet demand levels in a way which both costs and risks are controlled.

It said that in some emerging markets, technology companies may need to account for a 20-30% growth in their supply chain capacity to be able to meet consumer demand for the product within the first year of entering that market.

"Network and operational agility become key differentiators for best practice technology supply chains," the report said. "This agile approach revolves around being asset light, but with access to fully qualified capacity when and where it is needed, typically through partnerships with logistics service providers... Sales volumes in emerging markets can expand and contract rapidly, and demand is difficult to forecast, given the nature of new markets. Therefore, technology firms must develop effective strategies both to mitigate and to capitalise on the demand volatility."

The businesses can take advantage of "postponement solutions" which allow products to be customised and configured late so that they can be "redirected away from markets that suffer last minute downward fluctuations in demand", it said.

The Exel report also highlighted the need for technology businesses to prioritise regulatory compliance and quality over "low-cost quick fixes". It identified complex regulatory challenges the companies will meet when expanding into emerging markets, such as in relation to health and safety regulations, data protection requirements, tax obligations and environmental duties.

The companies must also be aware of the potential for organised crime to affect their business and of bribery and corruption in certain countries, it said. That activity, if engaged in by the companies, may be subject to "extra-territorial powers" of western governments as well as local laws.

"With such strong consequences for making the wrong decision, technology companies must choose wisely when forming partnerships for emerging markets, including carefully evaluating whether local providers have the adequate capabilities to meet customer requirements and fulfill contractual obligations," the report said. "The selected logistics and supply chain partner must not only meet the company’s own standards on compliance but also meet the legal standards required by the regulatory systems of the different countries in which they are active. This is essential in terms of maintaining brand value and avoiding the risk of harmful and costly litigation."

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