In the first two decades of the 21st century, we will experience more change than in the entire 20th century, predicts fabled futurist Ray Kurzweil (M.I.T.’s Inventor of the Year in 1998).

The magnitude and speed of this change is already visibly transforming all aspects of human life including a major revolution in supply chain and logistics management. The main engines of business change are globalization and a simultaneous technological revolution, in the context of significant political realignment. Globalization forces all enterprises to adopt a worldwide perspective to survive; technology enables efficient globalization and organizational restructuring at decreasing costs.

Globalization has opened enormous new supply and demand markets, brought substantial new talent into global business and is diffusing the sources of innovation across the world.

It has produced major changes of historic scope:

•     Decoupling of procurement, production, distribution and consumption of goods, services and information;

•     Maximization of economies of scale, scope and location;

•     Homogenization of supply, demand and management characteristics

•     Division of labor and trend towards equalization of compensations;

•     Increased competition and substitution;

•     Accelerating diffusion of product and process technologies;

Globalization is not a choice. It is a restriction imposed by the world’s economic evolution, which will continue to accelerate in the years ahead.

The revolution in information processing and communications brings most people in the world into instantaneous contact at low cost; this induces changes in business and organization structures to maximize their efficiency.

Moore’s Law summarizes the technological revolution: computer power will continue to double every 18 to 24 months, and its unit cost will continue to decrease at over 30% per year. No other resource has comparable performance. Thus, the foundation of every successful strategy is the replacement of all other resources by informational resources, whenever feasible.

From an organizational viewpoint, we have seen in the last few decades that information technology has enabled the restructuring of companies from vertical, functional organizations, to horizontal, process organizations, structured across functional lines. It has also enabled very close relationships between suppliers and customers that can work cooperatively across the world, for mutual benefit.

Impact on enterprise organization

At the beginning of the 20th century, manufacturing underwent a major transformation with the introduction of the mechanized production line by Henry Ford. To maximize efficiency and minimize transaction costs, Ford built a vertically integrated manufacturing company that went from iron mines to automobile assembly plants. At the time, this approach made economic sense.

However, with success came much increased volumes, and Ford saw the advantage of some specialization: buying instead of making its own steel, tires, textiles and glass. This was a substantial step towards the decoupling of economic activities, a fundamental concept at the heart of the current transformation of global production and logistics processes.

Adam Smith foresaw the desirability of process decoupling two centuries earlier. At every major stage of a manufacturing process, he observed, it was advantageous to establish whether the process should take place in-house, or its outputs purchased from other, more efficient companies, and integrated into the material flow instead.

In the U.S., process decoupling accelerated in the 1970s. Companies began to obtain cost and service advantages by moving into their warehouses some manufacturing processes designed for postponement. This started to blur the distinction between manufacturing and logistics facilities.

Design for postponement was the other side of the process deployment coin. Traditionally, the location of manufacturing processes took advantage of major weight loss by locating facilities near their main raw materials supply points; this was process design for anticipation. For example, since it takes about 3 tons of wood to produce 1 ton of paper, it makes sense to locate pulp or paper mills very close to the woodlands. Then, pulp sheets are transported to distant paper mills, or paper rolls are transported long distances to converting plants. These transform the paper into boxes, labels and other paper products, near their consumption markets. The resulting manufacturing/logistics system meets customers’ requirements and maximizes benefit for the paper companies. A similar approach has been traditional in other continuous manufacturing process businesses.

The increasing transfer of processes among facilities across the world proved to be the most efficient manner to deploy capacities and inventories to meet global customer demands. This approach replaced the location of fully integrated facilities of traditional types, such as manufacturing, assembly, and warehousing. It became much more profitable to look under the traditional facilities’ roofs and decide how best to decouple and deploy the processes underneath. This approach gave rise to mixed facilities where traditional manufacturing and logistics processes took place, thus increasing company productivity.

The main limitations to decoupling processes are operational and financial. From an operational viewpoint, the main restriction is that the in-process goods exiting a process must be transportable to the subsequent processes with minimum damage or loss. When this is not technically feasible, the processes in question must be co-located so that the material transfers between them only require materials handling, without transportation. From a financial viewpoint, the aim is to minimize the total landed cost at customer locations, or to maximize an extended enterprise’s profit contribution to its partners, while meeting customers’ requirements.

The advantages of process decoupling and deployment are compounded by the availability of powerful informational technologies, such as the Internet and wireless communications, that make it economically feasible first to offshore processes and then to outsource offshore processes to local partners to maximize economic advantages.

Under these conditions, companies can obtain economies of scale and access to new capabilities using specialized partners worldwide. They also obtain additional economies of location by placing each process at the best global locations for it. The result is the emerging global process network, which performs some processes at a central company, the network Orchestrator, and independent partners provide the rest of the processes needed to complete the offers to customers. The Orchestrator selects the partners and ensures that all partners work in a well-coordinated manner so that the finished products and services are delivered to customers efficiently and reliably.

However, the advent of global crime, terrorism and conflicts, and potentially massive climate changes, impose the need to look for process network structures that are above all very robust, i.e., they can withstand and respond effectively to significant, instant changes in the business environment. Even during emergencies, these structures must also be capable of continuing to perform near optimally, i.e., in a manner that meets customers’ requirements while maximizing total benefits for the Orchestrator and its partners; this points to an incipient trend towards networks’ regionalization.

We are living in times characterized by increasing speed, complexity, risk and uncertainty. Thus, in addition to the considerations stated above, we need to consider also the consequences of doing business in many different countries, with different legislations, different business customs, different political and social stability, different economic conditions, different currencies with varying exchange rates, different rates of growth and inflation, and so on.

Under these conditions, the Orchestrator now has a far more complex task than before: the design and management of robust global networks to optimize the deployment of processes and simultaneously determine their preferred ownership, by location. That deployment results in the specification of the facilities required to house the processes: their number and location, their ownership, the flows among them, and especially, their mission: the processes they must perform and their characteristics.

Information technology to the rescue

Powerful computational techniques, enabled by contemporary computers, greatly facilitate this task. We find that the size and complexity of the models required to determine the best configuration for a robust, global process network cannot be performed using pure mathematical optimization techniques: the models are too large to accomplish the task in an acceptable time. If the models are simplified or aggregated too much, the results obtained have limited or no practical value: their results are optimal but irrelevant.

Genetic algorithms and related mathematical techniques are being used to generate models of very large, very detailed global process networks representing all their strategic or tactical options. Those techniques, used in conjunction with mathematical optimization techniques, enable the design of global process networks that are very robust and near optimal.

The use of optimization techniques as part of calculation engines provides several important byproducts. First, an optimal solution maximizes the benefits for the enterprise under the stated conditions (thus it is very desirable to be near those assumptions). Most important, it enables systematic sensitivity analysis, to determine for any inputs, how much they can change without affecting the structure of the optimal solution. An important and useful characteristic of optimal solutions is that they are most often counter-intuitive. Thus, they reveal unusual, unexpected ways of deploying and allocating resources leading to serving customers efficiently while maximizing benefits.

These new technical approaches not only enable the design and management of very competitive process networks and their coming replacements. They also enable the incorporation into them of other, newer concepts that are proving extremely effective. To illustrate this point, let us consider the motorcycle industry in China.

A Chinese illustration

A few years ago, major Japanese motorcycle manufacturers established plants in China, typically in partnership with state-owned enterprises there. They included Honda, Suzuki and Yamaha. They incorporated the latest Japanese production technology and work design. They planned to take over the entire Chinese market and export worldwide from those facilities. However, eventually they found that local, private Chinese manufacturers, located mainly in the city of Chongquing, were manufacturing motorcycles of similar quality and design at a much lower cost than their lowest possible cost. Those companies include Dachangjiang, Longxin, and Zongshen, practically unknown outside China and South East Asia to this day.

Given the enormous disparity of cost for similar quality and design motorcycles, the University of Tokyo, the most prestigious in Japan, sent a mission to study the production processes utilized by the Chinese motorcycle manufacturers. They wanted to learn how it was possible for the Chinese manufacturers to obtain such enormous cost advantage without sacrificing features or quality. Their conclusions sent a tremor throughout the Japanese motorcycle industry and beyond: they explained how the Chinese manufacturers had implemented a new type of approach that worked much more efficiently that the ones used by the Japanese companies. They called the approach “Localized Modularization.”

The approach they described is the step beyond supply chain orchestration (the self-organizing process networks of partner companies). In this approach, the motorcycle company, the network Orchestrator, designs the motorcycle around a series of process modules and components. The Orchestrator develops very general specifications for the components outsourced to partners. Typically, the specifications consist only of the purpose, main external dimensions and the weight of each component. It is up to the partners to do the detailed design required to provide the components to the Orchestrator in the quantities and within the time and cost agreed beforehand.

Furthermore, the Orchestrator typically deals with several partners for every major component. This is a significant difference from the supply chain approaches used by U.S., Japanese and European companies, who try to minimize the number of suppliers for each part or component. However, an important advantage the Chinese companies obtain is the flexibility to use different suppliers, using different designs, to meet the particular requirements of different customers.

The consequence of this new approach is that Chinese motorcycles now account for more than 50% of all motorcycles sold in the world and their market share is increasing. In particular markets, such as Vietnam, they have conquered the lion’s share of it. In 1997, Honda controlled about 90% of the Vietnamese motorcycle market. Five years later, their market share was down to 30%, and right now, it is estimated at about 10%. The rest is controlled by Chinese manufacturers. The price of the motorcycles sold in Vietnam fell from about $700 in 1997, to under $200 now.

This is not an isolated occurrence: China is now at, or near the heart of every major value-adding manufacturing network in the world.

Looking at the future

We are living amidst the next revolution in supply chain and logistics management. This revolution goes so deep that it makes little sense to use the label supply chain to describe it.

We are no longer looking at structuring “supply chains” integrating a minimum of suppliers at one or more tiers, traditional manufacturing and logistics facilities, wholesalers, retailers, and customers. Instead, we are now looking at integrating a redundant number of suppliers at multiple tiers, in many places, and especially, at the optimal, global deployment of processes that defines the resulting facilities, their missions and characteristics. We refer to this entity as a process value-adding network (VAN)-not as a supply chain. It can efficiently represent the conditions demanded by localized modularization and other conditions we foresee coming in the near future.

Typically, an optimal, robust, global process VAN has a total cost 5% to 15% below the cost of an optimal supply chain with classical facilities serving the same customers with the same service levels. These additional benefits are primarily obtained by design for anticipation and for postponement, by economies of scale, scope and location at the process level, and by access to partners’ specialized design and process knowledge.

Looking beyond, we can already see that the main elements in the process VANs of the future will be the intensive use of nanotechnology and related technologies, such as graphene films, in manufacturing and the mass use of RFID and its successors in logistics. These developments will bring about major changes in the characteristics, costs and locations of processes, will increase network robustness, and will enable companies to obtain global, real time visibility of their entire value-adding networks at low and decreasing cost.

Following Kurzweiler’s forecast, we can expect to experience more change in the next five years than in the previous 20. And those changes will happen suddenly, like earthquakes, making life increasingly interesting. wt