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January 12, 2021

What is holding back innovation in South East Asia’s supply chains?

What is holding back innovation in South East Asia’s supply chains?

In a world where our smartphones can conjure up all means of services and your browser seems to know what you want even before you do, this may seem like a ridiculous question.

But we are coming at it from a slightly different angle.  How does South East Asia nurture leading companies such as Grab and Go-Jek, yet within the region we barely use route optimization and telematics in mainstream logistics?

We have been working in this region with both multinational and local Asian businesses for over 20 years.  It is disappointing, but a consistent trend we have noticed has been an ever-diminishing willingness to ‘stretch’ for ambitious targets.

A lot has been written on the fact that, while businesses recognize a need to innovate, they find it extremely hard to do so.  

In this short paper, we want to highlight some observations on how innovation is constrained in South East Asian Supply Chain and Distribution, and what to do about it.­

 

CONSTRAINT 1: The dispersed and fragmented nature of supply chain and distribution

Company supply chains incorporate multiple external parties and have to be robust enough to handle a vast number of variables that can disrupt performance, undermine sales and damage customer relationships.

Businesses therefore work hard to limit the potential for tension and/or disruption within their supply chain.   

More often than not, this translates into management avoiding dialogue on any changes that might ‘rock the boat’ with influential stakeholders.  The result is that inertia sets in.  We would argue that in many cases, the risk of not driving change is now far greater than the risk associated with change. 

 

CONSTRAINT 2: Lack of internal skills and bandwidth

We are noticing that many companies (now running very lean) have become fearful of supply chain innovation because they do not believe it can be executed without potential disruption.  So, why take the risk? 

Returning to the question about route optimization and telematics.  Here is a perfect example of the skills and bandwidth problem.  The tools, the digital maps and user’s experiences are all around us – but businesses fear that they will neither be able to effectively implement new systems, nor enforce the required disciplines (and make them stick) on the shop floor.

Although, within South East Asia, huge supply chain advances have been made in the past 25 years, the pool of managers with in-depth experience (particularly in development practices) is still proportionally less than in the developed economies of Europe, North America, and Japan.  Furthermore, very few managers in South East Asian economies will have ‘come through the ranks’, gaining the hands-on operations experience that can make all the difference when trying to drive change that sticks.

 

CONSTRAINT 3:  Organization structures and dedication to corporate processes

Many years ago, we designed a time-slotting process to control the shipping of product out of our client’s production plants.  This involved developing a small software program to record vehicle movements in and out of the plants.

This project had an immediate impact on product availability, helping the client reduce logistics costs while growing sales by 30% over the following 15 months.  

Yet, 6 months after implementation, when we asked if we could adapt the program to capture movements in/out of external depot sites (neatly closing the primary transport loop) we were told this development (requiring about 2 days’ effort) was blocked because the company’s global ERP system was going to be extended to cover transport.  To the best of our knowledge, 10 years later, this ERP extension has still not happened.

Our client could see the obvious logic of our plan…but it was not worth the corporate battle he would have to fight.  We have experienced this many times over.

 

CONSTRAINT 4: Fear of disrupting is greater than that of being disrupted

When discussing development opportunities with clients, we notice that, in some organizations, there is zero appetite for anything that has not been repeatedly proven and that can be implemented with little effort and at absolutely no risk.   

We note that this is particularly true when dealing with manufacturers’ distribution networks where, naturally, there is wariness of risking any disruption of a key revenue channel.  The question, however, is when does ‘doing nothing’ present a greater risk than ‘doing something’?

This may relate, perhaps,  to a question of urgency.  However, at a time when General Trade networks are coming under immense pressure1  we see little evidence, in the FMCG sector at least, that the potential threat from changes driven by the digital sector is being addressed.

1: See our previous piece: Is South East Asia’s General Trade Dying Post Covid-19?

 

CONSTRAINT 5: Margins being too thin

We see this as being particularly relevant to the Third Party Logistics2 sector upon which many companies rely.

Logistics outsourcing has delivered major breakthroughs for SE Asian based businesses since the mid-1990s.  The sector introduced modern logistics practices that lifted product availability from around 65% to 95% while massively enhancing visibility of the logistics process.

Unfortunately for the 3PLs, their client base then applied practices from the developed markets to commoditize the service – driving competition and margin squeeze.

The effect is that:

  • Clients gain short-term wins through short-term contracts that shave 3PL costs while just about keeping service at acceptable levels
  • 3PLs have neither the margins nor the recovery time to invest in innovation

The result is that we get more of the same.  A typical 3PL warehouse in the FMCG sector looks and runs exactly the same way as those being rolled out 20 years ago.3

2: We note that, post-covid, a number of our clients have expressed new interest in exploring outsourcing as a means of reducing logistics costs.
3 : A minor exception. Reach truck engineering has improved and new warehouses frequently have an extra pallet level.

 

In Conclusion…

Talking is always good!

If you would like to discuss your frustration on where your supply chain is at today, connect with us for an informal chat with absolutely no obligation attached.

John Talbot, Co-founder & CEO
Email: john.talbot@lca.asia
Mobile/WhatsApp: +60 12 290 2625

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