Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the Aug 8, 2006 issue of the Bangkok Post.
By Paul Summer, Pichpajee Saichuae, Vatin Chalermdamrichai, Niphan Srisukhumbowornchai and Kulvech Janvatanavit
This is the first instalment in a series of articles that will take a look at the restructuring of supply chains. In this instalment, we will examine the issues that arise with different models.
It's a sunny Tuesday morning in the lobby of the Bangkok City Tower. Three colleagues from Tax and Advisory at PricewaterhouseCoopers Thailand are sitting in the coffee shop, sipping cappuccinos and having a pre-work chat.
''Have you noticed that we're getting more questions from our clients about the structuring of their supply chains?'' asks Niphan.
''Definitely,'' replies Parima. ''Their needs are shifting because of changes in the market. They're looking at issues such as shorter product life cycles, more product variety, less order-cycle time, fast-rising fuel costs, and increased security concerns.''
''Exactly,'' agrees Niphan. ''Our clients come to us because they want to know if their supply chains are operating effectively. So how do we help them?''
''Well, our approach is to look at the issues from different angles,'' replies Vatin. ''So the process begins with a thorough understanding of the issues surrounding different supply chain models.''
''What issues do you look at to improve the ways they operate?'' asks Niphan.
''One of the major issues in supply chain restructuring is to find the optimum balance between centralising and decentralising the distribution network,'' replies Vatin. ''Let's look at centralisation first. The underlying principle is that it's cheaper and more efficient to produce very large quantities at central plants, ship them to a central distribution centre, and dispense the goods in smaller batches to the retailers and end consumers. This way, we can exploit economies of scale and scope on production and distribution.
''But conditions are changing in the market and these benefits may not hold. We may need to either ship directly from plants, or manufacture the product as close to the market as possible, hence decentralisation.''
''That's true, Vatin,'' agrees Parima. ''But companies may forget that tax and customs can play a major role in operational efficiency and effectiveness. What is important is that they understand what the total costs are within their supply chain, so that everyone can help work to minimise those costs. That's why it's helpful to review the group effective tax rate.''
''Besides this, how else can companies assess their effectiveness?'' asks Niphan.
''Well, from an operational perspective, supply chain decisions are typically made based on cost, service, or quality. The more advanced companies are progressing towards other measures such as speed, flexibility, and security,'' says Vatin.
''That's right,'' agrees Niphan. ''Traditionally, decisions were made based on tradeoffs such as cost versus service, or cost versus speed. However, leading companies are breaking away by outperforming in all, or most, categories. That means they can be the cost leaders, while excelling in service, and at the same time getting the products and services to the market faster than their competitors.''
''So, Parima, what are some of the customs non-tariff barriers that companies should be aware of when deciding to restructure their supply chains?'' asks Vatin.
''There are lots,'' answers Parima. ''For goods that have to be moved across borders, we've seen recent developments in customs regulation, such as C-TPAT (Customs Trade Partnership Against Terrorism) or Star (Secure Trade in the Apec Region). These may increase cost and reduce flexibility.
''For example, some of our clients may be dealing with more paper filings and complex procedures. Luckily, increasing use of EDI (electronic data interchange) and other technologies are helping to reduce clearance times and make rapid 'import for re-export' more practical.''
''What about free trade agreements? Do you think the increase in FTAs has helped cross-border distribution?'' asks Niphan.
''Well, FTAs have lowered duty rates on a bilateral and multilateral basis,'' replies Parima. ''This means that market access becomes easier, and customs duties are reduced, but direct consignment rules may still apply.''
''In short, there are a lot of issues to look at in restructuring a supply chain,'' says Niphan. ''Based on our experience, cost, speed, and security are the key issues for our clients. The challenge for all companies is to assess the impact of their decisions on all the related issues, over the short and long term.''
''Well, I think we've covered a lot already this morning,'' says Vatin. ''Why don't we meet again in two weeks and explore the key issues in more detail?''
''Sounds good,'' says Parima. ''See you then.''
In the next instalment of this series Niphan, Vatin and Parima will delve deeper into how cost, speed and security can affect centralised and decentralised supply chain models.
