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Building regional integrated ecosystem imperative for GCC's sustained growth
By Anil Khurana
Published in The Saudi Gazette on 14 - 08 - 2010

While executives worldwide are gearing up their supply chains for expected recovery in global demand, the Middle East represents a special case. Based on the PRTM Global Supply Chain Trends survey 2010-2012, it was noted that benefits from an eventual financial upturn will depend largely on how local companies deal with five key global supply chain trends:
Trend 1 - Supply chain volatility and uncertainty have permanently increased:
Globally, market transparency and greater price sensitivity have led to lower customer loyalty, while product commoditization has further reduced the meaning of differentiation. However, this has not yet happened in the Middle East. Options and choices for local customers are sometimes limited because of market regulations and barriers to entry, and thus it is very much a supplier's market.
This situation will no doubt change. PRTM predicts that the Middle East will be increasingly exposed to volatility and uncertainty as markets are deregulated, global competitors enter the Middle East market, and consumer expectations rise. Companies in the region need to differentiate themselves, and prepare for increased supply chain complexity and volatility.
Trend 2 - Securing growth requires truly global customer and supplier networks:
The study has shown that future market growth depends on international customers and customized products, calling for an ever-more-effective management of supply chain complexity and increased globalization. Although many Middle East companies are content to rely on the local market for growth, the entry of global competitors with strong supply chain capabilities could put these local markets at risk. Case in point: General Electric, which recently designated Saudi Arabia as one of its key global manufacturing hubs.
To mitigate risk, local companies must make sure their supply chain capabilities keep up with those of companies globally. Further, they must be ready to compete on cost or customer service-the two key drivers of an effective supply chain-when the competitive landscape opens up to foreign players.
Local companies also need to expand into new markets abroad, especially those of developing countries. The Middle East may in fact have a geographical advantage in penetrating markets in Asia and Africa. An example is IFFCO, a UAE-based consumer goods company that has transformed itself from a largely locally oriented firm to a multi-national player with a presence in 84 countries.
Trend 3 - Market dynamics demand regional, cost-optimized supply chain configurations:
End-to-end supply chain cost optimization will also be increasingly critical, as customer requirements and competitors necessitate regionally tailored supply chains and product offerings. Similarly, Middle East-based respondents expect that cost will become more critical in the Middle East than it is today, even in the context of an economic upturn. However, the mandate for cost savings extends beyond the domestic market. Capturing growth opportunities in developing countries requires a supply chain network and footprint that is optimized for cost, at least in niche segments.
Trend 4 - Risk management involves the end-to-end supply chain:
Risk and opportunity management should span the entire supply chain-from demand planning to expansion of manufacturing capacity-and should include the supply chains of key partners.
This finding reveals a key weakness in Middle Eastern supply chains: the lack of integration between the supply chain of the company and those of its partners. As we have often observed, such integration is lacking even between the individual functions of a company's own supply chain. As a result, visibility is greatly hampered, making it more difficult for executives involved in demand and supply planning to exploit opportunities and manage risk.
Trend 5 - Existing supply chain organizations are not truly integrated and empowered:
The supply chain organization needs to be treated as a single integrated organization. Supply chain improvements can only be effective with synchronized support from all functions involved in supply chain.
Functional silos are common in Middle East companies. Consequently, optimization in one area frequently comes at the expense of another-and sometimes has a net-negative effect on profitability. In our experience, companies do not consistently implement or make use of business processes and tools that improve collaboration horizontally across functions, such as sales and order planning (S&OP), and vertically across layers, such as a balanced scorecard. To prepare for increased global competition, it is essential for Middle Eastern companies to integrate their supply chain organizations. This is a step that the Carlyle Group has taken for one of its regional investments, a Saudi industrial company. Carlyle selected PRTM as its preferred operational advisor to enable cross-functional collaboration and optimization of all aspects of the company's operations. “Prior to making the investment,” said Firas Nasir, Carlyle's managing director responsible for GCC investments. “We recognized that integrating and optimizing the supply chain was key to unlocking value,” he added.
These five supply chain trends make one thing clear. Middle Eastern companies need to improve integration and coordination on several dimensions. Horizontally across functions, which tend to operate in silos and consequently fail to optimize the overall supply chain for maximum profit; vertically across organizational layers, preventing successful operational execution of the business strategy into operational execution; and externally across supply chain partners, where the lack of visibility often leads to supply chain disruptions. But local companies also lack integration geographically across countries, where regulators often focus exclusively on ramping up local logistical capability (e.g., airports, sea terminals, and intermodal connections), without taking into consideration the impact of foreign regulations, procedures, standards, etc.
By addressing those integration issues at corporate and regulatory levels, Middle East-based companies can serve the large domestic market more profitably and prepare for increased competition. These improvements will also help companies reach the cost-sensitive customer base located in developing markets, including those in Asia and Africa, as well as supporting the creation of local and regional manufacturing and service hubs that are an imperative for local economic development.
The Saudi government is currently backing up a $400 billion stimulus program over the next five years to develop infrastructure, and the UAE is investing heavily in several industries, including aerospace, aluminum, healthcare, and cleantech to diversify the economy away from oil-based revenue.
Policymakers should continue to facilitate the movement of materials, eliminating any barriers related to customs and documentation.
It is also critical that they think strategically to develop capabilities beyond transit logistics, in order to develop a regionally integrated ecosystem, starting with value-added services, to put greater emphasis on industrial activities, PRTM pointed out.
- The writer is director, PRTM Management Consultants. __


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