scm development

Supply chain modernization in low-cost labor markets

Three reasons why companies in low-cost labor markets should not wait to upgrade their logistics operations. Now is the right time to invest in technology.

According to “The Economist”, the average factory worker in China earns US$27.50 per day, while Indonesian and Vietnamese workers get paid approximately $8.60 and $6.70 per day respectively. Compared to their US or European counterparts, these wage levels are drastically low and development is direly needed. As explained in my previous posts, emerging markets in Asia face many challenges and various economic programs and infrastructure initiatives aim to support the process.

But there is also a lot that businesses in these regions can drive by themselves in order to improve their market positions and conditions. It is noticeable, for example, that many businesses are still not investing in their future through technology and automation. I suspect this is likely based on the fact that direct cost-savings of IT solutions are not immediately clear to them, and investing in more manpower still seems the more obvious choice to accommodate immediate growth.

This reflects a reactive and short-sighted business strategy, however, and to manage the current economic growth in these regions to their success, it’s crucial for local businesses to look ahead and put the right foundations in place. Investments in the right areas are required to ensure long-term success and competitiveness. If companies operating in low-wage markets ignore the potentials and benefits of technology at this point in time, they run the risk of losing out.

Here are three key aspects supporting IT investments by businesses in low-cost labor markets in the various areas of global supply chains. These arguments are valid for all markets, of course, but they are of special importance for low-cost labor markets – because their time to act really is now.

1. Becoming part of a global network. Join in or lose out?

Businesses aspiring to become partners in global supply chain networks almost always need to adopt a modern supply chain solution. Automotive manufacturers that have moved their production to countries such as Indonesia or Thailand, for example, usually manage supply chains on an international level and therefore expect high levels of integration, visibility, and compliance from their partners.

Such partners could be material suppliers, component manufacturers, distributors, carriers, and/or after-sales providers. IT integration with partners is essential for these manufacturers to establish visibility and control through real-time data tracking throughout the supply chain. This allows for pro-active management of potential disruptions and maintaining high levels of quality, service, and customer satisfaction.

  • Local businesses that can demonstrate IT integration capabilities and support comprehensive visibility are therefore much more attractive as a potential supply chain partner for such globally acting companies. For many it has by now become common practice to list certain IT capabilities as precondition for new suppliers or logistics partners to even be considered. Without suitable IT landscapes and capabilities, even the cheapest provider may find itself out of the race before entering it.

2. Getting export-ready. Get it or get out?

This is an important point. The world is becoming smaller and even local niche businesses are getting competition in the most remote corners of the globe. Being able to smoothly deliver across borders has become essential to stay in the game. Being export-ready refers to all areas from procurement to fulfilment and involves operational, administrational, and legal requirements: delivering order fulfilment data and updates to buyers, managing electronic declarations to customs authorities, submitting export licenses to trade control agencies, issuing supplier declarations for clients – to name just a few.

  • Operationally efficient and legally compliant exporting is unthinkable without IT today. The right tools help keep a business safe and avoid violations of export control laws. At the same time, they also deliver the ever-important cost savings on the operational side through lowering customs duties, accelerating transactions, increasing productivity, and reducing transportation costs, for example. IT-supported export-readiness pays off quickly and paves the way towards new export markets and future growth.

3. Managing growth. Make it or break it?

Large and growing operations that exclusively rely on manual workforces for warehousing and inventory management often experience disruptions once volumes shift or scale-ups need to be managed quickly. Can you imagine major logistics operations as run by Amazon or Alibaba relying solely on manpower without deploying sophisticated tools to manage and support the whole process?

A well-established distributor, whom I visited the other day, can attest to the need for technology as they recently expanded without an automated system – both in terms of material handling and data processing – to support their growth. Results were messy: inaccurate stocks, unfulfilled orders, inefficient picking, missing items, increased damages, and confused staff members. Simply adding more staff could no longer address the issues that arose in all areas – and IT support, new tools, and processes were needed to streamline operations.

  • Past a certain point in terms of operational volume, business complexity, or scope of services, most businesses will inevitably find that increasing manpower without increasing the level of IT deployment will result in clear limitations. The consequential array of administrative and managerial challenges can quickly outweigh the benefits of expansion.

Find the right balance and act now!

Operating in a low-cost labor market is subject to strong competition and investments in modern supply chain IT solutions are considered a big commitment – a luxury rather than a necessity. I am convinced, however, it is the latter which will lead the way in these regions for growing businesses to achieve sustainable success.

I also believe technology should not be regarded as a threat but rather as an essential support system to fuel and enable development and future growth in these areas. Investments in advanced supply chain and logistics solutions provide the basis for workers to take better decisions, balance the workload, increase quality and safety, plan ahead, and be more efficient.

In my view, to successfully manage a growing business and stay competitive in a low-cost environment, it’s not a question if to invest in IT but when, how, and in what areas. Technology truly forms the basis of global supply chains today, and the time could not be better for low-cost labor markets to work on their foundations and get ready for future growth.

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