Globalization and localization are opposing forces. However, both coexist today and their presence has a fundamental impact on how the largest companies on the planet organize their supply chains.
While globalization pushes towards the creation of global companies that respond to a global and homogenized market, localization invites us to deal specifically with each market and each region, adapting to their tastes, needs and particularities, as well as bringing factories and stores to consumers.
Why, being opposites, do both share space today? What are the consequences of both options? How can this affect my logistics?
What are the new global companies
The last few decades have seen the rise of so-called global companies. Companies whose market is the entire planet. It is important to differentiate these global companies from companies that simply export to a few countries. A truly global company will source materials and products from different locations around the globe, often with multiple production and warehousing centers around the globe as well.
For these global companies it would be idyllic if markets and buyers were perfectly homogeneous in all corners of the world. So they could sell them the same drink, the same appliances or the same clothes. This would allow them to reduce their costs in a very important way thanks to the economy of scale: savings in manufacturing, purchases of supplies of greater volume and at a better price, etc.
In part, this dream of companies has been coming true. The globalization of society has also resulted in a globalization of tastes and what we consume. However, even if the phenomenon of globalization takes effect, there is no denying the reality that local and regional variations continue to exist. Sometimes with subtle differences and sometimes with radical changes compared to the rest of the world.
The logistic problem of Globalization and Localization
Global companies want to take advantage of those savings in manufacturing and purchasing. However, this process has a direct impact on the logistics needs of companies. This is where they must measure whether the theoretical savings in costs or the greater expense in transport that involves having to supply the same number of places from a smaller number of factories – and therefore further from their destinations – is greater.
The question seems clear: what is the appropriate degree of decentralization for my company? How globalized or localized should I have my manufacturing, my logistics and my management? Martin Christopher proposes in “Logistics and Supply Chain Management” three main alternatives: specialized factories, inventory centralization or localization.
This option is committed to creating factories specialized in a very small number of products to achieve that much-awaited economy of scale. His ideal: to have a limited range of products and in huge quantities with which to supply -and please- the entire world.
Christopher cites the example of the Heinz brand, whose ketchup production for the whole of Europe takes place in just three production sites. And that in its search for cost improvement it is capable of varying production from one center to another as local costs vary.
The problem, as we have already mentioned, is that this search for cost improvement in production makes us forget about other costs or additional problems. Transport is the first thing that comes to mind, since the number of kilometers to be traveled will be greater, which will affect both the price and the delivery periods. But there are other less obvious problems, such as the labeling of products in many languages on the same package (not to mention that the same product sometimes changes its name in different countries).
Finally, these production models also have less ability and flexibility to adapt, comfortable with the rigidity of mass production and large numbers. When products have short life cycles or require customization or variety possibilities, these types of solutions suffer.
Centralized inventories, compared to dispersed inventories in numerous warehouses, have shown that they allow a very significant reduction in the amount of necessary stock, as well as safety stock. This has led more and more companies to close their national warehouses to make way for supranational distribution centers that cover many countries at the same time.
He wants to go one step further with the digital centralization of inventories. In this case, we are not talking about physically unifying the spaces and stocks, but about computerizing the management of various warehouses so that they can share their information, no matter how far away they are. In this way, products from other warehouses can respond to the needs of different regions if necessary.
The force of globalization is undeniable, but so far its victory has not been absolute. We continue to shop in different ways, we like different cars, and our culture and lifestyles remain inconsistent across the globe.
The location is committed to addressing local markets and adapting the products to the particularities of each region. In addition, Martin Christopher also proposes the delay when giving the final shape to the product. The idea is to create generic semi-finished products that only later receive their final shape, which is what allows them to be most adaptable.
This model provides several advantages. On the one hand, the creation of generic semi-finished products makes it easier to take advantage of the economy of scale. In addition, it also facilitates storage by reducing the need for inventories: we do not need finished products of all varieties, but rather many semi-finished products and a smaller number of components that allow for the final finish. Incidentally, this way of working also makes it easier to predict demand -errors are less serious by having this common intermediate product- and allows the company to be more flexible in the face of possible changes.
By applying this philosophy to the entire company, the final assembly of the product can be carried out in the distribution centers closest to the final destination. And even, defends Christopher, it can become an external logistics operator in charge of carrying out this task.
Companies that have to respond to products with reduced life cycles or that gain a great competitive advantage by being able to offer personalized products to their customers have good reasons to opt for this solution.
As we have seen, there is no single answer to globalization and localization. More homogeneous markets coexist with others that continue to cling strongly to their geographical characteristics. Global companies are forced to maintain different product portfolios in their different markets, while many food giants vary the flavor of the same product in different countries to cater to local preferences (even if they keep the same name).
The appropriate logistics solution will depend on each company, each sector and each region; without magic and pre-established formulas that assure you the best option. Knowing in which field we move and the ability to know our costs and know how to assess when one option or another compensates us more will be essential to be able to get it right.