Global Supply Chain Management

GLOBAL MARKET FORCES–Foreign competition in local markets

–Growth in foreign demand

–Global presence as a defensive tool

–Companies forced to develop and enhance leading-edge technologies and products.

TECHNOLOGICAL FORCES–Knowledge diffusion across national boundaries, hence need for technology sharing to be competitive

–Global location of R&D facilities• Close to production (as product cycles get shorter)

• Close to expertise (Indian programmers?)

Why GSCM????

GLOBAL COST FACTORS–Availability of skilled/unskilled labor at lower cost

–Integrated supplier infrastructure (as suppliers become more involved in design)

–Capital intensive facilities like tax breaks, price breaks etc.

POLITICAL AND ECONOMIC FACTORS–Trade protection mechanisms:

• Tariffs, Quotas, Voluntary export restrictions, Local content requirements, Environmental regulations, Government procurement policies (discount for local)

–Exchange rate fluctuations and operating flexibility

Why GSCM????

Questions GSC??????????• Manufacturing Strategy:

– How many plants & where should each be located?

– Products made & process to be used at each plant?

– What part of the world should each plant serve?

• Supply Base Design / Vendor Consolidation:– How to select supplier for parts in same product group?

– How many suppliers is best?

– Which suppliers should send which parts to which plants?

– Can I source more than one part at a time from a supplier?

• Impact of Duty / Drawback, Taxes, Local Content :– If the duty rates come down according to GATT/WTO, how should I

change my supply chain design?

– What is the best use of the tax havens?

– How much of local & global sourcing is possible?Source: Global Supply Chain Associates (GSCA) 1999

Questions GSC??????????• Outsourcing:

– What parts to produce "in-house" and what parts to outsource?

• Spare Parts Logistics:– How many echelons of repair and stocking is best?

– How many repair shops are needed, where should they be located, what products should each handle, and what geographic area should each serve?

– How do the drivers of product value i.e. product’s weight, complexity, and frequency of repair affect this decision?

• New Product Pipeline Design:– What should the supply chain look like for a new product?

– How should I fit the new product into my current supply chain?

– Should I single or double source this product?

– How much do my fixed costs affect this decision?

– What is the cross-over point to open up a second and third source of supply? Source: Global Supply Chain Associates (GSCA) 1999

• Costs- Local labor rates / International freight tariffs - Currency exchange rates

• Customs Duty- Duty rates differ by commodity and level of assembly - Impact of GATT/WTO: Changes over time

• Export Regulations & Local Content- Denied parties list / Export licenses - Local content requirement for government purchases

• Time• Lead time /Cycle time /Transit time /Customs clearance

• Taxes on Corporate Income- Tax havens and not havens - Make vs. buy effect

Global SCM Factors

Source: Global Supply Chain Associates (GSCA) 1999

Global Supply Chain SystemInternational distribution systems : - Manufacturing(domestically), Distribution (overseas)

International suppliers : - Raw materials and Components(foreign suppliers), Final assembly/

Manufacturing(domestically),

Offshore manufacturing :- Product is sourced & manufactured in a single foreign location,

- Shipped back to domestic warehouses for sale and distribution.

Fully integrated global supply chain :- Products are supplied, manufactured and distributed from factories

located throughout the world

- In a truly global supply chain, it may appear that the supply chain was designed without regard to national boundaries.

- The true value of a global supply chain is realized by taking advantage of these national boundaries

Risk Management in GSC

• Outsourcing and offshoring expose the supply

chain to increased risks.

• Trends toward cost reduction, lean manufacturing

and JIT imply low inventory levels in supply chain

– In the event of an unforeseen disaster, adherence to this

type of strategy could result in a shutdown of

production lines because of lack of raw material or

parts inventory.

Factors Impacting Exposure to Risks

• Customer reactions

• Competitor reactions

• Supplier reactions

• Government reactions

Sources of Risks

MANAGING UNKNOWN-UNKNOWN

Managing the Unknown-Unknown

• Invest in redundancy

• Increase velocity in sensing and responding

• Create an adaptive supply chain community

Redundancy Example• Respond to unforeseen events by careful

analysis of supply chain trade-offs– A company with 40 facilities over the world– Initial analysis for reduction of cost by $40M a

year • shut down 17 of its existing manufacturing facilities• leave 23 plants operating• satisfy market demand all over the world.

Redundancy Example:Problems with New Decision

• New design left no plant in North America or Europe– Long and variable supply lead times– Higher inventory levels.

• Remaining manufacturing facilities in Asia and Latin America fully utilized– Any disruption of supply from these countries, due to

epidemics or geopolitical problems, would make it impossible to satisfy many market areas.

• How can one design the supply chain taking into account epidemics or geopolitical problems that are difficult to quantify?– Analyze the cost trade-offs

Redundancy Trade-Offs

Increase in total cost negligible compared to increases in redundancy and hence risk.

Sensing and Responding

• Speed in sensing and responding can help the firm overcome unexpected supply problems

• Failure to sense could lead to:– Failure to respond to changes in supply chain – Can force a company to exit a specific market

Sensing and RespondingExample

• Different responses of Nokia and Ericsson on a fire at one of the supplier’s facility– Supplier was Philips Semiconductors in Albuquerque,

Mexico

• Nokia:– Changed product design to source components from

alternate suppliers

– For parts that could not be sourced from elsewhere, worked with Philips to source it from their plants in China and Netherlands

– All done in about five days

Sensing and RespondingExample

• Ericsson’s experience was quite different – Took 4 weeks for the news to reach upper management – Realized five weeks after the fire regarding the severity

of the situation. – By that time, the alternative supply of chips was already

taken by Nokia. – Devastating impact on Ericsson

• $400M in potential sales was lost• Part of the loss was covered by insurance.

– Led to component shortages

• Wrong product mix and marketing problems caused: – $1.68B loss to Ericsson Cell Phone Division in 2000

Adaptability

• It is the most difficult risk management method to

implement effectively.

• Requires all supply chain elements to share the

same culture, work towards the same objectives

and benefit from financial gains.

• Need a community of supply chain partners that

reorganize to better react to sudden crisis

AdaptabilityExample

• In 1997, Aisin Seiki the sole supplier of 98% of brake fluid proportioning valves (P-valves) used by Toyota

• Inexpensive part (about $7 each) but important in the assembly of any car.

• Saturday, February 1, 1997:Fire stopped Aisin’s main factory in the industrial area of Kariya, – Two weeks to restart the production– Six months for complete recovery

• Toyota producing close to 15,500 vehicles per day. – JIT meant only 2-3 days of inventory supply

Recovery Effort by Toyota • Blueprints of valves were distributed among all

Toyota’s suppliers• Engineers from Aisin and Toyota relocated to

supplier’s facilities• Existing machinery adapted to build the valves

according to original specifications• New machinery acquired in the spot market• Within days, firms with little experience with P-

valves were manufacturing and delivering parts to Aisin– Aisin assembled and inspected valves before shipment to

Toyota – About 200 of Toyota’s suppliers were involved

Vehicle Production & P-Valves Inventory

Outcome

• Accident initially cost: – 7.8B Yen ($65M) to Aisin– 160B Yen (or $1.3B) to Toyota

• Damage reduced to 30B Yen ($250M) with extra shifts and overtime

• Toyota issued a $100M token of appreciation to their providers as a gift for collaboration

Single Sourcing and Adaptability• Single sourcing is risky

– Achieves economies of scale – High quality parts at a low cost

• JIT mode of operation builds a culture of:– Working with low inventories– Ability to identify and fix problem quickly– Entire supply chain was stopped once the fire

occurred– Prompted every company in the chain to react

to the challenge

MANAGING KNOWN-UNKNOWN

• Speculative Strategies : A company bets on a single scenario, with

often spectacular results if the scenario is realized, and dismal ones if it is

not.

• Hedge Strategies : A company designs the supply chain in such a way

that any losses in part of the supply chain will be offset by gains in another

part.• Multiple plants in different countries, where, Certain plants more profitable at

times than others

• Move production between plants to be successful overall.

• Flexible Strategies

Flexible Strategy• Requires a flexible supply chain

– multiple suppliers

– flexible facilities

– excess capacity

– various distribution channels

• Can be expensive to implement

– coordination mechanisms

– capital investments

– loss of economies of scale

• Production shifting : Flexible factories, excess capacity and

suppliers used to shift production from region to region to take advantage of current circumstances.

•Information sharing : Information can be used to anticipate

market changes and find new opportunities.

•Global coordination : Having multiple facilities worldwide

provides a firm with a certain amount of market leverage that it might otherwise lack.

•Political leverage : The opportunity to move operations

rapidly gives firms a measure of political leverage in overseas operations. For example, if governments are lax in enforcing contracts or international law, or present expensive tax alternatives, firms can move their operations.

Approaches to Flexible Strategy

• Product development : It’s important to design products that can be modified easily for major markets, and which can be manufactured in various facilities.

• Purchasing : A company will find it useful to have management teams responsible for the purchase of important materials from many vendors around the world. In this way, it is much easier to ensure that the quality and delivery options from various suppliers are compatible

• Production : Excess capacity and plants in several regions are essential if firms are to take full advantage of the global supply chain by shifting production as conditions warrant.

• Demand management : It involves setting marketing and sales plans based on projected demand and available product, is carried out on a regional basis.

• Order fulfillment :To successfully implement a truly flexible SCM system, a centralized system must be in place so that regional customers can receive deliveries from the global supply chain with the same efficiency as they do from local or regionally based supply chain.

Requirements for Global Strategy Implementation

Other Issues in GSCM

Region-specific products Vs True global products

Local Autonomy vs Central Control

Exchange rate fluctuation

Local collaboration may become competitors

To access new market may require handing over

critical manufacturing and engineering expertise

At any time the threat of protectionism might

appear.

Regional Differences in Logistics

First World Emerging Third World

Infrastructure Highly developed Under development Insufficient to support advanced logistics

Supplier operating standards

High Variable Typically not considered

Information system availability

Generally available Support system not available

Not available

Human resources Available Available with some searching

Often difficult to find

CustomerService

Requirements

OrganizationalDesign andTraining

Requirements

PerformanceGoals

Global SupplyChain Management

BusinessProcesses

Plant andDistribution

Center NetworkDesign

InformationSystems

Key Customerand SupplierRelationships

PerformanceMetrics

InventoryManagement

Outsourcingand Third-Party

LogisticsRelationships

Elements of a Global SCM

Improve Delivery of

Supplies

Establish aPresence in a

Foreign Market

Reduce Costs

Reasons for Global SourcingStrategies

React toCompetitor’s

OffshoreSourcingPractices

Increase Exposureto WorldwideTechnology

StrengthenReliabilityof Supply

Improve Quality

Gain Accessto Materials

Satisfy OffsetRequirements

Supplier Networks

Evaluate operating andcompetitive environments

Define scope of internationalpurchasing effort

Identify and evaluate potentialsuppliers worldwide

Determine appropriate nature ofbuyer-supplier relationship

Request/evaluateproposals from suppliers

Continual reevaluation of implementationstatus, requirements, and capabilities

Select “best” supplier, establish contract termsand conditions, and build desired relationship

Steps in the Global Sourcing Process

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