Global Supply Chain Management and Uncertainty

1. Global Supply Chain Management and Uncertainty Sources: Dornier et al., GOL, 1998 Flaherty, GOM, 1996

2. Overview • Supply Chain Management • The Bullwhip Effect in Supply Chains • Domestic vs. International Supply Chains • Vertical Integration Issues in Global Supply Chains

3. Supplier IC Mfg US DC Customer Supplier PCAT FAT European DC Customer Supplier Print Mech Mfg Far East DC Customer 1 week 1 day (US) - 5 weeks Global Supply Chain Mgt: HP DeskJet Printer (Vancouver) PCAT = Printed Circuit Assembly and Testing FAT = Final Assembly and Testing Print Mech. Mfg. = Print Mechanism Manufacturing DC = Distribution Center • Definition of Supply Chain Mgt: • Management of activities that transform raw materials into intermediate goods and final products, and that deliver final products to customer. • Require operating a network of facilities, often scattered around the world.

4. Global Supply Chain Management Factors to be considered when moving from (mostly) domestic chains to global ones • Substantial geographic distances • Foreign market forecasting difficulties • Exchange rates fluctuations and other macroeconomic uncertainties • Differences in infrastructure • Explosion of product variety Implications?

5. Overview • Supply Chain Management: • The Bullwhip Effect in Supply Chains • Domestic vs. International Supply Chains • Vertical Integration Issues in Global Supply Chains

6. 800 600 400 200 Bullwhip Effect due to Seasonal Sales of Campbell Soup 0 Shipments from Manufacturer to Distributors Order Quantity Retailers’ Sales 1 Weeks 52 The Bullwhip Effect Recurring Theme: • Orders to upstream members exhibit greater variance than actual orders at PoS (demand distortion) • The variance of orders increases as one moves upstream (variance propagation)

7. 800 600 400 200 Bullwhip Effect due to Seasonal Sales of Campbell Soup 0 Shipments from Manufacturer to Distributors Order Quantity Retailers’ Sales 1 Weeks 52 The Bullwhip Effect Results: • Excessive inventory • Dissatisfied customers • Lost revenues • Ineffective production schedules • Etc.

8. The Bullwhip Effect Influence: • Individual decisions • Isolated functions • Isolated entities along the supply chain • Types of incentives • Shortage cost vs. inventory cost • Marketing, manufacturing, distribution

9. The Bullwhip Effect Causes: • Demand forecast updating • Order batching • Price fluctuations and special sales • Rationing and shortage gaming How can we remedy the situation?

10. The Bullwhip Effect Remedial Strategies • Forecast Demand Updating • Access to market demand info (use POS data) • Info sharing across SC links (EDI) • Vendor managed inventory (VMI) • Lead time reduction and JIT supply • Order Batching • Reduction of Processing Costs (CAO) • New ways of achieving economies of scale in transportation/distribution (3PLs)

11. The Bullwhip Effect Remedial Strategies (cont.) • Price Fluctuations • Reduce frequency and magnitude of special trade deals and consumer promotions (EDLP) • Continuous Replenishment Programs (CRP) • Rationing and shortage gaming • Better product allocation policies in short supply periods (based on past sales) • Penalties on order cancellations

12. The Bullwhip Effect Remedial Strategies (cont.) • Reduce Complexity • Shorter supply chains reduce variance in response times • Reducing customer options reduces response variation • In-short: reduce Agility in order to decrease uncertainty and increase responsiveness

13. Overview • Supply Chain Management: • The Bullwhip Effect in Supply Chains • Domestic vs International Supply ChainsVertical Integration Issues in Global Supply Chains

14. Domestic vs. International SCM • Distinctive characteristics of int‘l SCs • Greater Geographic Distance and Time • Diversity of SCs and Demand Conditions • Issues more important or different • Transportation and coordination more important • Order-to-delivery times longer • Communication and travel more difficult • Adjustment is more difficult • Information technology for common work • Learning • New issues in international supply chains • Language and national culture differences • Exchange rates, duty, subsidies, quotas • Feeding back local ideas to headquarters • Lead suppliers • Working in key locations for an industry

15. Domestic vs. International SCM • Distinctive characteristics of int‘l SCs • Multiple National Markets • Multiple Locations ofOperations • Issues more important or different • Complex SC network • Postponement and commonality in product design • Competition among multiple markets • Complex SC network • New issues in international supply chains • Hedging through operations • Diff. Regulations and tastes, languages • Exchange rates, gov’t policies, macro-economic effects • Worldwide scanning • Worldwide scanning • Sharing work among many locations: 24hr workdays • Exchange Rates • Operational hedges

16. Vertical Integration (VI) vs Development of Local Suppliers (LS) Condition of Variable Types of variables Low High Country Environment Market size and growth LS VI Labor cost VI LS Labor skill LS VI Local managerial capacity VI LS Political risk VI LS FG import controls LS(VI) VI(LS) Cultural compatibility LS VI Competitive Situation Industry concentration LS VI Relative competitive strength LS VI Company characteristics Product (eg. maturity, brand identiry, line diversity, service intensity) … ... Technology (eg. maturity, stability, complexity) … ... Resources (eg. capital, management, previous experience) LS VI Extend of globalization LS VI Vertical Integration Issues in Global Supply Chains