CHAPTER 11: Global Supply Chains

1. CHAPTER 11:Global Supply Chains

2. Global supply chain challenges Video link with Dr. Pat Dixon (7:03 min.) http://www.youtube.com/watch?v=_wWHfrBz104

3. Global supply chain overview • Global economies are the overarching rationale for global supply chains • Global supply chain integration happens in stages based on business strategy decisions • Global sourcing decisions are complex and require input from logistics managers

4. Global economies • Most firms today are impacted by global economies • Global sourcing of materials or products • Global customers who want to purchase • Common objectives to go global include • Increasing revenue through access to new markets • Increasing production capacity • Reducing direct cost using cheaper resources and labor

5. Major reasons that firms expand into other countries Table 11.1 Rationale for Globalization

6. Table 11.2 – Estimated 2008 national logistics cost

7. Figure 11.1Generic International Strategies Transnational Strategy Global Strategy High Force TowardsGlobal Integration Low No International Strategy Multi-domestic Strategy Low High ForceTowardsLocal Responsiveness Source: Fitzsimmons, James and Mona Fitzsimmons (2011). Service Management: Operations, Strategy and Information Technology, Seventh Edition (New York: McGraw-Hill). Pg. 352.

8. Factors and Considerations –No International • Advantages • Focused on local market • Minimum coordination efforts • Cross functional decisions made by small group of executive managers • Disadvantages • Growth limited to local markets • Not easy to respond to globally based customers • Not large enough to take advantage of economies of scale

9. Factors and Considerations –Multi-domestic • Advantages • Focused on local market • Minimum coordination efforts • Allows firm to focus on key growth markets while minimizing complexity across a large number of markets. • Disadvantages • Not scalable • Not easy to respond to globally based customers

10. Factors and Considerations – Global • Advantages • Focused on local market • Firm begins to take advantage of global brands and products • Can meet the unique needs of individual markets • Disadvantages • Not scalable • Not easy to respond to globally based customers • Limited synergies when working with global customers • Limited drivers for global data and processes

11. Factors and Considerations – Transnational • Advantages • Global focus to facilitate global solution development and delivery • Very scalable to domestic and global firms • Disadvantages • Requires substantial coordination and information integration • Reduced ability to respond to market uniqueness

12. Global supply chain integration requires • Understanding the complexity of logistics in the a global economy • Setting the firm on a path through the stages of international development • Export/Import • Local presence • Globally integrated enterprise • Managing the global supply chain differently from domestic operations NASA photo – View of the Earth seen by Apollo 17 crew traveling toward the moon

13. Complexity of logistics systems vary significantly in each major global region • North American operating challenges • Open geography • Extensive transportation options • Limited cross-border documentation • European operating challenges • Relatively compact geography • Numerous political, cultural, regulatory and language situations • Congested transportation infrastructure • Pacific Rim operating challenges • Island-based geography • Relatively poor infrastructure • Extensive water and air shipments to travel vast distances

14. Operating unique North American, European or Pacific Rim business strategies was common • Easier to create and operate separate regional strategies • However, duplication of activities led to • Loss of economies of scale • Poor asset utilization • Growth oriented firms are integrating their regional strategies into global business strategies to eliminate duplication • Requires global integration of the entire enterprise • Regionalization will remain viable for some firms

15. Logistics in a global economy face more complex operating characteristics • Increased uncertainty results from • Greater distances • Longer leadtimes • Decreased market knowledge • Increased variability arises from • Unique customer requirements • Unique documentation requirements • Shifting political environments • Decreased control results from • Extensive use of international service firms • Potential customs requirements and trade restrictions by governments • Decreased visibility results from • Longer transit times • Longer holding times • Less ability to track shipment locations

16. Table 11.3Differential Characteristics of Global Services

17. Export/Import with a national perspective • International transactions in support of domestic business • Focus is to increase revenues or decrease costs • Influence on logistical decisions • Sourcing and resource choices are artificially constrained • E.g. use restrictions, local content laws or price surcharges • Planning complexity is increased • Extends domestic logistics systems and operating practices to global origins and destinations • Exceptions become numerous • E.g. bribery may be necessary in some developing countries

18. International operations with local presence • Establishment of operations in a foreign country • Some combination of sales, marketing, production and logistics • Local presence of facilities and operations increases awareness and sensitivity to the foreign market • Often restricted to a limited number of geographic areas • Over time, business units operating within foreign markets will adopt local business practices • E.g. unique sales organization and local business systems

19. Globally integrated enterprise • Market, location, and resource decisions made with little or no regard to national boundaries • “…locates work, skills, and operations wherever it makes sense…” • Truly global firms • Employ global brands with limited customization • Operate in most global regions • Employ a global resource view of production and logistics • Use integrated reporting systems and planning technologies • “…no specific home or parent country dominates policy.” • E.g. ABB (Switzerland), Coca Cola (USA), Dow Chemical (USA), Hoechst (Germany), Nestle (Switzerland) and Philips (Netherlands)

20. Managing the global supply chain • Performance cycle structure • Transportation • Operational considerations • Information systems integration • Alliances Five major differences between domestic and international operations

21. Length of the performance cycle is a major difference • Longer performance cycles for international operations • Domestic is measured in days • International is measured in weeks or months • E.g. fashion merchandise takes 30 to 60 days • Reasons for longer order cycle to delivery cycle times • Communication delays • Financing requirements • Special packaging requirements • Ocean freight scheduling • Slow transit times • Customs clearance • Overall this change requires higher asset commitment • Inventory is in transit for longer periods

22. Transportation is impacted by four significant global changes • Removal of intermodal ownership and operation • Reduced complexity of operation and tracking of international shipping • Increased carrier privatization • Government-owned carriers often costly and unreliable • Privatization has led to increased availability of efficient carriers • Relaxing of cabotage restrictions in European Union • Increases trade efficiency • E.g. US corporations save 10% to 15% in intra-European shipping costs • Major constraints on physical infrastructure capacity • Significantly increasing demand on port and airport capacities • Infrastructure in much of the world was built over 50 years ago

23. Operational considerations of international trade • Requires multiple languages for both product and documentation • E.g. computer keyboard or handheld calculator • Increases complexity since product is limited to a specific country on it is language-customized • May require unique national accommodations • E.g. performance features, technical characteristics, environmental considerations, and safety • Requires large amount of documentation • See Table 11.4 in text • High incidence of countertrade and duty drawback

24. Information systems integration is a major challenge • Systems integration typically lags the acquisition or merger used to make the enterprise global • Requires a substantial capital investment • Requires two system types to be integrated • ERP system • Global planning system • Few firms have fully integrated global information systems or capability

25. Challenges to Global Operations • Demand • Diversity • Distance • Documentation

26. Example: Potential Hidden Costs • Commissions to customs brokers • Financing charges, letter of credit fees, exchange rate differentials • Foreign taxes imposed • Extra inventory and carrying costs • Extra paperwork/documentation • Inventory obsolescence, deterioration, spoilage, pilferage • Packaging • Fees for consultants, inspectors • Marine insurance • Import tariffs • Freight forwarder • Warehousing fees, Port handling • Risk and Security • Transit Time Uncertainty

27. Domestic and International Characteristic Differentials International Domestic Estimated at 14% of world GDP today Mainly ocean and air, with significant intermodal activity Higher levels, reflecting longer lead times and greater demand and transit uncertainty Heavy reliance on forwarders, consolidators, and customs brokers High, owing to differences in currencies, inflation, levels and little recourse for default High, owing to longer and more difficult transit, frequent cargo handling, and varying levels of infrastructure development Many agencies involved (e.g., customs, commerce, agriculture, transportation Significant paperwork; the U.S. Department of Commerce estimates that paperwork cost for an average shipment is $250 Voice and paper costly and often ineffective; movement toward electronic interchange but variations in standards hinder widespread usage Cultural differences require significant market and product adaptation About 10% of U.S. GDP today Mainly truck and rail Lower levels, reflecting short-order, lead-time requirements and improved transport capabilities Modest usage, mostly in rail Low Low Primarily for hazardous materials, weight, safety laws, and some tariff requirements Minimal documentation involved (e.g., purchase order, bill of lading, invoice) Voice, paper-based systems adequate, with growing usage of electronic data interchange and Internet Relative homogeneity requires little product modification Cost Transport mode Inventories Agents Financial risk Cargo risk Government agencies Administration Communication Cultural differences

28. Domestic and International Characteristic Differentials Domestic International Cost Transport mode Inventories Agents Financial risk Cargo risk Government agencies Administration Communication Cultural differences About 10% of U.S. GDP today Mainly truck and rail Lower levels, reflecting short-order, lead-time requirements and improved transport capabilities Modest usage, mostly in rail Low Low Primarily for hazardous materials, weight, safety laws, and some tariff requirements Minimal documentation involved (e.g., purchase order, bill of lading, invoice) Voice, paper-based systems adequate, with growing usage of electronic data interchange and Internet Relative homogeneity requires little product modification Estimated at 14% of world GDP today Mainly ocean and air, with significant intermodal activity Higher levels, reflecting longer lead times and greater demand and transit uncertainty Heavy reliance on forwarders, consolidators, and customs brokers High, owing to differences in currencies, inflation, levels and little recourse for default High, owing to longer and more difficult transit, frequent cargo handling, and varying levels of infrastructure development Many agencies involved (e.g., customs, commerce, agriculture, transportation Significant paperwork; the U.S. Department of Commerce estimates that paperwork cost for an average shipment is $250 Voice and paper costly and often ineffective; movement toward electronic interchange but variations in standards hinder widespread usage Cultural differences require significant market and product adaptation

29. Supplier Warehouse in Southern USA Customer Warehouse China Supplier The Global Supply Chain: Total Cost Example - Shipping Process Option 1: Domestic Purchase (USA) Supplier Warehouse in Southern USA Customer Warehouse Truckload Order Fulfillment Manufacturing & Packaging Process Option 2: Purchase in China - Ocean Shipment 40’ Ocean Cntr. Truckload Manufacturing & Packaging Process Inspection Process Order Fulfillment

30. Option 3: Purchase in China - Air Shipment Air Transport Truckload Supplier Warehouse in Southern USA Customer Warehouse China Supplier Manufacturing & Packaging Process Inspection Process Order Fulfillment The Global Supply Chain: Total Cost Example - Shipping Process Smaller Shipments ??? • What other services or distribution options can be added? • Inspection? • Smaller shipments from supplier to customer warehouse? • Direct ship to end customer, bypassing customer warehouse?

31. The Global Supply Chain: Total Cost Example - Plastic Cups in China

32. The Global Supply Chain: Total Cost Example - Plastic Cups in China

33. Alliances with carriers and specialized service providers are essential • Alliances provide • Market access • Market expertise • Reduced inherent risk of global operations • Using alliances an enterprise maintains contact with supply chain partners around the globe • Retailers • Wholesalers • Manufacturers • Suppliers • Service providers

34. Global sourcing remains on the rise particularly among low-cost countries • All durable goods industries are investigating global sourcing options for finished goods in • Asia • China and Malaysia • Eastern Europe • Latin America • Africa • Why does low-cost country sourcing remain in such demand? • Rationale • Challenges • Guidelines

35. Rationale is driven by need to remain competitive • Low-wage rate typically reduces manufacturing cost • Increases the number of possible sources to keep competitive pressure on domestic suppliers • Can increase firm’s exposure to state-of-the-art product and process technologies • Establishes a local presence to facilitate sales in the international country

36. Challenges related to global sourcing strategies • Identification of sources capable of producing the materials in the quality and quantity required • Protection of a firm’s intellectual property • Understanding import/export compliance issues • E.g. “Made in the USA” requires 95% of the material to be domestic • Communication with suppliers and transportation companies • Differences in time zones, language and technology • Guarantee the product’s security while in transit • Obsolescence risk to inventory due to extended transit times • Understanding the difference between piece price and total cost

37. Guidelines for making complex sourcing decisions • Use the criteria in Table 12.5 to structure the decision analysis • Some examples using criteria from the table • Products with high labor content should consider a low-cost country source • Products with high intellectual property content should be sourced domestically • Logistics managers should provide realistic assessments of • Total cost • Performance implications

38. A list of general sourcing guidelines for use in decision making Table 12.5 Sourcing Guidelines