Managing Global Supply Chains

Focus on China & GZ

Introductory Course
Todays Schedule
9:00 - 9:30 - Welcome, trip Logistics,
syllabus review
9:30 - 10:15 - Lecture on Global Sourcing &
Outsourcing;
10:15- 10:40 - Team prep
10:40- 11:30ish - Review of the Scotts case
- Group presentations & discussion
11:40 -12:30 - Lunch
12:30-3:00 - Beijing portion coordinated by
Dr. Gillpatrick
Agenda - Topics
Trip Logistics Linda & Rachel
Syllabus overview Intro to class
Globalization
Outsourcing as a business strategy
Definitions and concepts
Rationales for outsourcing
The outsourcing process
Risk assessment
Success factors
Scotts case Team analysis
Globalization
Globalization can be cultural, political, &
economic.
Cultural: A new Universalism (laws
versus Jihad)
Political: policies regarding factors of
production (oil)
Economic: Markets and Production
Globalization of Production low-cost
factors of production Ricardos
comparative advantage
Globalization
Globalization Interdependent and integrated
world economy
All firms export and import 97% of firms in US
<500 employees
2006 over 2,500 trade treaties have been signed
vs. 181 in 1980.
Globalization of Production low-cost factors of
production: China; Weapons of Mass Production
Globalization
- World Bank states that by 2020 60% of econ activity by
developing nations, today 35% (Viet Nam, Indonesia, etc)
- Foreign Direct investment is easier with technology
- Multinationals moving east are not the only participants; Haier
& Li-Ning for ex.
- Backlash against market economy in some nations (Russia)
- China is even different by province (Shenzhen vs. Hong
Kong vs. Shanghai)
- Outsourcing & Jobs Social Justice vs. Economics
- Consumer savings vs. job displacement
- Division of income widens
- Environment degradation in developing nations







Outsourcing as a sourcing strategy
Previously:
Mainly outsourcing of manufacturing activities
Trend was for low-cost labor

Currently:
Complete business functions are outsourced
Common viable business strategy
Innovation & design are now included
Definition of outsourcing
Characteristics of outsourcing:
Normal In-house activities performed are
transferred to a third party
Assets, knowledge and sometimes employees
are sent to the external party
Extended and long term embedded relationship
Both parties experience new costs and risk
profiles
Forms of outsourcing services
Labor outsourcing
Mixed & consigned
outsourcing
Complete turnkey
outsourcing
Contractor provides
Facilities
Some employees
Some or all of the
following:
Employees
Materials
Process and Systems
Technology and
Equipment
Facilities
Management

Employees
Materials
Process and Systems
Technology and
Equipment
Facilities
Management
Decision rights
Codified knowledge
Host firm provides
Some employees
Materials
Process and Systems
Technology and
Equipment
Management
Some or all of the
following:
Employees
Materials
Process and Systems
Technology and
Equipment
Facilities
Management
Program management
Tacit knowledge
Chandrashekar, 2000
Definitions
Off-shoring: Off-shoring relates to the commissioning of
work and ownership to another country. Maintain ownership.
Partial outsourcing: only a part of an integrated
function is outsourced. The coordination of the function,
activities, and decision rights still lie with the client (the
buyer).
Turnkey outsourcing: applies when the
responsibility for the execution of the entire function (or
activities) lies with the external provider. This includes not
only the execution of the activities, but also the coordination
of these activities. May also include decision rights and
design.
Rationales for outsourcing
Strategic
reasons for
outsourcing
1. Improve company focus
2. Gain access to world class capabilities & Markets
3. Get access to resources that are not available
internally
4. Accelerate reengineering benefits
5. Improve customer satisfaction
6. Increase flexibility
7. Sharing risks
Tactical reasons
for outsourcing
1. Reduce control costs and operating costs
2. Free up internal resources
3. Receive an important cash infusion (next slide)
4. Improve performance
5. Ability to manage functions that are out of control
All these reasons underlie one overall objective: to improve the
overall performance of the outsourcing firm
Why Outsource?
Cash-to-Cash Cycle Time
0ENLI009
Inventory days + Days sales outstanding Average payment
of supply period for materials
Inventory
0OPPLAN012
Forecast
Accuracy
0OPPLAN008
Production
Lead Times
0OPMAKE017

Perfect Order
Fulfillment
0OPDEL061
Faultless
Invoices
0OPDEL023
Scheduled
Achievement
0OPMAKE022
Delivery
Performance
to Scheduled
Commit Date
0OPDEL019
Returns
0OPDEL067
Scrap
0OPMAKE023
Fill Rates
0OPDEL025
Order
Fulfillment
Lead Time
0OPPLAN030
Machine wait time
0OPMAKE007
Yield
0OPMAKE033
Number of
Supply
Sources
0OPSO012
Total Source
Lead Time
0OPSO041
0ENLI015
Sales
0ENPR026
0ENLI003
0OPPLAN017
One example of why to outsource
Three phases:
Strategic phase (why, what, who?)
Transition phase (how?)
Operational phase (how to control?)


Figure 8.4
The outsourcing process
Competence
analysis
Assessment
& approval
Contract
negotiation
Project execution
& transfer
Managing
relationship
Contract
termination
Strategic phase Transition phase Operational phase
Adapted from Momme, 2002
Strategic phase
1. Motives for outsourcing
Focus on core competences
Focus on cost efficiency/ effectiveness
Focus on service
2. Which activities or functions are
outsourced
Transaction cost approach
Core competence approach
3. Qualifications of the supplier
Technical and managerial qualities to achieve demanded
level of performance


Four phase model
Phase 1
Market search
Preliminary assessment
Potential supplier list
Phase 2
Detailed audit
Confidentiality agreement
Approved supplier list
Phase 3
Contract negotiation
Order issue
Kick-off meeting
Execution
Phase 4
Supplier report card
Post contract review
Continuous improvement
Supplier validation
Customer
Focus
Market
benchmark
Continuous
improvement
opportunities
Identification and assessment
Project execution
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Adapted from Momme, 2002
The Transition phase
Contract negotiation
Contract forms a legal basis for relationship
Contracts depends on characteristics of outsourced activity
The contract type has a great impact on the success of the joint
operation

Project execution and transfer
Outsourcing transition can be very complex
The transfer should be conducted using project management
principles
Test phase before going life
The operational phase
It is in the operational phase that the outsourcing will deliver
its expected results
Successful outsourcing depends heavily on close cooperation
with the supplier
Six core values as being critical to a successful outsourcing
relationship
Core values Supporting factors
Shared goals and objectives
Mutual dependence
Open lines for communication
Concern for the others profitability
Mutual commitment to customer
satisfaction
Trust
Developing a personal relationship
Having professional respect
Investment of effort by top
management
Commitment to continuous
improvement
McQuiston (2000)
Critical success factors of outsourcing
Understanding company goals and objectives
Inclusion of outsourcing in the strategic vision and plan
Selecting the right supplier
A properly structured contract
Open communication with the individual groups involved
Ongoing management of the relationship (not embeddedness)
Senior executive support and involvement
Careful attention to personnel issues & resources
Constant reflection on core competencies and IP versus
outsourcing, including decision and alienable rights

www.theoutsourcinginstitute.com
Outsourcing factors to consider?
-Labor efficiency Lean applied? % of COGS?
-DFM 60% of cost is in design phase
-Shipping & expediting flexibility?
-Training
-Quality eats up all savings (reputation & Warranty)
-Capacity / utilization if not >80%?
-Cheap labor Not static
-Plant start-up costs?
-Support & travel
-Knowledge protection, transfer, & codification
-Culture
Why design for manufacturability matters





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100%
Cumulative
percent of
cost
0%
Product development
Total life
cycle costs
Ability to
control costs
Production Support
60% to 80% of total life cycle costs are
largely determined during development
Outsourcing factors to consider?
-Where are the markets? Toyota in Silicon
Valley, Boeing & Oakley in Calif.
-Composition of COGS is direct labor? If
<7-15% as with high tech, <3% of some
apparel
-Lean can drive down cycle times to hours,
making offshore logistics the impediment
-Build to order allows for less E&O as well
as agility to customize products & lower
lead-times
-Consumer Do they care if built in USA?


Where to Outsource?
Factors to consider:
-Costs: labor, infrastructure
-Skill pool: labor, IT, language
-Environment: regulations,
bureaucracy, corruption
-Quality of Infrastructure Roads,
Airports, ports
-Risk: Earthquakes, war, politics
-Market potential: China vs. Vietnam

China Labor Market Relate
to the NPI case?
Facts:
FDI-$500B; Directly Employ 16M people
112M factory workers
200 largest exporters, 153 were from FDI
Is unrest growing? 280K labor disputes 2009
Wages increased 9%/yr since 2002
Surplus labor or shortage?
Half the number of <16-29yrs by 2020

Final Alternatives
Near-shoring Mfg located in low cost
region, but supplier in local market
Best-shoring MFG offers alternatives
pending risk and complexity
Out-source / Co-located Factory within a
factory

Scotts Miracle Gro Case
In-House, Outsource, or Off-Shore?
Scotts Questions
What is the purpose of the exercise in your opinion, why would a firm
want to outsource / offshore this type of product in its portfolio?
What are the internal / external political and ethical issues associated
with this decision? Are they relevant to the company, product, and
global sourcing?
What are the strategic risks and benefits of outsourcing / offshoring
production of the Temecula plant to a location in Mainland China?
Include all hard and soft items in a risk & benefit format.
Financially compare the options of staying in Temecula and moving to
China. Provide the soft variables when arguing against the
quantifiable numbers in the analysis.

Scotts Questions
Consider the following in your financial analysis:
5 year horizon, volumes & material costs are stagnant in
Temecula
Taxes excluded, lease in Temecula could be cancelled
New molds in China are estimates only by students
Shipping rates
Exchange rates
Production Costs (Labor, overhead, plant / equip)
Governance Costs (Management Overhead & Start-up
costs)

Break into Teams..
Scotts Case
My Numbers:
- Temecula: $61,234,227
- Outsource: $55,003,263
- Offshore: $60,003,275

Scotts Case
Offshore is burdened: by $8M up front investment
minus the savings in EMS GM%
Outsourcing is burdened:
Risk for currency exchange of 5% annually
Start-up costs of $1.5M
Lease buy-back $1.5M
Freight costs of $7M
Temecula is burdened:
High labor, electricity, lease of building, etc.
What is beyond the numbers?????
Scotts case
Variables:
- Ramp
- Inventory
- SKU proliferation
- Closing time of Temecula
- Seasonality
- Made in USA
- China market?
- What did they do? Keep Temecula