Global Supply Chains

McGraw-Hill/Irwin

Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Global supply chain challenges

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

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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

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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
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Major reasons that firms expand into other countries

Table 12.1 Rationale for Globalization

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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

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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

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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

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Logistics in a global economy face more complex operating characteristics

Increased uncertainty results from
Greater distances Longer leadtimes Decreased market knowledge

Decreased control results from

Extensive use of international service firms Potential customs requirements and trade restrictions by governments

Increased variability arises from

Unique customer requirements Unique documentation requirements Shifting political environments

Decreased visibility results from

Longer transit times Longer holding times Less ability to track shipment locations

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Continuum of global trade capabilities shown in 3 stages of development

Table 12.2 Differential Characteristics of Global Development

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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

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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

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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)

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Managing the global supply chain

Five major differences between domestic and international operations
Performance cycle structure Transportation Operational considerations Information systems integration Alliances

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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

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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
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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 12.4 in text

High incidence of countertrade and duty drawback

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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

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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

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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
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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 firms exposure to state-of-the-art product and process technologies Establishes a local presence to facilitate sales in the international country
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Challenges related to global sourcing strategies

Identification of sources capable of producing the materials in the quality and quantity required Protection of a firms 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 products security while in transit Obsolescence risk to inventory due to extended transit times Understanding the difference between piece price and total cost

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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

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A list of general sourcing guidelines for use in decision making

Table 12.5 Sourcing Guidelines

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