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CHAPTER 11:

Global Supply Chains

McGraw-Hill/Irwin

Copyright 2013 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

11-2

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

11-3

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
11-4

Major reasons that firms expand into


other countries
Table 11.1
Rationale for
Globalization

11-5

Table 11.2 Estimated 2008 national


logistics cost
Region
North America

Europe

GDP (Millions)
1,510,957

Logistics as % of
GDP
8.50%

89,676

1,088,128

8.24%

United States

1,173,720

14,264,600

8.23%

Region

1,391,885

16,863,685

8.32%

Austria

25,907

415,321

6.24%

Belgium

46,749

506,392

9.23%

Czech Rep

16,418

217,077

7.56%

Denmark

22,423

342,925

6.54%

France

188,005

2,865,737

6.56%

Germany

341,371

3,667,513

9.31%

GrBritain

169,947

2,674,085

6.36%

Greece

51,770

357,549

14.48%

Hungary

8,721

156,284

5.58%

Ireland

22,122

273,328

8.09%

Italy

152,238

2,313,893

6.58%

Country Name
Canada

Logistics (Millions)
128,490

Mexico

11-6

Figure 11.1
Generic International Strategies

High

Force
Towards
Global
Integration

Low

Global
Strategy

No
International
Strategy

Transnational
Strategy

Multi-domestic
Strategy

Low

High

Force Towards Local


Responsiveness

Source: Fitzsimmons, James and Mona Fitzsimmons (2011). Service Management: Operations,
Strategy and Information Technology, Seventh Edition (New York: McGraw-Hill). Pg. 352.
11-7

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

11-8

Factors and Considerations Multidomestic


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

11-9

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

11-10

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

11-11

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

11-12

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

11-13

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

11-14

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

11-15

Table 11.3
Differential Characteristics of Global Services
Development
Stages

Service
Focus

Marketing
Strategy

Delivery
Strategy

Management Human Resource


Strategy
Development

No
international
strategy

Standard
product for
local market

Single
strategy
focused on
local market

Direct to customer

Single simple
financials

Operated by
entrepreneur with
limited specialization

Multi-domestic
strategy

Domestic
marketing
and delivery

Domestic
customers

Collaboration

Transaction
driven with
integrated
financials

Management with
home country focus

Global strategy

Local market
customization

Focused
specific
market areas
which may
cross
international
boundaries

Subsidiaries with
local presence

Decentralized
operations with
local profit
responsibility

Limited top
management with
international
experience

Transnational
strategy

Global
branding and
integrated
operations

Global
customers

Worldwide flow of
key resources

Centralized
planning in global
sites

International training
and experience

11-16

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

11-17

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

11-18

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)

11-19

Managing the global supply chain


Five major differences between
domestic and international
operations

Performance cycle
structure
Transportation
Operational considerations
Information systems
integration
Alliances

11-20

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

11-21

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
11-22

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

11-23

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
11-24

Challenges to Global Operations

Demand
Diversity
Distance
Documentation

11-25

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

11-26

Domestic and International


Characteristic Differentials
Domestic

International

Cost
Transport mode

About 10% of U.S. GDP today


Mainlytruckandrail

Estimated at 14% of world GDP today


Mainlyoceanandair,withsignificantintermodal
activity

Inventories

Lowerlevels,reflectingshort-order,lead-time
requirementsandimprovedtransportcapabilities

Higherlevels,reflectinglongerleadtimesand
greaterdemandandtransituncertainty

Agents

Modestusage,mostlyinrail

Heavyrelianceonforwarders,consolidators,and
customsbrokers

Financial risk

Low

High,owingtodifferencesincurrencies,inflation,
levelsandlittlerecoursefordefault

Cargo risk

Low

High,owingtolongerandmoredifficulttransit,
frequentcargohandling,andvaryinglevelsof
infrastructuredevelopment

Government
agencies
Administration

Primarilyforhazardousmaterials,weight,safety
laws,andsometariffrequirements

Manyagenciesinvolved(e.g.,customs,commerce,
agriculture,transportation

Minimaldocumentationinvolved(e.g.,purchase
order,billoflading,invoice)

Significantpaperwork;theU.S.Departmentof
Commerceestimatesthatpaperworkcostforan
averageshipmentis$250

Communication

Voiceandpapercostlyandoftenineffective;
Voice,paper-basedsystemsadequate,with
growingusageofelectronicdatainterchangeand movementtowardelectronicinterchangebut
variationsinstandardshinderwidespreadusage
Internet

Cultural differences Relativehomogeneityrequireslittleproduct


modification

Culturaldifferencesrequiresignificantmarketand
productadaptation

11-27

The Global Supply Chain: Total Cost


Example - Shipping Process
Option1:DomesticPurchase(USA)
Supplier
Warehouse in
Southern USA

Truckload

Order
Fulfillment

Manufacturing&
PackagingProcess
Option2:PurchaseinChina-OceanShipment
40Ocean
Truckload
Cntr.
Supplier
China
Warehouse in
Supplier
Southern USA
Manufacturing&
PackagingProcess

Customer
Warehouse

Inspection
Process

Customer
Warehouse
Order
Fulfillment

11-28

The Global Supply Chain: Total Cost


Example - Shipping Process
Option3:PurchaseinChina-AirShipment
AirTransport
China
Supplier
Manufacturing&
PackagingProcess

Truckload

Supplier
Warehouse in
Southern USA

Customer
Warehouse

Inspection
Process

Smaller Shipments

Order
Fulfillment
???

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?
11-29

The Global Supply Chain:


Total Cost Example - Plastic Cups in China
Raw Material Cost
Resin
Colorant
Package
QA Inspection
Tooling Amortization
Molding Labor
Assembly/Packaging
Labor
Freight
Port Terminal Handling
STANDARD PURCHASE
PRICE
China Markup (10%)
Duty/Broker fee
TOTAL COST TO BUYER
PRICE WITH 30% PROFIT
Inventory Carrying Cost

USA Cost

China Cost by Ocean

2.40
0.70
1.32
N/A
2.00
0.35

2.40
0.70
1.32
0.15
1.00
0.18

3.75
0.87
N/A

0.15
1.43
0.08

11.39

7.41

N/A
11.39
14.81

0.74
0.19
8.34
10.84
11-30

The Global Supply Chain:


Total Cost Example - Plastic Cups in China
USA Cost
Raw Material Cost
Resin
Colorant
Package
QA Inspection
Tooling Amortization
Molding Labor
Assembly/Packaging
Labor
Freight
Port Terminal Handling
STANDARD PURCHASE
PRICE
China Markup (10%)
Duty/Broker fee
TOTAL COST TO BUYER
PRICE WITH 30% PROFIT
Inventory Carrying Cost
(15%)

China Cost by
Ocean China Cost by Air

2.40
0.70
1.32
N/A
2.00
0.35

2.40
0.70
1.32
0.15
1.00
0.18

2.40
0.70
1.32
0.15
1.00
0.18

3.75
0.87

0.15
1.43

0.15
4.63

N/A

0.08

11.39

7.41

10.53

N/A
11.39
14.81

0.74
0.19
8.34
10.84

0.74
0.19
11.46
14.90

N/A

0.82

11-31

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

11-32

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
11-33

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
11-34

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

11-35

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
11-36

A list of general sourcing guidelines for


use in decision making
Table 12.5 Sourcing Guidelines

11-37