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 12-2 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 12-3 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 12-4 Major reasons that firms expand into other countries Table 12.1 Rationale for Globalization 12-5 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 12-6 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 12-7 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 12-8 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 12-9 Continuum of global trade capabilities shown in 3 stages of development Table 12.2 Differential Characteristics of Global Development 12-10 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 12-11 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 12-12 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) 12-13 Managing the global supply chain Five major differences between domestic and international operations • • • • • Performance cycle structure Transportation Operational considerations Information systems integration Alliances 12-14 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 12-15 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 12-16 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 12-17 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 12-18 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 12-19 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 12-20 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 12-21 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 12-22 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 12-23 A list of general sourcing guidelines for use in decision making Table 12.5 Sourcing Guidelines 12-24