Global Supply Chain Design
Goals, strategies and techniques
Thomas Bousonville, HTW Saarland
Summer School International Logistics
05 Sep 2012
Learning objectives

At the end of this presentation you can
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
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

© Prof. Dr. Th. Bousonville
describe the new quality of international
production networks and supply chains with
modern globalization
explain the main motivations of companies to
engage in global supply chains
Name relevant criteria for the reconfiguration
of a production network
set up a concise cost function to support the
reconfiguration decision
use this cost function inside a simple optimization
model to calculate optimal supply chain operating
costs
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Globalization – The Phenomenon
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© Prof. Dr. Th. Bousonville
What is your take on “Globalization”?
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Amazon.com Editor's Picks: 10 Best Business Books of 2005
Globalization – The Phenomenon
Wiley, 2007
© Prof. Dr. Th. Bousonville
Wiley, 2nd ed., 2009
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Globalization – The Phenomenon

Global trade grows stronger than GDP
Source: WTO Secretariat, April 2012. Figures for 2012 and 2013 are projections
© Prof. Dr. Th. Bousonville
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Globalization – The Phenomenon
FOREIGN DIRECT INVESTMENT (FDI)
INWARD STOCKS
in Mill. USD
20.000.000
18.000.000
16.000.000
14.000.000
12.000.000
10.000.000
TOTAL WORLD
8.000.000
OECD
6.000.000
4.000.000
2.000.000
0
Source: OECD, August 2012
© Prof. Dr. Th. Bousonville
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Globalization – The Phenomenon
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DAX-30 companies:
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53 out of 191 executive board members are of foreign
nationality
Share of foreigners among DAX-30 board members
© Prof. Dr. Th. Bousonville
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Globalization – Phases
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When did „Globalization“ start?
Early internationalization
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Sales offices in foreign countries
Local production in foreign countries
New sales offices
Development of Siemens
international activities
Foreign production
failities
Source: Siemens in Jakob, Meyer (2006)
© Prof. Dr. Th. Bousonville
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Globalization – Phases
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„ Modern Globalization“
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Starting in the 1980ies
Accellerating in the 1990ies
Integrated international production networks
Characteristics
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High interdependence of supply chain elements
and national economies
Source: Accsus.com
© Prof. Dr. Th. Bousonville
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Globalization – Phases
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Example Volkswagen*
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99 Plants
27 Countries
153 national sales markets
Porsche Cayenne
Source: Porsche
*) Source: VW 2012
© Prof. Dr. Th. Bousonville
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Globalization – Phases
Daimler forces local production in emerging countries. In the
future mid-size SUVs of M-Klasse [..] for the first time will be
assembled outside the US-plant in Tuscaloosa, Alabama
based on preproduced component sets. This was released
on Monday. Final assembly will take place in India, Thailand
and Indonesia – the M-Klasse will start this year.
Source: LOG.m@il Newsletter Nr. 35, 31. August 2012, Translation: Th. Bousonville
© Prof. Dr. Th. Bousonville
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Globalization – Drivers
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Reduced transport and communication cost
Source: Busse M.: HWWA Discussion Paper Nr. 116; BDI: Außenwirtschafts-Report 04/2002
© Prof. Dr. Th. Bousonville
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Globalization – Drivers

Reduced transport cost
Source: UNCTAD – 2004 Development and Globalization: Facts and Figures
© Prof. Dr. Th. Bousonville
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Globalization – Drivers
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Reduced transport cost
Reduced tariffs
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© Prof. Dr. Th. Bousonville
Creation of free trade zones (EU, NAFTA)
Supply Chain Design
Summer School on International Logistics
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Globalization – Drivers
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Reduced transport and communication cost
Reduced tariffs
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Emergence of new fast growing markets
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GDP Growth rates. Source: OECD – Online Database, 04 Sep 2012
© Prof. Dr. Th. Bousonville
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Source: OECD – Online Database, 04 Sep 2012
Globalization – Drivers
Growth
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
GDP
in percent
absolute
US $, current prices, current exchange rates, millions
Abs.
Growth
US
China
Abs Growth
US
China
Rel. Growth
US
China
2000 - 2007
4.063.000
2.295.582
2000-2010
4.548.300
4.732.068
335.100
126.346
356.300
129.021
3%
11%
3%
10%
499.100
187.131
5%
13%
708.500
290.686
6%
18%
766.500
325.253
6%
17%
750.200
456.040
6%
20%
647.300
781.105
5%
29%
257.500
1.025.475
2%
29%
- 355.700
470.702
-3%
10%
583.500
940.310
4%
19%
Exchange rate
US $ vs. Renminbi Yuan
© Prof. Dr. Th. Bousonville
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Globalization – Drivers
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Reduced transport and communication cost
Reduced tariffs
Emergence of new fast growing markets
Huge differences in factor (esp. labor) costs
Comparison of labor cost in 2004 data
Country
Highest wage country (e.g. Germany)
High wage country (e.g. UK)
Eastern European Countries
Asian LCC (e.g. China, India)
Semiskilled
worker
27 USD
18 USD
2-5 USD
1 USD
Experienced
skilled Worker
36 USD
24 USD
4-9 USD
3 USD
Source: Meyer, T. (2006)
© Prof. Dr. Th. Bousonville
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
Substantial differences
between countries, but also
within the same country
 between qualifications
 between different regions
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Goals of a global business perspective
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
Presence in growing markets
Achieve a better cost position
Region
Market
China/India
Eastern Europe (EU)
Other
Surveyed
companies
Main motivation (in percent)
Cost
52
13
26
Other
32
59
40
16
28
34
87
36
75
Based on a survey among > 50 international companies
Source: Abele/Kluge (2005)

Further goals


Access to technical know-how
Minimize exchange rate risks
Exchange rates US $ vs. €
© Prof. Dr. Th. Bousonville
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Example Airbus
© Prof. Dr. Th. Bousonville
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Choosing new facility locations:
Factors to consider
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Market potential
Labor costs
Technical Know-How / Workers qualification
Logistics costs
Macroeconomic factors
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Availability of suppliers
Political factors
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© Prof. Dr. Th. Bousonville
Tariffs
Exchange risks
Stability
Corruption
Property rights protection
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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20
Review of Learning objectives

At the end of this presentation you can





© Prof. Dr. Th. Bousonville
describe the new quality of international
production networks and supply chains with modern
globalization
explain the main motivations of companies to
engage in global supply chains
name the relevant criteria for the reconfiguration
of a production network
set up a concise cost function to support the
reconfiguration decision
use this cost function inside a simple optimization
model to calculate optimal supply chain operating
costs
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
(v1.1)
(v1.2)
22
Methods for site assessment & selection
Based on
Total operational
costs
Operational cost +
yearly cash flows for
investments, ramp
up and closing of
facilities
Determines achievable
cost position
(strategic)
Supports network
migration plan
(tactical)
Static Cost Comparison
Dynamic Investment Methods
© Prof. Dr. Th. Bousonville
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
(v1.2)
23
Cost function
Fixed production cost
+ Variable production cost
+ Transportation cost
+ Tariffs
= Total cost
© Prof. Dr. Th. Bousonville
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Paraneters
Parameters of potential network
configuration
n
= Number of plants (supplying facilities)
m
= Number of markets/sales regions
bj
= Amount of demand in market j
ai
= Capacity of supplying facility i
fi
= Fixed costs of plant i
cpi = Var. production cost at i
?
ctij = Transportation costs of one unit
from plant i to market j
cij
= cpi + ctij
© Prof. Dr. Th. Bousonville
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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(v1.2)
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Decision based cost function
Decisions:
Use plant i
:
Amount of goods
:
produced at i for target
market j
yi ∈ {0,1}
xij
Cost function:
n
n
m
∑ f y + ∑∑ c
i =1
i
i
© Prof. Dr. Th. Bousonville
i =1 j =1
ij
(1 + tij ) xij → min
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
?
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Example: SunOil AG

SunOil AG operates a worldwide business with
renewable primary products (like colza)
Demand, production costs and transportation costs are
listed in the following table:
Production and Transportation Costs (€ / Mill. Units)
Sales market
Supply
N.America
S.America
Europe
Asia
Africa
N.America S.America
81
92
117
77
102
105
115
125
142
100
Demand (Mill. Units)

© Prof. Dr. Th. Bousonville
12
8
Europe
101
108
95
90
103
14
Asia
130
98
119
59
105
Africa
115
100
111
74
71
16
7
Capacity options
Small
Big
Capacity
Fixed costs
Capazity
Fixed costs
(Mill Units)
(€)
(Mill. Units)
(€)
6000
20
9000
10
10
4500
20
6750
10
6500
20
9750
10
4100
20
6150
10
4000
20
6000
Source: Inspired by Chopra/Meindl (2004), p. 110

How much and for which market should each of the
plants produce?
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Excel representation
Var. cost cij
Supply capacity ai
Costs, Capacities and Demand
Demand bj
Supply
N.America
S.America
Europe
Asia
Africa
Production and Transportation Costs (€ / Mill. Units)
Sales market
N.America S.America
81
92
117
77
102
105
115
125
142
100
Demand (Mill. Units)
12
Europe
101
108
95
90
103
8
Asia
14
130
98
119
59
105
Africa
115
100
111
74
71
16
7
Capacity options
Small
Big
Capacity Fixed costs Capazity Fixed costs
(Mill Units)
(€)
(Mill. Units)
(€)
10
6000
20
9000
10
4500
20
6750
10
6500
20
9750
10
4100
20
6150
10
4000
20
6000
57
Fixed cost fi
Decisions
N.America
S.America
Europe
Asia
Africa
Total
Cost function
Var. Costs
Fixed Costs
Costs
Total cost
© Prof. Dr. Th. Bousonville
N.America S.America
10
2
8
Europe
Asia
Operating
small plant
Africa
Operating
big plant
14
1
1
16
12
4.431
30.400
34.831
8
Total
1
1
14
16
Prod./Transp.
volume xij from i tp j
7
7
1
10
10
14
16
7
Decisions yi on
operating plant i
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Finding a good network configuration
Based on
experience of
senior managers
or …
setting up plausible
configurations
(scenarios)
manually
© Prof. Dr. Th. Bousonville
Using optimization
techniques from
Operations
Research
to compute cost
optimal configurations
using standard or
dedicated software
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
(v1.2)
29
The Capacitated Facility Location Model
Objective function
n
n
m
∑ f y + ∑∑ c
i =1
i
i
i =1 j =1
ij
(1 + tij ) xij → min
Minimize production and
transportation costs and tariffs
∀j = 1,.., m
Demand has to be met exactly
Constraints
n
∑x
i =1
ij
m
∑x
j =1
© Prof. Dr. Th. Bousonville
ij
= bj
≤ ai yi
∀i = 1,.., n
The supplied quantity per location
cannot be exceeded
xij ≥ 0 ∀i = 1,.., n ∀j = 1,.., m
Shipped quantities
cannot be negative
yi ∈ {0,1} ∀i = 1,.., n
Plant is open or shut down
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Including exchange rates
Let
cij be the costs for producing one unit at location i and
shipping it from there to market j expressed in the currency
of location i (e.g. Lats)
be the exchange rate between the valid currency in location
i and the reference currency (e.g. €)
ri
tij be the tariff for a unit of goods imported from location i to
market j
Modified objective function:
n
n
m
∑ f r y + ∑∑ c r (1 + t ) x
i =1
© Prof. Dr. Th. Bousonville
i i
i
i =1 j =1
ij i
ij
ij
→ min
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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33
Extension to multiple stages in the supply chain
Suppliers
Plants
Number of items:
l
n
t
m
Capacity/demand:
Sh
Ki
We
Dj
© Prof. Dr. Th. Bousonville
Warehouses
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
Customers
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Extension to multiple stages in the supply chain:
Simultaneous decision on plants and warehouses
Additional parameters:
chi = Cost of buying and shipping one unit from supplier h to plant i
cie = Cost of producing one unit at plant i and shipping it to warehouse e
cej = Cost of storing one unit at warehouse e and shipping it to customer j
fi
Fe
= Fixed costs of facility i
= Fixed costs of warehouse e
Decision variables
yi
ye
xhi
xie
xej
© Prof. Dr. Th. Bousonville
=
=
=
=
=
1 if plant i is open, = 0 elsewise
1 if warehouse e is open, = 0 elsewise
Number of units shipped from supplier h to plant i
Number of units shipped from plant i to warehouse e
Number of units shipped from warehouse e to customer j
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Extension to multiple stages in the supply chain:
Simultaneous decision on plants and warehouses
Objective function
n
l
l
n
∑ f y + ∑ F y + ∑∑ c
i
i =1
i
e =1
e
e
h =1 i =1
∑x
i =1
t
hi
≤ Sh
∀i = 1,.., n
∑x
∀e = 1,.., t
j =1
ej
≤ y eWe
ej
= Dj
t
∑x
e =1
© Prof. Dr. Th. Bousonville
t
m
x hi + ∑∑ cie xie + ∑∑ cej x ej → min
i =1 e =1
e =1 j =1
∀h = 1,.., l
∑ xie ≤ yi K i
e =1
m
hi
t
Minimize production and
transportaton costs
Constraints
n
n
∀j = 1,.., m
Capacity restrictions for suppliers,
plants and warehouses
Demand restriction
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
(v1.2)
36
Extension to multiple stages in the supply chain:
Simultaneous decision on plants and warehouses
Constraints (cont’)
l
t
∑x
hi
− ∑ xie ≥ 0 ∀i = 1,.., n
∑x
ie
− ∑ xej ≥ 0 ∀e = 1,.., t
h =1
n
i =1
e =1
m
Input-Output flow restriction for
plants and warehouses
j =1
xhi > 0, xie > 0, xej ≥ 0 ∀h = 1,.., l ∀i = 1,.., n ∀e = 1,.., t ∀j = 1,.., m
Non-negativity of shipped quantities
yi , y e ∈ {0,1} ∀i = 1,.., n; ∀e = 1,.., t
© Prof. Dr. Th. Bousonville
Plant / warehouse open or not
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Additional extensions

Profit maximization instead of cost minimization


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
Direct shipments from the factory to the customer
Economies of scale in production and transportation
Multiple periods

© Prof. Dr. Th. Bousonville
Include sales prices
Avoid unprofitable sales
=> need to model inventory (costs)
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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Bibliography & Links




© Prof. Dr. Th. Bousonville
Abele, E.; Kluge, J. (2005): How to Go Global –
Designing and implementing global production
networks. Projektbericht ProNet, McKinsey & Company,
Frankfurt
Meyer, T. (2006): Globale Standortauswahl –
Einflussfaktoren, in: Abele, E. et al. (Ed.): Handbuch
Globale Produktion, München, 2006
Chopra, Sunil / Meindl, Peter (2004): Supply Chain
Management. 2nd Ed., Upper Saddle River 2004, S.
109-115.
Volkswagen (2012): Production Plants,
http://www.volkswagenag.com/content/vwcorp/content
/en/the_group/production_plants.html, Accessed:
August 31, 2012
Supply Chain Design
Summer School on International Logistics
Saarbrücken, 5-sep-2012
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