Global Supply Chain
Management
Tomas Hult
Director, International Business Center (MSU-CIBER)
Associate Professor of Marketing and Supply Chain Management
Michigan State University
Email: hult@msu.edu
It’s All About Leverage
• Consider how to turn an aircraft. Aircrafts are steered through the use
of a system of ailerons on the wings and the rudder at the tail of the
aircraft. In comparison to the aircraft, the ailerons and the rudder are
very small; however, leverage allows them to turn the large aircraft. In
other words, putting the right combination of a little leverage on the
right places allows incredible maneuvering.
What is a Supply Chain?
• Supply chains are linkages of partially
discrete, yet interdependent entities that
collectively transform raw materials into
finished products.
• Supply chains connect the functions of
inbound activities (such as purchasing) with
outbound activities (such as logistics and
“place” activities).
A. . . . . . . . . . . . . . . End Customer
Formal Definition
of a Supply Chain
• A supply chain is a “network of facilities and activities that
performs the functions of product development,
procurement of material from suppliers, the movement of
materials between facilities, the manufacturing of products,
the distribution of finished goods to customers, and aftermarket support for sustainment” (Mabert and
Venkataraman 1998).
Supply Chain Utilities
TIME
PLACE
POSSESSION
Network of Relationships
Finland
Sweden
Germany
Denmark
Norway
Netherlands
Iceland
Ford Example
Belfast
Carburetors and
distributors
Enfield
Instruments, fuel
and water gauges,
plugs
Treforest
Basildon
Radiators, water
pump assembly,
engine components
Genk
Spark plug
insulators
Body panels,
road wheels
Leamington
Wülfrath
Foundry production
of engine
components
Transmission
parts, engine
components
Dagenham
Cologne
Die-cast transaxle
casings, gear and
engine components
Final assembly
Bordeaux
Transmissions
Valencia
Saarlouis
Final assembly
Final assembly
Types of International
Sourcing Strategy
Sourcing
Intra-Firm Sourcing
Outsourcing
Domestic
International
Domestic
International
Domestic In-House Sourcing
Offshore Subsidiary Sourcing
Domestic Purchasing Arrangement
Offshore Outsourcing
A company procures
major components inhouse by procuring them
domestically
A company procures
major components from
its foreign subsidiary
A company buys major
components from
independent suppliers at
home
A company buys major
components from
independent suppliers
internationally
Source: Kotabe (2000)
International Supply
Chain Organization
• A supply chain organization is a
relatively enduring interfirm
cooperative that uses resources
from international participants to
accomplish shared and independent
goals of its members.
International SCM Theory
Actor Bonds
Resource Ties
Activity Links
National
Competitive
Advantage
Firm Strategy,
Structure, and
Rivalry
Factor
Endowments
A nation’s position in
factors of production
such as skilled labor or
the infrastructure
necessary to compete in
a given industry.
The conditions in the
nation governing how
companies are created,
organized, and managed
and the nature of
domestic rivalry.
Demand
Conditions
Related and
Supporting
Industries
The nature of
home demand for
the industry’s
product or service.
The presence or absence in a
nation of supplier industries
and related industries that are
internationally competitive.
Source: Porter 1990
The Value Chain
• Michael Porter, professor at Harvard Business School,
uses the value chain as a systematic means of displaying
and categorizing business activities.
• The term value chain means that at each stage of the
order-to-delivery system, value is added to the product
or service.
Porter’s Value Chain
Firm Infrastructure
Support Activities
Human Resource Management
Technology Development
PROCUREMENT
Information Technology
Service
Marketing & Sales
OUTBOUND LOGISTICS
Operations
INBOUND LOGISTICS
Primary Activities
Source: Porter 1985
Primary Activities
• Primary activities are the five basic functions needed to
physically produce a product or service, deliver and
market it to buyers, and support it after the sale. Each
contributes value in specific ways.
– Inbound logistics refers to activities/actions required before physical
production of a product can begin or before service can be performed (inputs
such as materials handling, warehousing, inventory control, vehicle
scheduling and returns to suppliers).
– Outbound logistics refers to all activities from the point of a finished product
to its delivery to the market or customer or those activities that follow the
completion of a service (such as distribution, delivery vehicle operations,
order processing, and scheduling).
Support Activities
• Support Activities provide inputs or infrastructure in
support of primary activities. These supporting
activities stretch across the entire value chain since
they impact each primary activity.
– Procurement is obtaining purchased inputs, such as raw
material, parts, equipment, etc.
From the Value Chain…
•
Five continuous and interactive steps are involved in
developing a global supply chain strategy along the value
chain:
1.
Identify the separable links (R&D, manufacturing, and marketing) in
the company’s global value chain.
2.
In the context of those links, determine the global location of the
company’s competitive advantages, considering both economies of
scale and scope.
3.
Ascertain the level of transaction costs (e.g., cost of negotiation, cost
of monitoring activities, and uncertainty resulting from contracts)
between links in the global value chain, both internal and external, and
select the lowest cost mode that provides the most value.
Source: Kotabe and Helsen 2001
From the value chain…
4.
Determine the comparative advantages of countries (including
the company’s home country) relative to each link in the value
chain and to relevant transaction costs.
5.
Develop adequate flexibility in corporate decision making and
organizational design so as to permit the company to respond to
changes in both its competitive advantages and the comparative
advantages of countries.
Source: Kotabe and Helsen 2001
Competencies Needed for
Efficient Global SCM
Positioning
The selection of strategic and
structural approaches to guide
global operations
Integration
The establishment of what to do and
how to do it creatively
Agility
The achievement and retention of
global competitiveness and global
customer success
Measurement
The internal and external
monitoring of global operations
Source: Michigan State University (1995)
Global SCM Factors
• Costs
– Local labor rates
– International freight tariffs
– Currency exchange rates
• Customs Duty
– Duty rates differ by commodity and level of assembly
– Impact of GATT/WTO: Changes over time
Source: Global Supply Chain Associates (GSCA) 1999
Global SCM
Factors Continued
• Export Regulations
• Denied parties list
• Export licenses
• Time
•
•
•
•
•
Lead time
Cycle time
Transit time
Export license approval cycle
Customs clearance
Global SCM
Factors Continued
• Taxes on Corporate Income
– Different markups by country
– Tax havens and not havens
– Make vs. buy effect
• Offset Trade and Local Content
– Local content requirement for government purchases
– Content for preferential duty rates
Questions to Answer
• Manufacturing Strategy:
–
–
–
–
How many plants do I need?
Where should each plant be located?
What products should each make?
What process technologies should each have and
how much of each process is needed?
– What part of the world should each plant serve?
Source: Global Supply Chain Associates (GSCA) 1999
Questions to Answer Continued
• Supply Base Design / Vendor Consolidation:
– How do I simultaneously perform supplier selection for all the
parts in the same commodity group?
– How many suppliers is best and which suppliers should send
which parts to which plants?
– Am I missing opportunities by sourcing one part at a time?
• Outsourcing:
– What parts of my supply chain should I keep "in-house" and what
parts to outsource?
– What if a third party has a higher variable cost but a lower fixed
cost than in-house production?
Questions to Answer Continued
• Impact of Duty / Drawback, Taxes, Local Content & Offset
Trade:
– If the duty rates come down according to GATT/WTO, how should I
change my supply chain design?
– Does it make sense to still locate production inside the Triad areas or what
trading block areas should we consider?
– What is the best use of the tax havens (Singapore, Puerto Rico, Ireland)?
• Spare Parts Logistics:
– How many echelons of repair and stocking is best?
– How many repair shops are needed, where should they be located, what
products should each handle, and what geographic area should each serve?
– How do the drivers of product value, weight, complexity, and frequency of
repair affect this decision?
Questions to Answer Continued
• New Product Pipeline Design:
•
•
•
•
•
What should the supply chain look like for a new product?
How should I fit the new product into my current supply chain?
Should I single or double source this product?
How much do my fixed costs affect this decision?
What is the cross-over point to open up a second and third source
of supply?
Auto Parts Example
in Japan
Automobile makers
affiliated parts makers
Automobile makers
Dealers
Independent
parts makers
Repair parts
makers
Wholesalers
Special agents
Cooperative
sales companies
Sub-dealers
2nd-level
wholesalers
Retailers
Gasoline
stations
Large users
Automobiles
repair shops
End users
Source: McKinsey Industry Studies
Auto Parts Example
in the U.S.
Manufacturer
51% Warehouse
distributor
Jobber buying groups
Jobber
Installer
Customer
10%
18%
Mass
merchandiser
21%
Repair
specialist
Primary channel
Secondary channel
Source: McKinsey Industry Studies
Global SCM Example 1:
Large Computer Company
• Goals
– Reduce cost
– Improve ROA
– Simplify the worldwide supply chain
Source: Global Supply Chain Associates (GSCA) 1999
Objectives
• Redesign the entire worldwide supply chain
• Determine how many plants and where they should
be located
• Determine what process technologies should be in
each plant
• Specify the loading on each plant and the service
area
Global Supply Chain Structure Before
Reorganization
Source: Global Supply Chain Associates (GSCA) 1999
Redesigned
Global Supply Chain
• Recommended plant closings and re-tooling
• Reduced number of facilities from 33 plants to 12 plants
• Created three relatively self-contained customer-oriented
supply zones: Americas, Europe, Pacific Rim
• Estimated benefits:
– Reduced manufacturing / logistics cost by $375 Mil. annually
– Improved Corporate ROA by 3.2 points
Source: Global Supply Chain Associates (GSCA) 1999
Global Supply Chain Structure After
Reorganization
Source: Global Supply Chain Associates (GSCA) 1999
READINGS
• Michigan State University’s Global Logistics Research
Team (1995), World Class Logistics: The Challenge of
Managing Continuous Change,” Oak Brook, IL: Council
of Logistics Management (Sponsored by the Council of
Logistics Management).
• Locke, Dick (1996), Global Supply Management, Boston,
MA: McGraw Hill (Sponsored by the National Association
of Purchasing Management).