Global Supply Chain
Management and Uncertainty
Sources: Dornier et al., GOL, 1998
Flaherty, GOM, 1996
Overview
Supply Chain Management
The Bullwhip Effect in Supply Chains
Domestic vs. International Supply
Chains
Vertical Integration Issues in Global
Supply Chains
Global Supply Chain Mgt:
HP DeskJet Printer (Vancouver)
PCAT = Printed Circuit Assembly and Testing
Supplier
IC Mfg
Supplier
PCAT
Supplier
Print
Mech Mfg
FAT = Final Assembly and Testing
FAT
1 week
Print Mech. Mfg. = Print Mechanism Manufacturing
DC = Distribution Center
US DC
Customer
European DC
Customer
Far East DC
Customer
1 day (US) - 5 weeks
Definition of Supply Chain Mgt:
Management of activities that transform raw materials into
intermediate goods and final products, and that deliver final
products to customer.
Require operating a network of facilities, often scattered around
the world.
Global Supply Chain Management
Factors to be considered when moving
from (mostly) domestic chains to
global ones
Substantial geographic distances
Foreign market forecasting difficulties
Exchange rates fluctuations and other
macroeconomic uncertainties
Differences in infrastructure
Explosion of product variety
Overview
Supply Chain Management:
The Bullwhip Effect in Supply
Chains
Domestic vs. International Supply
Chains
Vertical Integration Issues in Global
Supply Chains
The Bullwhip Effect
Recurring Theme:
Orders to upstream members exhibit greater variance
than actual orders at PoS (demand distortion)
The variance of orders increases as one moves
upstream (variance propagation)
Order Quantity
Bullwhip Effect due to Seasonal Sales of Campbell Soup
800
600
Shipments from Manufacturer
to Distributors
400
Retailers’ Sales
200
0
1
Weeks
52
The Bullwhip Effect
Results:
Excessive inventory
Dissatisfied customers
Lost revenues
Ineffective production schedules
Etc.
Order Quantity
Bullwhip Effect due to Seasonal Sales of Campbell Soup
800
600
Shipments from Manufacturer
to Distributors
400
Retailers’ Sales
200
0
1
Weeks
52
The Bullwhip Effect
Influence:
Individual decisions
Isolated functions
Isolated entities along the supply chain
Types of incentives
Shortage cost vs. inventory cost
Marketing, manufacturing, distribution
The Bullwhip Effect
Causes:
Demand forecast updating
Order batching
Price fluctuations and special sales
Rationing and shortage gaming
How can we remedy the situation?
The Bullwhip Effect
Remedial Strategies
Forecast Demand Updating
Access to market demand info (use POS data)
Info sharing across SC links (EDI)
Vendor managed inventory (VMI)
Lead time reduction and JIT supply
Order Batching
Reduction of Processing Costs (CAO)
New ways of achieving economies of scale in
transportation/distribution (3PLs)
The Bullwhip Effect
Remedial Strategies (cont.)
Price Fluctuations
Reduce frequency and magnitude of special trade
deals and consumer promotions (EDLP)
Continuous Replenishment Programs (CRP)
Rationing and shortage gaming
Better product allocation policies in short supply
periods (based on past sales)
Penalties on order cancellations
The Bullwhip Effect
Remedial Strategies (cont.)
Reduce Complexity
Shorter supply chains reduce variance in response
times
Reducing customer options reduces response
variation
In-short: reduce Agility in order to decrease
uncertainty and increase responsiveness
Overview
Supply Chain Management:
The Bullwhip Effect in Supply Chains
Domestic vs International Supply
Chains
Vertical Integration Issues in Global
Supply Chains
Domestic vs. International SCM
Distinctive
characteristics
of int‘l SCs
Issues more
important or
different
New issues in
international
supply chains
• Greater Geographic
Distance and Time
• Transportation and
coordination more
important
• Order-to-delivery times
longer
• Communication and
travel more difficult
• Adjustment is more
difficult
• Language and national
culture differences
• Information technology
for common work
• Learning
• Feeding back local ideas
to headquarters
• Lead suppliers
• Working in key locations
for an industry
• Diversity of SCs and
Demand Conditions
• Exchange rates, duty,
subsidies, quotas
Domestic vs. International SCM
Distinctive
characteristics
of int‘l SCs
Issues more
important or
different
• Multiple National
Markets
• Complex SC network
• Postponement and
commonality in product
design
• Competition among
multiple markets
• Multiple Locations of
Operations
• Complex SC network
New issues in
international
supply chains
• Hedging through
operations
• Diff. Regulations and
tastes, languages
• Exchange rates, gov’t
policies, macro-economic
effects
• Worldwide scanning
• Worldwide scanning
• Sharing work among many
locations: 24hr workdays
• Exchange Rates
• Operational hedges
Vertical Integration Issues
in Global Supply Chains
Vertical Integration (VI) vs Development of Local Suppliers (LS)
Condition of Variable
Types of variables
Country Environment
Market size and growth
Labor cost
Labor skill
Local managerial capacity
Political risk
FG import controls
Cultural compatibility
Competitive Situation
Industry concentration
Relative competitive strength
Company characteristics
Product (eg. maturity, brand identiry, line diversity, service intensity)
Technology (eg. maturity, stability, complexity)
Resources (eg. capital, management, previous experience)
Extend of globalization
Low
High
LS
VI
LS
VI
VI
LS(VI)
LS
VI
LS
VI
LS
LS
VI(LS)
VI
LS
LS
VI
VI
…
…
LS
...
...
VI
LS
VI