Belfast Carburetors and distributors Treforest Spark plug insulators Leamington Foundry production of engine components Dagenham Final assembly Bordeaux Transmissions Enfield Instruments, fuel and water gauges, plugs Basildon Radiators, water pump assembly, engine components Genk Body panels, road wheels Wülfrath Transmission parts, engine components Saarlouis Final assembly Cologne Die-cast transaxle casings, gear and engine components Valencia Final assembly Ford Example
GLOBAL MARKET FORCES
Foreign competition in local markets
Growth in foreign demand
Global presence as a defensive tool
Companies forced to develop and enhance leading-edge technologies and products.
Knowledge diffusion across national boundaries, hence need for technology sharing to be competitive
Global location of R&D facilities
Close to production (as product cycles get shorter)
Close to expertise (Indian programmers?)
GLOBAL COST FACTORS
Availability of skilled/unskilled labor at lower cost
Integrated supplier infrastructure (as suppliers become more involved in design)
Capital intensive facilities like tax breaks, price breaks etc.
POLITICAL AND ECONOMIC FACTORS
Trade protection mechanisms:
Tariffs, Quotas, Voluntary export restrictions, Local content requirements, Environmental regulations, Government procurement policies (discount for local)
Exchange rate fluctuations and operating flexibility
How many plants & where should each be located?
Products made & process to be used at each plant?
What part of the world should each plant serve?
Supply Base Design / Vendor Consolidation:
How to select supplier for parts in same product group?
How many suppliers is best?
Which suppliers should send which parts to which plants?
Can I source more than one part at a time from a supplier?
Impact of Duty / Drawback, Taxes, Local Content :
If the duty rates come down according to GATT/WTO, how should I change my supply chain design?
What is the best use of the tax havens?
How much of local & global sourcing is possible?
Source: Global Supply Chain Associates (GSCA) 1999
What parts to produce "in-house" and what parts to outsource?
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 i.e. product’s weight, complexity, and frequency of repair affect this decision?
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?
Source: Global Supply Chain Associates (GSCA) 1999
Local labor rates / International freight tariffs
Currency exchange rates
Duty rates differ by commodity and level of assembly
Impact of GATT/WTO: Changes over time
Export Regulations & Local Content
Denied parties list / Export licenses
Local content requirement for government purchases
Lead time /Cycle time /Transit time /Customs clearance
Taxes on Corporate Income
Tax havens and not havens
Make vs. buy effect
Global SCM Factors Source: Global Supply Chain Associates (GSCA) 1999
Global Supply Chain System
International distribution systems :
- Manufacturing(domestically), Distribution (overseas)
International suppliers :
Raw materials and Components(foreign suppliers), Final assembly/ Manufacturing(domestically),
Offshore manufacturing :
Product is sourced & manufactured in a single foreign location,
Shipped back to domestic warehouses for sale and distribution.
Fully integrated global supply chain :
Products are supplied, manufactured and distributed from factories located throughout the world
In a truly global supply chain, it may appear that the supply chain was designed without regard to national boundaries.
The true value of a global supply chain is realized by taking advantage of these national boundaries
Risk Management in GSC
Outsourcing and offshoring expose the supply chain to increased risks.
Trends toward cost reduction, lean manufacturing and JIT imply low inventory levels in supply chain
In the event of an unforeseen disaster, adherence to this type of strategy could result in a shutdown of production lines because of lack of raw material or parts inventory.
Factors Impacting Exposure to Risks
Sources of Risks
Managing the Unknown-Unknown
Invest in redundancy
Increase velocity in sensing and responding
Create an adaptive supply chain community
Respond to unforeseen events by careful analysis of supply chain trade-offs
A company with 40 facilities over the world
Initial analysis for reduction of cost by $40M a year
shut down 17 of its existing manufacturing facilities
leave 23 plants operating
satisfy market demand all over the world.
Redundancy Example: Problems with New Decision
New design left no plant in North America or Europe
Long and variable supply lead times
Higher inventory levels.
Remaining manufacturing facilities in Asia and Latin America fully utilized
Any disruption of supply from these countries, due to epidemics or geopolitical problems, would make it impossible to satisfy many market areas.
How can one design the supply chain taking into account epidemics or geopolitical problems that are difficult to quantify?
Analyze the cost trade-offs
Increase in total cost negligible compared to increases in redundancy and hence risk.
Sensing and Responding
Speed in sensing and responding can help the firm overcome unexpected supply problems
Failure to sense could lead to:
Failure to respond to changes in supply chain
Can force a company to exit a specific market
Sensing and Responding Example
Different responses of Nokia and Ericsson on a fire at one of the supplier’s facility
Supplier was Philips Semiconductors in Albuquerque, Mexico
Changed product design to source components from alternate suppliers
For parts that could not be sourced from elsewhere, worked with Philips to source it from their plants in China and Netherlands
All done in about five days
Sensing and Responding Example
Ericsson’s experience was quite different
Took 4 weeks for the news to reach upper management
Realized five weeks after the fire regarding the severity of the situation.
By that time, the alternative supply of chips was already taken by Nokia.
Devastating impact on Ericsson
$400M in potential sales was lost
Part of the loss was covered by insurance.
Led to component shortages
Wrong product mix and marketing problems caused:
$1.68B loss to Ericsson Cell Phone Division in 2000
It is the most difficult risk management method to implement effectively.
Requires all supply chain elements to share the same culture, work towards the same objectives and benefit from financial gains.
Need a community of supply chain partners that reorganize to better react to sudden crisis
In 1997, Aisin Seiki the sole supplier of 98% of brake fluid proportioning valves (P-valves) used by Toyota
Inexpensive part (about $7 each) but important in the assembly of any car.
Saturday, February 1, 1997:Fire stopped Aisin’s main factory in the industrial area of Kariya,
Two weeks to restart the production
Six months for complete recovery
Toyota producing close to 15,500 vehicles per day.
JIT meant only 2-3 days of inventory supply
Recovery Effort by Toyota
Blueprints of valves were distributed among all Toyota’s suppliers
Engineers from Aisin and Toyota relocated to supplier’s facilities
Existing machinery adapted to build the valves according to original specifications
New machinery acquired in the spot market
Within days, firms with little experience with P-valves were manufacturing and delivering parts to Aisin
Aisin assembled and inspected valves before shipment to Toyota
About 200 of Toyota’s suppliers were involved
Vehicle Production & P-Valves Inventory
Accident initially cost:
7.8B Yen ($65M) to Aisin
160B Yen (or $1.3B) to Toyota
Damage reduced to 30B Yen ($250M) with extra shifts and overtime
Toyota issued a $100M token of appreciation to their providers as a gift for collaboration
Single Sourcing and Adaptability
Single sourcing is risky
Achieves economies of scale
High quality parts at a low cost
JIT mode of operation builds a culture of:
Working with low inventories
Ability to identify and fix problem quickly
Entire supply chain was stopped once the fire occurred
Prompted every company in the chain to react to the challenge
Speculative Strategies : A company bets on a single scenario, with often spectacular results if the scenario is realized, and dismal ones if it is not .
Hedge Strategies : A company designs the supply chain in such a way that any losses in part of the supply chain will be offset by gains in another part .
Multiple plants in different countries, where, Certain plants more profitable at times than others
Move production between plants to be successful overall.
Requires a flexible supply chain
various distribution channels
Can be expensive to implement
loss of economies of scale
Production shifting : Flexible factories, excess capacity and suppliers used to shift production from region to region to take advantage of current circumstances.
Information sharing : Information can be used to anticipate market changes and find new opportunities .
Global coordination : Having multiple facilities worldwide provides a firm with a certain amount of market leverage that it might otherwise lack.
Political leverage : The opportunity to move operations rapidly gives firms a measure of political leverage in overseas operations. For example, if governments are lax in enforcing contracts or international law, or present expensive tax alternatives, firms can move their operations.
Approaches to Flexible Strategy
Product development : It’s important to design products that can be modified easily for major markets, and which can be manufactured in various facilities.
Purchasing : A company will find it useful to have management teams responsible for the purchase of important materials from many vendors around the world. In this way, it is much easier to ensure that the quality and delivery options from various suppliers are compatible
Production : Excess capacity and plants in several regions are essential if firms are to take full advantage of the global supply chain by shifting production as conditions warrant.
Demand management : It involves setting marketing and sales plans based on projected demand and available product, is carried out on a regional basis.
Order fulfillment : To successfully implement a truly flexible SCM system, a centralized system must be in place so that regional customers can receive deliveries from the global supply chain with the same efficiency as they do from local or regionally based supply chain.
Requirements for Global Strategy Implementation
Other Issues in GSCM
Region-specific products Vs True global products
Local Autonomy vs Central Control
Exchange rate fluctuation
Local collaboration may become competitors
To access new market may require handing over critical manufacturing and engineering expertise
At any time the threat of protectionism might appear.
Regional Differences in Logistics First World Emerging Third World Infrastructure Highly developed Under development Insufficient to support advanced logistics Supplier operating standards High Variable Typically not considered Information system availability Generally available Support system not available Not available Human resources Available Available with some searching Often difficult to find
Elements of a Global SCM Customer Service Requirements Organizational Design and Training Requirements Performance Goals Global Supply Chain Management Business Processes Plant and Distribution Center Network Design Information Systems Key Customer and Supplier Relationships Performance Metrics Inventory Management Outsourcing and Third-Party Logistics Relationships
Improve Quality Supplier Networks Improve Delivery of Supplies Establish a Presence in a Foreign Market Reduce Costs Reasons for Global Sourcing Strategies React to Competitor’s Offshore Sourcing Practices Increase Exposure to Worldwide Technology Strengthen Reliability of Supply Gain Access to Materials Satisfy Offset Requirements
Evaluate operating and competitive environments Define scope of international purchasing effort Identify and evaluate potential suppliers worldwide Determine appropriate nature of buyer-supplier relationship Request/evaluate proposals from suppliers Continual reevaluation of implementation status, requirements, and capabilities Select “best” supplier, establish contract terms and conditions, and build desired relationship Steps in the Global Sourcing Process