International supply chain management, supply networks, examples H&M and BMW

1. Louvain School of Management
Center for Supply Chain Management
SUPPLY CHAIN MANAGEMENT
International Supply Networks
Per AGRELL
per.agrell@uclouvain.be

2. Outline
Drivers of globalization
– Global market forces
– Technological forces
– Global cost forces
– Political and economic forces
Risks management international chains
Specificities of International SCM
Examples:
– BMW Global manufacturing
– H&M Global supply chain
Chopra-Meindl, Chapter 6
2

3. References
(Chopra-Meindl, Chapter 6)
Ferdows, K. (1997). Making the most of foreign factories.
Harvard Business Review, 75, 73-91.
Arntzen, B. C., Brown, G. G., Harrison, T. P., & Trafton, L. L.
(1995). Global supply chain management at Digital
Equipment Corporation. Interfaces, 25(1), 69-93.
Vidal, C. J., & Goetschalckx, M. (2001). A global supply chain
model with transfer pricing and transportation cost
allocation. European Journal of Operational Research,
129(1), 134-158.
UCL/LSM/CESCM/AGRELL
3

4. Supply chain challenges
UCL/LSM/CESCM/AGRELL
4
Supply Chain Brief (2018)

5. High impact risks
UCL/LSM/CESCM/AGRELL
5
Supply Chain Brief (2018)

6. Top supply chain goals
UCL/LSM/CESCM/AGRELL
6
Supply Chain Brief (2018)

7. Globalization
What are some advantages, disadvantages of:
– International distribution
– International suppliers
– Off-shore manufacturing
– Fully integrated global supply chain
7

8. Forces Driving Globalization
Global Market Forces
Technological Forces
Global Cost Forces
Political and Economic Forces
8

9. Global Market Forces
Foreign competition in local markets
Growth in foreign demand
– Domestic consumption from 40% to <30% of world
consumption
– Foreign sales fuel growth
Global presence as a defensive tool
– Arla Foods,
Presence in state-of-the-art markets
– Japan -- retail services, consumer electronics
– Germany – cars, machine tools
– USA ?
– Belgium ?
9

10. Technological Forces
Diffusion of knowledge
– Many high-tech components developed overseas
– Need close relationships with foreign suppliers
– For example, Canon has 80% of laser engines
Technology sharing/collaborations
– Access to technology/markets
Global location of R&D facilities
– Close to production (as cycles get shorter)
– Close to expertise (Indian programmers?)
10

11. Global Cost Forces
Low labor cost
– Diminishing importance (costs underestimated,
benefits overestimated)
Other cost priorities
– Integrated supplier infrastructure
– Skilled labor
Capital intensive facilities
– tax breaks
– joint ventures
– price breaks
– cost sharing
11

12. Political and Economic Forces
Exchange rate fluctuations and operating
flexibility
Regional trade agreements (EU, NAFTA,…)
– Value of being in a country in one of these regions
– Implications for supply network design
– Reevaluation of foreign facilities (Production
processes designed to avoid tariffs)
12

13. Categories of facilities
13

14. Categories
Idea:
– Facilities (abroad or domestic) have specific
autonomy, roles and logistical flows in the global
supply chain
– Principally derived from :
Access to resources (labor, material, information)
Access to protected markets
Internal capacity for R&D
Internal capacity for process development
Economies of scale (volume)
Logistical capacity
14

15. Ferdows (1997) facility
categorization
Offshore factory
– low cost investment & labor costs, reshipped to core plants
Source factory
– plant management involved in supplier selection & production
planning.
Server factory
– Firm uses government incentives & low exchange risk & tariff barriers
to reduce taxes & logistics costs.
Contributor factory
– Firm involved in product development, production planning,
procurement decisions, & developing suppliers.
Outpost factory
– Embedded network of suppliers, competitors, research facilities for
materials, components & products.
Lead factory
– Firm is source of product/process innovation and competitive
advantage of the entire organization.
UCL/LSM/CESCM/AGRELL
15

16. Ferdows : Strategic roles
UCL/LSM/CESCM/AGRELL
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17. Case BMW Global SC
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18. Offshoring
18

19. The Offshoring Decision: Total
Cost
Comparative advantage in global supply chains
Quantify the benefits of offshore production
along with the reasons
Two reasons offshoring fails
1. Focusing exclusively on unit cost rather than total
cost
2. Ignoring critical risk factors
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20. The Offshoring Decision: Total
Cost
20
Performance
Dimension
Activity Impacting
Performance
Impact of Offshoring
Order communication Order placement More difficult
communication
Supply chain visibility Scheduling and expediting Poorer visibility
Raw material costs Sourcing of raw material Could go either way
depending on raw
material sourcing
Unit cost Production, quality
(production and
transportation)
Labor/fixed costs decrease;
quality may suffer
Freight costs Transportation modes and
quantity
Higher freight costs
Taxes and tariffs Border crossing Could go either way
Supply lead time Order communication,
supplier production
scheduling, production time,
customs, transportation,
receiving
Lead time increase results
in poorer forecasts and
higher inventories

21. The Offshoring Decision: Total
Cost
21
Performance
Dimension
Activity Impacting
Performance
Impact of Offshoring
On-time delivery/lead
time uncertainty
Production, quality, customs,
transportation, receiving
Poorer on-time delivery
and increased uncertainty
resulting in higher
inventory and lower
product availability
Minimum order
quantity
Production, transportation Larger minimum
quantities increase
inventory
Product returns Quality Increased returns likely
Inventories Lead times, inventory in
transit and production
Increase
Working capital Inventories and financial
reconciliation
Increase
Hidden costs Order communication,
invoicing errors, managing
exchange rate risk
Higher hidden costs
Stock-outs Ordering, production,
transportation with poorer
visibility
Increase

22. Global risk management
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23. Risk Management In
Global Supply Chains
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Category Risk Drivers
Disruptions Natural disaster, war, terrorism
Labor disputes
Supplier bankruptcy
Delays High capacity utilization at supply source
Inflexibility of supply source
Poor quality or yield at supply source
Systems risk Information infrastructure breakdown
System integration or extent of systems
being networked
Forecast risk Inaccurate forecasts due to long lead
times, seasonality, product variety, short
life cycles, small customer base
Information distortion
Table 6-3

24. Risk Management In
Global Supply Chains
24
Category Risk Drivers
Intellectual property risk Vertical integration of supply chain
Global outsourcing and markets
Procurement risk Exchange-rate risk
Price of inputs
Fraction purchased from a single source
Industry-wide capacity utilization
Receivables risk Number of customers
Financial strength of customers
Inventory risk Rate of product obsolescence
Inventory holding cost
Product value
Demand and supply uncertainty
Capacity risk Cost of capacity
Capacity flexibility

25. Risk Management In
Global Supply Chains
Good network design can play a significant role in
mitigating supply chain risk
Every mitigation strategy comes at a price and may
increase other risks
Global supply chains should generally use a
combination of rigorously evaluated mitigation
strategies along with financial strategies to
hedge uncovered risks
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26. Risk Management In
Global Supply Chains
26
Risk Mitigation Strategy Tailored Strategies
Increase capacity Focus on low-cost, decentralized capacity
for predictable demand. Build centralized
capacity for unpredictable demand.
Increase decentralization as cost of
capacity drops.
Get redundant suppliers More redundant supply for high-volume
products, less redundancy for low-volume
products. Centralize redundancy for low-
volume products in a few flexible
suppliers.
Increase responsiveness Favor cost over responsiveness for
commodity products. Favor
responsiveness over cost for short–life
cycle products.

27. Risk Management In
Global Supply Chains
27
Risk Mitigation Strategy Tailored Strategies
Increase inventory Decentralize inventory of predictable, lower
value products. Centralize inventory of less
predictable, higher value products.
Increase flexibility Favor cost over flexibility for predictable, high-
volume products. Favor flexibility for
unpredictable, low-volume products. Centralize
flexibility in a few locations if it is expensive.
Pool or aggregate demand Increase aggregation as unpredictability grows.
Increase source capability Prefer capability over cost for high-value, high-
risk products. Favor cost over capability for low-
value commodity products. Centralize high
capability in flexible source if possible.

28. Flexibility, Chaining, and
Containment
Three broad categories of flexibility
– New product flexibility
Ability to introduce new products into the market
at a rapid rate
– Mix flexibility
Ability to produce a variety of products within a
short period of time
– Volume flexibility
Ability to operate profitably at different levels of
output
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29. Flexibility, Chaining, and
Containment
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30. 30
Boeing

31. Flexibility, Chaining, and
Containment
As flexibility is increased, the marginal benefit derived from
the increased flexibility decreases
– With demand uncertainty, longer chains pool available
capacity
– Long chains may have higher fixed cost than multiple smaller
chains
– Coordination more difficult across with a single long chain
Flexibility and chaining are effective when dealing with
demand fluctuation but less effective when dealing with
supply disruption
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32. Factors to consider in global
supply chain management
International level
– Bilateral agreements
– Multilateral and industry agreements
Country level
– Economic factors (market size and growth, labor
cost, labor skill, managerial capacity, infrastructure)
– Political factors (risk, capital, price and import
controls)
– Cultural factors
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33. City competitiveness
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34. Risks and Advantages of
International Supply Chains
Substantial geographic distances
Added forecasting difficulties
Infrastructural inadequacies
– Worker skill, performance expectations
– Supplier availability, reliability, contracts
– Lack of local technologies
– Inadequacies in transportation, communications
infrastructure
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35. Added Complexities
Exchange rate uncertainties
Cultural differences
– accepted partnerships styles
– value of punctuality
Political instability
– tax rates
– government control
Added competition “at home”
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36. Exchange Rates
Transaction Exposure
– The results of transactions denominated in foreign
currencies change (cash deposits, debt obligations)
Translation Exposure
– Result of translating foreign financial statements
into the currency of the parent company
Financial instruments used to hedge these
36

37. Louvain School of Management
Center for Supply Chain Management
SUPPLY CHAIN MANAGEMENT
H&M Global Supply Chain
Per AGRELL

38. Value chain

39. Supply and markets
© 2012 U N I V E R S I T É C A T H O L I Q U E D E L O U V A I N , L O U V A I N S C H O O L O F M A N A G E M E N T , C E S C M
plants are small and labor-intensive installations with low overhead. H&M only works directly with
supplier-plants, contrary to the parallel system of agents-middlemen that is operated by e.g. GAP.
A sourcing-call-off agreement is made by plant and not by supplier, indicating exactly the
responsible and modes or order and delivery for each order and plant. The production offices are
regularly commissioning process audits (over 2,200 in 2009) that encompass technical, labor and
economic safety and compliance. The results of the audits are reported to the production offices
and to the central sourcing at H&M. Audits are also performed on potential suppliers prior to any
order, as well as on suppliers that never have supplied to H&M.
36.
Figure 18 - Répartition géographique des bureaux de productions (SIBEL OKAN)
Figure 3 H&M markets and production offices 2007/2008 Source: Joris and Lampereur (2010)

40. H&M Production network
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41. Supply chain
41 Source: Hagemann (2015), Journal of Urban research

42. Sewing facilities
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43. Supply chain
43 Source: Hagemann (2015), Journal of Urban research

44. Global SC

45. H&M Supply chain
Production offices (H&M) 16 (2016)
Suppliers 1,900 (2018)
Production plants
– SE Asia 700 (CN 600)
– S Asia 500 (IN 250, BD 200)
– EU 700 (TR 350, IT 150)
CDC 3 (Hamburg, US, Australia)
RDC 16 in EU
Retail stores 4,968 (2018)
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46. DC
H&M DC Ghlin, Belgium. Source: Willemen (2012)

47. H&M Production Office
47

48. H&M Supply chain
Production offices (H&M) 16 (2016)
Suppliers 1,900 (2018)
Production plants
– SE Asia 700 (CN 600)
– S Asia 500 (IN 250, BD 200)
– EU 700 (TR 350, IT 150)
CDC 3 (Hamburg, US, Australia)
RDC 16 in EU
Retail stores 4,968 (2018)
48

49. Supplier tiers
Manufacturing plants (T1)
– Cut & sew – final manufacturing
– Full auditing per plant (integrated or contracted)
– SIPP (Sustainable Impact Partnership Programme)
Processing plants (T1)
– Subprocess (e.g printing, embroidery)
– Full auditing per plant (integrated or contracted)
– SIPP
Fabric & yard mills (T2)
– Normally contracted by T1
– Some included in audit programme
– Disclosure on T2
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50. H&M suppliers
Supplier programs:
– Workplace dialogue programme (594 plants, 73%
vol, 840k empl)
– Fair living wage strategy (500 plants, 67% vol, 635k
empl)
Transparency
– All suppliers disclosed with address, rating and role
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51. Supplier rating
Platinum (Strategic partner)
– Capacity planning 5 yrs
– Incentives for production efficiency
– Close collaboration, trainings
– Joint investments
Gold (Preferred supplier)
– Capacity and production planning 2-3 years
– Incentives for production planning & efficiency
– Close monitoring, training,
Silver (Long-term supplier)
– Production planning 1 year
– Regular monitoring, training
Other (New supplier)
– Test orders (batch)
– Peak supplier (batch)
– Niche supplier (batch)
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52. Supplier score card

53. Retail
Store network
– 4,900 (2018)
– Fully owned
Online store
– Centrally operated
– Delivery in 51 countries from RDCs
– Residual markets have catalogues

54. Store network

56. Value analysis
Source: Odyssey 314 (2016)

57. Pricing
Source: Edited (2019)

58. Demand risk
ure 25 - Comparaison des coûts de revient unitaire moyen de différents gro
secteur du textile
em cost in USD and % of average selling price. Source: J
ce par la firme suédoise que nous venons de détailler.
Figure 24 - Comparaison des COV de H&M et de ses concurre
uarterly demand variability (Coefficient of variation, CoV
Source: Joris and Lempereur (2010).
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59. Price and margin
R e t a i l
The 2,200 retail stores are fully owned by H&M and designed to accommodate all product lines.
The marketing (5% of revenues) is high-profiled including pressmedia, TV-ads, billboards and
direct mailings, often using wellknown models to display the products. The specific collections are
released through “buzz” techniques through social networks, often creating free publicity around
the scarce shipments of underpriced designer-goods delivered to a subset of the stores. As seen in
Figure 4 below, the average items are cheap compared to the competitors. The overall concept
is to create a “one-stop” shopping experience with dynamic and attractive fashion at low prices.
The demand variability for the products is given in Figure 5 below.
des segments cibles différents et sans doute une stratégie différente.
Tableau 14 - Coût de revient unitaire moyen par groupe exprimé en dollar US et en pourcentage du prix
moyen
Groupe Coût de revient ($) Coût de revient (en % du prix moyen)
H&M 9 40,00%
Inditex 26,75 43,79%
Gap 14,56 62,28%
Esprit 20,6 47,00%
Mango 25,12 45,00%
Figure 25 - Comparaison des coûts de revient unitaire moyen de différents groupes présents dans le
secteur du textile
Figure 4 Average item cost in USD and % of average selling price. Source: Joris and Lempereur
(2010).
H&M d’obtenir une certaine flexibilité notamment grâce à ses fournisseurs en Europe qui
peuvent rapidement réapprovisionner les marchés européens. Cette flexibilité diminue
également l’incertitude la supply chain. Enfin, les centres de distribution nationaux et les
entrepôts possèdent de gros stocks ce qui repoussent la frontière push/pull discutée
précédemment au niveau des entrepôts nationaux et non plus des magasins. Ce procédé
permet aux entrepôts nationaux d’absorber toute l’incertitude de la demande effectuée aux
magasins. Globalement, toutes ces actions diminuent l’incertitude logistique.
Analyse quantitative de l’incertitude de la demande
Au-delà de cette analyse qualitative, nous avons calculé l’incertitude de la demande d’H&M
et de ses concurrents grâce à la méthode décrite dans le point II.1.4 page 13. La Figure 24
reprend les différents concurrents d’H&M sur l’axe des COV de la demande trimestrielle.
Comme on peut le remarquer, selon notre méthode de calcul, H&M possède la demande la
plus certaine de tous les acteurs considérés. Bien que ceci puisse paraître étonnant pour le
milieu de la mode dans lequel s’est inscrit H&M, cette performance s’explique via la stratégie
mise en place par la firme suédoise que nous venons de détailler.
59

60. Performance
GAP ZARA H&M
Sales (2015) MEUR 15,500 13,600 18,600
Stores (2015) 3,721 2,002 3,924
Stores (franchised, %) 11% 13% 4%
Min TimeToMarket [days] 90 5 20
Ave Lead time [days] 270 15 90
Ave inventory [days] 71 14 106
Markdown items (%) 3.2% 24.2%
Salvage (>50% discount) 0.2% 9.3%

61. Operations strategy
GAP H&M
Procurement org Local agents Prod.offices (PO)
Production control Push (MTS) Push (MTS)
Market High-end mass
garments
US “casual cool”
Low-end mass
European trendy
OW Price, service Price, look
OQ Availability, quality,
look
Availability, range
Process Central prod develop
Central distribution
Outsourced production
Centralized sourcing
Decentralized transport
Central prod develop
Central distribution
Coordinated ext production
Decentralized sourcing
Coordinated transport
Infrastructure Downstream control Strong integration PO-CDC
Orientation Efficiency, stability Efficiency, market-push

62. Operations strategy (2)
GAP H&M
PLC Medium Short
Batch control Long runs, repeated Single,
Suppliers 1,000 (50% for 16) 750
Infrastructure focus Availability retail Promotion push
Availability
Counterfeit Low risk Low risk
CSR mitigation Supplier partnership
Random audit by agent
Supplier clearance
PO audits
Random audits
Supplier selection Price by agent Two-stage:
Capacity
Price & quality
Quality assurance Batch control PO control
Process control

63. Operations strategy (3)
ZARA GAP H&M
OW Production
innovation
Cost Cost
OQ Cost Service Innovation
(Range)
OQ- Service Innovation Service
Source: Cela Diaz (2005) MIT

64. Flexibility in global networks
64

65. Addressing Global Risks
Speculative Strategy
– Bet on a single scenario
– Japanese auto manufacturing in Japan
– Zara business model
Hedged Strategy
– Losses in one area offset by gains in another
– VW in US, Brazil, Mexico, Germany
– H&M business model
65

66. Operational Flexibility
Flexibility to take advantages of operational
exposure
Requires a flexible supply chain
– multiple suppliers
– flexible facilities
– excess capacity
– various distribution channels
Can be expensive to implement
– coordination mechanisms
– capital investments
– loss of economies of scale
66

67. Operational Flexibility
Production/sourcing shifts are key to strategy
– This has many switching/startup costs
Distribution channels must be flexibility so
sourcing is invisible to end customers
Other benefits include:
– improved information availability
– global coordination
– political leverage
67

68. Specifics of International
Supply Chain Management
More complex
More risk
Cultural, political and economic factors
Multiple players, international partners
Higher inventory costs
– Distance - pipeline inventory cost
– Uncertainty – safety stock cost
– Pilferage and risk – carrying cost
68

69. Logistics challenges
Transportation more difficult and costly
Multiple transportation modes
– International – ship, air
– Domestic – rail truck
Complex management
– Institutions, terms
– Language, documentation
– Labor norms
Lack of infrastructure
Access to materials and local markets
Slower and costlier service
69

70. Basic alternatives for
multinational firms in supply
chain
Business planned around geographic areas
– multidomestic companies
Business planned around products
– global companies
70

71. Evaluation
Criteria Multidomestic Global
Variation in customer needs Large Small
Import restrictions on raw material Stringent Liberal
Economies of scale Small Large
Restriction on exchange rate Stringent Liberal
Cost of labor differences Small Large
Decentralization request Strong Weak
Logistic management efforts Decentralized Centralized
by country by
product
Coordinated Country/region Globally
Visibility Less More
71

72. Additional Issues in Global
SCM
International vs. regional products
– Cars vs. Coca-cola
Local autonomy vs. central control
– GlaxoSmithKline introducing Contact to Japan
– Short term expectations
Collaborators become competitors
– Apple vs Samsung
– Toshiba copiers, Hitachi microprocessors
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73. Summary
International supply chain design
– Network strategy
– Facility strategy
– Risk assessment
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