Global Supply Chain Management
Tomas Hult
Director, International Business Center (MSU-CIBER)
Associate Professor of Marketing and Supply Chain Management
Michigan State University
Email: [email protected]
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.
A. . . . . . . . . . . . . . . End Customer
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).
Formal Definitionof 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 after-market support for sustainment” (Mabert and Venkataraman 1998).
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
Types of InternationalSourcing Strategy
Dom estic In-House Sourcing
Dom estic
Offshore Subsidiary Sourcing
International
Intra-Firm Sourcing
Dom estic Purchasing Arrangem ent
Dom estic
Offshore Outsourcing
International
Outsourcing
Sourcing
A company procures major components in-
house 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 SupplyChain 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.
FactorEndowments
DemandConditions
Firm Strategy,Structure, and
Rivalry
Related andSupportingIndustries
A nation’s position in factors of production such as skilled labor or the infrastructure necessary to compete in a given industry.
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.
The conditions in the nation governing how companies are created, organized, and managed and the nature of domestic rivalry.
NationalCompetitiveAdvantage
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
Human Resource Management
Technology Development
PROCUREMENT
Information Technology
INB
OU
ND
LO
GIS
TIC
S
Op
erations
OU
TB
OU
ND
LO
GIS
TIC
S
Mark
eting &
Sales
Service
Mar
gin
Margin
Primary Activities Source: Porter 1985
Su
pp
ort Activities
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 SCMFactors Continued
• Export Regulations• Denied parties list
• Export licenses
• Time• Lead time
• Cycle time
• Transit time
• Export license approval cycle
• Customs clearance
Global SCMFactors 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 Examplein Japan
Automobile makers affiliated parts makers
Independent parts makers
Repair parts makers
Automobile makers Wholesalers Special agents
Dealers
Sub-dealers
Cooperative sales companies
2nd-levelwholesalers
Retailers
Large usersGasoline stations
Automobiles repair shops
End users
Source: McKinsey Industry Studies
Auto Parts Examplein the U.S.
Manufac-turer
Warehouse distributor
Jobber buy-ing groups
Jobber
Mass merchandiser
Repairspecialist
51%
10%
18%
Primary channel
Secondary channel
Source: McKinsey Industry Studies
Installer Customer
21%
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
RedesignedGlobal 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).