Global Logistics and International Operations
4. Summary, Trends and Challenges
Strategic Logistics Management Leadership Program
4
Logistics Systems
Important IssuesImportant Issues::
• Complex relationships between agents at different levels
{Cooperation• A variety of mechanisms for: Coordination
Control
• Many Products and Many Locations
• Uncertainty in Demand (Over Time and Space)
Segmentation…
A B C Item Class
A B C
A
B
C
Family of Suppliers Family of Customers
SuppliersIntegrationPolicies
CustomersServicePolicies
5
6
Sources of Uncertainty
Vendor LT CustomersChange Due Dates
Yield Forecast
Time
Quantity
Supply Demand
7
Mini Case
• In 1968, Switzerland had a 65% market share of the worldwide watch market. Their market share had increased steadily for 60 years. They had done this partly by continuously improving their watches. In 1968, what market share would you have forecast for 1978?
8
Suppliers Consumers
Two Strategic Questions:
1. Who Controls the Supply Chain?
2. Who Should Manage Which Part?
Crafting Your Supply Chain Strategy
Managing the Linkages and the Network
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MustManage &Own
Must Manage(But Need Not Own)
CanOutsource
Can SubcontractComponents
Proprietary & Complex
Standard
Strategic Importance of Production & Logistics
Pro
cess
Tec
hn
olo
gy
Low High
If you are a manufacturer, when Own, Manage, or Outsource?
10
Manage & Own
[Vertical Integration]
Outsource Completely
[Arms-length Relationship]
Share Data, New Designs, etc.
[Work Closely with Suppliers]
Manage & But Don’t Own
[Manage “Dispersed Mfg.”]
YOU OTHERS
Separate Ownership from ManagementOf The Supply Chain
Supply chain management
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WHEN? Push, or Wait for Pull?
HOW MUCH? “Economic” Batch Size or Amount Required?
WHO DECIDES? “Supplier” or “Receiver”?
Fundamental Question in Managing the Flow in Any Process
13
When “capacity” is expensive,Pull System becomes more difficult as:
Seasonality of Demand
Uncertainly of Demand
Variability of Supply
When?
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Therefore, if “capacity” is set, to move closer to Pull System we must Reduce Variability and Uncertainty
Manage Demand
• Seasonality of Orders• Unpredictability of Orders
When?
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• Unreliability of Operations• Unbalanced Batch Sizes• Varying Lead Times• Bottlenecks
Manage Supply
MUST GO AFTER THEIR ROOT CAUSES
Manage Demand
• Seasonality of Orders• Unpredictability of Orders
Therefore, if “capacity” is set, to move closer to Pull System we must Reduce Variability and Uncertainty
When?
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“Economic Batch” or Amount Required (or Ordered)
“Economics” of ProductionProcurement or Logistics
“Economics” of ProductionProcurement or Logistics
Required Amount(Customer Orders)
Required Amount(Customer Orders)
How Much?
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Find optimum trade-off among:• Setup Costs• Ordering Costs• Holding Costs• Quantity Discounts• Etc.
“Economics” of ProductionProcurement or Logistics
“EOQ” “ELS” “POQ” ….
How Much?
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Plan and Communicate Requirements, considering:
• Lead Times• Bill Of Materials• Production and Logistics Routing• Capacities•Etc.
Required Amount(Customer Orders)
“MRP-1” “MRP-II” “ERP” ….
How Much?
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Focus on Flexible & Rapid Response
Just -in-Time (JIT)Mass Customized Production
Focus on Exchange of Information
Materials Requirement Planning (MRP)…Enterprise Resource Planning (ERP)
Evolution of Managerial Focus
Focus on Cost Optimization
Economic Order Quantity (EOQ)Economic Shipment Load (TL,…)
How Much?
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Focus on Flexible & Rapid ResponseJust -in-Time (JIT)Mass Customized Production
“Economics” of ProductionProcurement or Logistics
Required Amount(Customer Orders)
Requires changing
To fit closer to
How Much?
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Making the supply chains more responsive
CONSUMERSCONSUMERS
• Multiple Parties
• Lagged & Distorted Information Flows
• Variability and Unpredictability
• Imbalance
is not easy
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Coordinate the Supply Chain
Coordinate the Supply Chain
Redesign theSupply Chain
Redesign theSupply Chain
Manage the Demand
Manage the Demand
What can we do?
CONSUMERSCONSUMERS
Avoid the “Bullwhip” Effect
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Amplification of Orders Placed on Suppliers
ActualConsumerConsumption
ConsumerOrders onRetailer
RetailerOrders onDistributor
DistributorOrders onBarilla DC
Barilla DCOrders onBarilla Plant
RetailerDistributorBarilla DC
Barilla Plant
Consumer
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The “Bullwhip” Effects in Supply Chains
The ordering patterns share a common recurring theme:
– The variabilities of an upstream site are always greater than those of the downstream site.
Small Perturbation
Bullwhip Handle
Large Swingsat Tip
26Time
100
200
300
400
Ord
er Q
uan
tity
Factory
Distributor Retailer
Consumer sales
Information Distortion: The Bullwhip Effect
CONSUMER
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Drivers of Variation in Distribution Systems
Transportation Discounts Volume Discounts Promotional Activity No Minimum or Maximum Order Quantities Product Proliferation Long Order Fulfillment Lead Times Poor Customer Service Sales Compensation System Poor Communication
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Coordinate the supply chain
POS Data Forecasts (share and do jointly) Schedules (share and do collaboratively)
POS Data Forecasts (share and do jointly) Schedules (share and do collaboratively)
1. Share More Information
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Vendor Managed Inventory Supplier
Consignment Stocks Supplier
“Sell-through” Supplier
2. Change Controls in the Channel
Coordinate the supply chain
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CONSUMERSCONSUMERS
These areInter-firm (or Inter-plant) Initiatives
POS Data Forecasts (share and do jointly) Schedules (share and do collaboratively) VMI Consignment Stocks “Sell-through”
POS Data Forecasts (share and do jointly) Schedules (share and do collaboratively) VMI Consignment Stocks “Sell-through”
There are also Intra-operation InitiativesThere are also Intra-operation Initiatives
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Intra-Operation Initiatives
Invest in postponement
Increase modularity
Share platforms / Common components
Reduce changeover costs (and batch sizes)
Reduce weight of capacity utilization as KPI
Invest in postponement
Increase modularity
Share platforms / Common components
Reduce changeover costs (and batch sizes)
Reduce weight of capacity utilization as KPI
CONSUMERSCONSUMERS
3. Create More Operational Flexibility
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Coordinate the Supply Chain
Coordinate the Supply Chain
Redesign theSupply Chain Redesign theSupply Chain
Manage the Demand
Manage the Demand
What can we do?
CONSUMERSCONSUMERS
Fit the supply chain to product’s “clock speed”
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Product Characteristics
• Functional:
– Long life cycle (2 years), low contribution margin (5-20%), low product variety (10-20 per category), low forecast error (10%), low stock-out rate (1-2%), no forced markdowns (0%), long make-to-order lead time (6+ months).
• Innovative:
– short life cycle (3 months - 1 year), high contribution margin (20%-60%), high product variety (often millions per category), high forecast error (40-100%), high stockout rate (10-40%), many markdowns (10-25% of full price), short make-to-order lead time (1 day to 2 weeks).
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“Functional” vs. “Innovative” productsDifferent “Clock Speeds”
GasolinePencilsCereals
“Functional”
PrintersDigital camerasFashion apparel
“Innovative”
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Soup vs. Sunglasses
Cost of lost sale
Risk of obsolescence
Forecast accuracy
Product variety
Product life cycle
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Physically EfficientSupply Chain
Market ResponsiveSupply Chain
Functional Products Innovative Products
Source: “What is the right supply chain for your product?” Marshal Fisher, HBR, March-April 1997
Fit the Supply Chain to Product’s “Clockspeed”
match
match
mismatch
mismatch
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Brooks Brothers Manages Fashion and Staple
Inventories• Demand for fashion items is more difficult to predict than for staple items
• Managing inventories is the key to avoiding clearance sales
• Dual response
– Staple items manufactured in Asia
– Fashion items produced in NYC to react faster to market signals
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Postponment: a New Process for Benetton
• Traditionally wool sweaters required yarn to be dyed before the knitting
• Now: All sweaters are knitted in white, then dyed to match popular colors
– Best for fashionable items, staple products produced the traditional way
– Requires special garment treatment to stabilize the wool before dyeing
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Classic Postponement Example: Hewlett Packard
• Redesigned products so localization happens in Europe
• This allows HP to customize the products as late as possible– Serving the diverse
needs of European customers
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Tailored Bicycle Customization : National Bicycles In Japan
FACTORY COMPUTER SYSTEM
CUSTOMER
POS RETAILER
BAR CODE TRACKING
DISTRIBUTOR
MANUFACTURING
• Mass customization allows for 8 Million options
• Dealer Selection
• 2 week delivery to customer
• 150 minutes per bike• Name engraved
•Barcode•CAD System generates blueprint
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Coordinate the Supply Chain
Coordinate the Supply Chain
Redesign theSupply Chain
Redesign theSupply Chain
Manage the Demand Manage the Demand
What can we do?
CONSUMERSCONSUMERS
Employ dynamic pricing, and highly coordinated marketing promotions
Employ dynamic pricing, and highly coordinated marketing promotions
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Coordinate the Supply Chain
Coordinate the Supply Chain
Redesign theSupply Chain
Redesign theSupply Chain
Manage the Demand
Manage the Demand
Summary
CONSUMERSCONSUMERS
Avoid the “Bullwhip” Effect
Watch the“Clockspeed”
Manage the“Yield”
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Logistics Strategies and the Brand/Formulation/Packaging Mix
Brand: pan-European
Formula: Common to All Markets
Packaging: Common to All Markets
Examples Possible Logistics Responses
Potential Benefits
Total
Product Standard. Strategy
Partial Product
Standard. Strategy
Different. Product Strategy
YES YES YES Gillette Sensor Blades
Centralized Operations – Fully Centralized P&O
EOS in
P& D
YES NO YES Bundled Mfg. – Design product to allow cust. at latest stages of production
Rationaliz. of compon. simplifies Inbound Log. and improves Q
YES NO NO Necasfe Coffee Deferred Finish. – Final configrtn. at mkt.
Similar
YES YES NO Fuji Color Film Deferred Packing – Labeling and packing at mkt. warehouse
EOS in Prod., less Invent. and high Service
NO YES NO Aquafresh and Odol Toothpaste
Deferred Packing –
Similar
NO NO NO Odol Mouthwash
Limited – Little opport. for logist. Reconfiguration
Limited
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Inter-Firm Integration
EFFICIENT CONSUMER RESPONSE:
Program searching for a close Coordination and Cooperation among participants of the Supply Chain
The final Objective is the satisfaction of the CONSUMER
Cooperation is obtained through:
* Optimization of flows (e.g., sharing data, transport, packaging)
* Effective coordination of promotions and negotiations * Effective selection of existing products
* Effective introduction of new products
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There is a shift There is a shift toward Centralization of toward Centralization of the Logistics Functionthe Logistics FunctionCompanies are building a strong core-logistics competency at headquarters.
TechnologyTechnology is driving the speed and is driving the speed and efficiency of information exchanges.efficiency of information exchanges.e.g., Collaborative Planning, Forecasting and Replenishment (CPFR) has helped one of Warner-Lambert products (Listerine) to increase sales by more than $8.5 million in one year and to increase shelf availability from 85% to 98%.
Logistics Software Companies are growing very rapidly (SAP,
BaaN, i2 Technologies, People Soft, Oracle, etc.)
Logistics Trends and Challenges
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Return LogisticsReturn Logistics and the Environment and the Environmente.g., Eastman Kodak returned and re-used 1.5 billion rolls of film since 1992. More than 45 million disposable cameras were recycled in 1999.
At Estee Lauder ($4 Billion in sales), returns, excess, obsolescence and destruction amounts to $190 Million on an annual basis. In the consumer electronics industry, product returns cost more than $15 Billion a year.
There is a trend towards There is a trend towards Strategic Strategic Logistics CooperativesLogistics Cooperatives
Companies are moving away from managing transactions into managing relationships. These relationships help by providing risk management opportunities. Implementation involves information systems management, performance measurement and quality programs.
e.g., Chrysler claims they have saved over $1.2 Billion since 1997 in cost savings ideas from suppliers. Hewlett-Packard and Solectron Corporation report cost efficiencies of 15% to 25%.
Logistics Trends and Challenges Cont.
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0
6
12
18
%
U.S. Industry U.S. Alliances European/AsianAlliances
Average Return on Investment
0
6
12
18
25 CompaniesMost Active in
Alliances
Fortune 500Average
25 CompaniesLeast Active in
Alliances
Alliance Intensity Effect on Return on Equity
The Creation of The Creation of Global Supply Chain Global Supply Chain AlliancesAlliances
In the past two years, more than 20,000 alliances have been formed worldwide. More than half of these have been between competitors, i.e., co-opetition. Alliance capability is becoming a competitive differentiator.
Logistics Trends and Challenges Cont.
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0%
5%
10%
15%
20%
25%
30%
35%
Ene
rgy
Tran
spor
tatio
n
Fina
ncia
l
Ele
ctro
nics
Ser
vice
s
Indu
stri
alC
onsu
mer
/Ret
ail
Com
mun
icat
ions
Bio
tech
/Med
ical
Com
pute
r/S
oftw
are
North America
Latin America
Europe
Japan
Asia/Pacific
Other
Alliances by Region and Industry
49
Logistics Trends and Challenges Cont. Terrorism Terrorism is changing the rules of the gameis changing the rules of the game
Through C-TPAT (Customs-Trade Partnership Against Terrorism ) Customs is establishing close cooperation with the trade community to heighten security efforts of the global supply chain, specifically commercial shipments imported into the U.S. against terrorist infiltration. Although currently a volunteer program, C-TPAT has grown rapidly to more than 1600 participants who recognize the value and benefits of
becoming a C-TPAT member. Currently, applications to become a C-TPAT member are being accepted from the following groups:
* Importers * Carriers (air, sea and land) * Customs Brokers * Air Freight Consolidators * NVOCCs (Non-Vessel Operating Common Carriers) * Ocean Transportation Intermediaries * Highway Carriers
Wal-Mart recently announced that it wants its top 100 suppliers, by 2005, to begin fitting their cases and pallets with radio-frequency-identification tags (RFID).
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Logistics is assuming a New Strategic Role
rationalizingrationalizingthe existing the existing supply chainsupply chain
MANAGING MANAGING THETHEPHYSICAL PHYSICAL FLOWFLOW
MANAGING THE INFORMATION FLOWMANAGING THE INFORMATION FLOW
LOGISTICSLOGISTICSBY-PASSBY-PASS
LOGISTICSLOGISTICSALLIANCEALLIANCE
LOGISTICSLOGISTICSOUTSOURCINGOUTSOURCING
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Scalability & Outsourcing
DemandManagementcapabilities
Supply Chain & Operations excellence
Information Management flexibility & efficiency
GlobalPresence
The right productAt the right timeAt the right placeAt the right cost
Material & InventoryManagementexpertise
Global Logistics Principles
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Domestic versus Global Logistics
* InventoryInventory is Higher- Higher in-transit inventories
- Pipelines are longer and slower- Higher Safety Stock levels
- Longer lead times- Political uncertainty- Production uncertainties
- More SKUs
* Facilities Network More Difficult to ControlControl- Several languages and cultures- Labor norms - Customs- Infrastructure
* TransportationTransportation is More Difficult and Costly
- Freight rates- Intra-country transport- Different modes- Complex documentation and intermediaries- Consolidation
* ServiceService is Slower and More Costly
- Lead times are longer- Pipelines are longer- Uncertainty about availability- Order processing is more difficult- Stockouts are more frequent
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Action Plan
Understand the Logistics Function and the Role you might play
Manufacturing Excellence is Fundamental(i.e., is LogisticsLogistics in your Core Competence Core Competence?)
De-emphasize the Short Term Cost Advantage
Emphasize the Long Term Service, Quality and ReliabilityAdvantages
Emphasize your willingness to adjust to the dynamics of market fluctuations
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Factors Affecting Your Logistics Role
Economic Factors:Economic Factors:a) Type of Product
* Product Life Cycle and Perishability * Strategic classification
b) Nature of Demand
c) Proliferation of Products
Environmental FactorsEnvironmental Factorsa) Level of Customer Service required in the
Market
b) Routing Requirements
c) Host Governments Regulations and Actions
Organizational FactorsOrganizational Factorsa) Marketing-Manufacturing Interface
b) Intra-Subsidiary Traffic and Accounting
c) Strategic priorities (C,Q,S,F) and Metrics
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Check 1: What are the nature of the uncertainties
of your products?
Su
pp
lyU
nce
rtai
nty
Low
(Functional Products)
High
(Innovative Products)Low
(Stable Process)
High
(Evolving Process)
Demand Uncertainty
56
Check 2: Do you have the right strategies that
match the needs?
Su
pp
lyU
nce
rtai
nty
Low
(Functional Products)
High
(Innovative Products)Low
(Stable Process)
High
(Evolving Process)
Demand Uncertainty
Efficiency, information integration, auto-replenishment, VMI
Buffer inv, shared resources, multi-sourcing, info sharing
Build to order, flexible mfg, accurate response, forecast collaboration
Postponement, design collaboration, inventory pooling
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Check 3: What are the dynamic characteristics faced
in your industry?Cycles
Market
Product Life
Technology
Demand Uncertainties
Supply Uncertainties
Demand Base
Supply Base
Cost Economics
Technology Adoption
• • •
58
Check 4: Are your Supply Chain Strategies
Dynamically Adapting?Market Conditions and Cycles
Product Life Cycles Technology Cycles
Supply Chain Strategies
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Dynamic Supply Chain Design
Market Dynamics
Technology lead, concentrated supply/demand
Technology ramp, regionally distributed supply/demand
Technology maturity, globally distributed supply/demand
Supply Chain
Cost efficiency
Responsiveness
Agility
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Step 5: How is your supply chain evolving
in response to technology advances?
Focus ImplementationSubstitution
Effect
Scale Effect
Structural Effect
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Dynamic Technology Strategy
Technology Life Cycle
Introduction phase, simple usage, early adopters
Ramp up phase, increasing usage, widespread users
Mature phase, new forms of usage and applications
Impacts
Substitution
Scale
Structural
63
Evolution of Technological Innovations
Substitution Effect
Scale Effect
Structural Effect
Motor Engine
Vehicles in placeof horses/boats
More frequent & extensive travels
Highways, suburbs, malls
Trades
Traders in place of barter markets
Frequent & extensivetrades
Financial markets, insurance industries
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IT Opportunities
Opportunity
Internet-based transactions
Auctions and secondary markets
Intelligent supply chain integration
Values
Overhead and time efficiency
Lower costs, supply & demand matching
Super-efficiency across the chain, higher revenues
Substitution Effect
Scale Effect
Structural Effect
65
Step 6: Are you able to integrate your supply
chain?InnovationsScope Expansion
Vertical supply chain coordination
Horizontal supply chain coordination
From one function to another
66
Integration Innovations
Innovations
Visibility and coordinated planning
Intelligent dual sourcing & responses
Linking with design & demand management
Scope Expansion
Vertical supply chain coordination
Horizontal supply chain coordination
From one function to another
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Three Steps forSupply and Demand
IntegrationStages
Visibility
Coordination
Optimization
Elements
Marketing plans, inventory, capacity, sales
Demand instruments, supply chain plans coordinated
Demand and supply chain integration
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Dimensions of Supply Chain Integration
Extended communication and performance measures, incentive realignment
Accountability, risks/costs/gain
Organizational relationship linkage
Decision delegation, work realignment, outsourcing
Decisions, work
Coordination and resource sharing
Information Sharing, collaborative planning, forecasting, and replenishment
Information, knowledge
Information Integration
HowExchangesDimension
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Major Supply Chain Collaboration Opportunities
Manufacturers
Retailers
Distributors/Wholesalers
SynchronizedProductionScheduling
Collaborative ProductDevelopment
CollaborativeDemandPlanning
Multi-tierSupplier
Collaborative Logistics Planning•Transportation Services•Distribution Center Services
Source: AMR research
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Summary
• One-size-fit-all strategy very risky: use right supply chain strategy for the right product, market, and time.
• Efficiency for Functional• Responsiveness for Innovative
• Evolving supply chains to adapt to evolving global business environments, product life cycles, and technology dynamics.
• Dynamic supply chain strategies can create great competitive advantages.
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Basis for Successful Supply Chain Integration
• Transparency of goals, scope, incentives, responsibilities. Organizational integration:• Communication
• Sharing and coordination
• Extended performance measures
• Incentive alignment
• Understanding of expected outcomes.
• Ongoing monitoring of performance measures.
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Summary
• Matching Global Supply Chain integration is the “competitive battlefield for the next century”
• Significant value creation from:• Vertical supply chain integration• Horizontal coordination through dual response• Supply and design collaboration• Supply and demand management integration
• The stakes for not moving forward are huge.
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The Book!
Global Operations and Logistics: Text and Cases
Edited by John Wiley and Sons