DPS 406 GLOBAL SUPPLY CHAIN MANAGEMENT TOPIC ONE

DPS 406: GLOBAL SUPPLY CHAIN MANAGEMENT TOPIC ONE: INTRODUCTION TO SUPPLY CHAIN MANAGEMENT 1

Bibliiography Clarkson University. “Global Supply Chain Management. ” www. clarkson. edu May 7, 2002. Global Supply Chain Associates homepage. www. gsca. com May 7, 2002. Macaulay Institute. “Why have these global supply chains developed. ” www. mluri. sari. ad. uk/ May 8, 2002. Russell, Roberta and Taylor, Bernard. Operations Management. New Jersey: Prentce Hall, Inc. 2000. pp 373 -86. The Forum. “The Stanford Global Supply Chain Management Forum. ” www. stanford. edu/group/scforum/ May 8, 2002. • 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: Mc. Graw Hill (Sponsored by the National Association of Purchasing Management).

Supply Chain Management • A supply chain is a set of organizations directly linked by one or more of the upstream and downstream flows of products, services, finances, and information from a source to a customer. Managing a supply chain is 'supply chain management' • Supply chain management (SCM) is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers. Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption (supply chain). 3

Historical developments in supply chain management • Six major movements can be observed in the evolution of supply chain management studies: Creation, Integration, and Globalization, Specialization Phases One and Two, and SCM 2. 0. 4

Historical developments in supply chain management Creation era • The term supply chain management was first coined by a U. S. industry consultant in the early 1980 s. However, the concept of a supply chain in management was of great importance long before, in the early 20 th century, especially with the creation of the assembly line. The characteristics of this era of supply chain management include: 5

Historical developments in supply chain management – The need for large-scale changes, – Re-engineering, – Downsizing driven by cost reduction programs, and – Widespread attention to the Japanese practice of management 6

Historical developments in supply chain management Integration era • This era of supply chain management studies was highlighted with the development of Electronic Data Interchange (EDI) systems in the 1960 s and developed through the 1990 s by the introduction of Enterprise Resource Planning (ERP) systems. This era has continued to develop into the 21 st century with the expansion of internet-based collaborative systems. This era of supply chain evolution is characterized by both increasing value-adding and cost reductions through integration. 7

Historical developments in supply chain management Globalization era • The third movement of supply chain management development, the globalization era, can be characterized by the attention given to global systems of supplier relationships and the expansion of supply chains over national boundaries and into other continents. Although the use of global sources in the supply chain of organizations can be traced back several decades (e. g. , in the oil industry), it was not until the late 1980 s that a considerable number of organizations started to integrate global sources into their core business. 8

Historical developments in supply chain management • This era is characterized by the globalization of supply chain management in organizations with the goal of increasing their competitive advantage, value-adding, and reducing costs through global sourcing. 9

Historical developments in supply chain management Specialization era—phase one: outsourced manufacturing and distribution • In the 1990 s, industries began to focus on “core competencies” and adopted a specialization model. Companies abandoned vertical integration, sold off non-core operations, and outsourced those functions to other companies. This changed management requirements by extending the supply chain well beyond company walls and distributing management across specialized supply chain partnerships. • 10

Historical developments in supply chain management • This transition also re-focused the fundamental perspectives of each respective organization. The specialization model creates manufacturing and distribution networks composed of multiple, individual supply chains specific to products, suppliers, and customers who work together to design, manufacture, distribute, market, sell, and service a product. The set of partners may change according to a given market, region, or channel, resulting in a proliferation of trading partner environments, each with its own unique characteristics and demands. 11

Historical developments in supply chain management Specialization era—phase two: supply chain management as a service • Specialization within the supply chain began in the 1980 s with the inception of transportation brokerages, warehouse management, and non -asset-based carriers and has matured beyond transportation and logistics into aspects of supply planning, collaboration, execution and performance management. • At any given moment, market forces could demand changes from suppliers, logistics providers, locations and customers, and from any number of these specialized participants as components of supply chain networks. This variability has significant effects on the supply chain infrastructure, from the foundation layers of establishing and managing the electronic communication between the trading partners to more complex requirements including the configuration of the processes and work flows that are essential to the management of the network itself. 12

Historical developments in supply chain management • Supply chain specialization enables companies to improve their overall competencies in the same way that outsourced manufacturing and distribution has done; it allows them to focus on their core competencies and assemble networks of specific, bestin-class partners to contribute to the overall value chain itself, thereby increasing overall performance and efficiency. The ability to quickly obtain and deploy this domain-specific supply chain expertise without developing and maintaining an entirely unique and complex competency in house is the leading reason why supply chain specialization is gaining popularity. 13

Historical developments in supply chain management Supply chain management 2. 0 (SCM 2. 0) • Building on globalization and specialization, the term SCM 2. 0 has been coined to describe both the changes within the supply chain itself as well as the evolution of the processes, methods and tools that manage it in this new "era". 14

Historical developments in supply chain management • Web 2. 0 is defined as a trend in the use of the World Wide Web that is meant to increase creativity, information sharing, and collaboration among users. At its core, the common attribute that Web 2. 0 brings is to help navigate the vast amount of information available on the Web in order to find what is being sought. It is the notion of a usable pathway. SCM 2. 0 follows this notion into supply chain operations. It is the pathway to SCM results, a combination of the processes, methodologies, tools and delivery options to guide companies to their results quickly as the complexity and speed of the supply chain increase due to the effects of global competition, rapid price fluctuations, surging oil prices, short product life cycles, expanded specialization, near-/far- and off-shoring, and talent scarcity. 15

Interest in supply chains cont…. Ø It becomes critical for companies to manage the entire network of supply to optimize overall performance Ø due to a realization by most companies that maximizing performance of one department or functions may lead to less than optimal performance for the whole company. Ø E. g. Purchasing may negotiate at lower price on a component and receive a favorable purchase price variance, but the cost to produce the finished product may go up due to inefficiencies in the plant. 16

Interest in supply chains Ø The supply chain has become a very prominent concern for both large and small organizations as they strive for better quality and higher customer satisfaction (Chopra and Meindle 2001). Ø The increasing demand for reduced costs, increased quality, improved customer service and continuity of supply have significantly elevated supply chain management’s stature within organizations. Ø Companies have become more specialized and search for suppliers who can provide low cost, quality materials rather than own their source of supply. 17

Interest in supply chains cont. . . Ø increased national and international competition. Customers have multiple sources from which to choose to satisfy demand; locating product throughout the chain. However, the dynamic nature of the marketplace make holding inventories a risky and potentially unprofitable. Ø Supply chain has therefore become a key element in any organizational corporate strategy. 18

The Need for Supply Chain Management Ø The need to improve operations. Ø Increasing levels of outsourcing. Ø Increasing transportation costs. Ø Competitive pressures. Ø Increasing importance of e-commerce. Ø The need to manage inventories 19

What the supply chain is not Ø The definitions described and developed earlier and recent industry collaborative activities indicate that supply chain management is not a standalone process. Many supply chain efforts have fallen short of the potential advantages because the term is often viewed as only relating to the supply side of the business or to the purchasing function. As indicated above, supply chain management is much more that just procurement. 20

Among the misunderstanding evidenced, SCM is not: Ø Inventory management; Ø Logistics management; Ø Supplier partnerships; Ø Driven from the supply side; Ø A shipping strategy; Ø Distribution management; Ø The logistics pipeline; Ø Procurement Ø A computer system 21

Reasons for the slow growth of integrated SCM include the following: Ø Lack of guidelines for creating alliances with supply chain partners. Ø Failure to develop measures for monitoring alliances. Ø Inability to broaden the supply chain vision beyond procurement or product distribution to encompass larger business processes. Ø Inability to integrate the company internal procedures. 22

Reasons cont……. Ø Lack of trust inside and outside a company. Ø Organizational resistance to the concept. Ø Lack of buyin-by top managers. Ø Lack of integrated information systems and electronic commerce linking firms. 23

Elements of SCM Ø Supply chain management involves coordinating activities across the supply chain central to these corresponding activities at each level of the supply chain. Elements Typical Issues Ø Customers - Determining what products and/or services customers want Ø Forecasting - Predicting the quantity and timing of customer demand. 24

Elements of SCM Cont……. Ø Inventory holding Meeting demand requirements while managing the costs of inventory Ø Purchasing Evaluating potential suppliers, supporting the needs of operations on purchased goods and services 25

Elements……. . Ø Suppliers - Monitoring supplier quality, on-time delivery, and flexibility maintaining supplier relations Ø Location - Determining the location of facilities Ø Logistics - Deciding how to best move information and materials 26

Elements cont…. . Ø Capacity Planning - Matching supply and demand Ø Processing - Controlling quality, scheduling work 27

TOPIC TWO: OVERVIEW OF GLOBAL SUPPLY CHAIN 28

INTRODUCTION • International business - engages in cross-border transactions • Multinational Corporation - has extensive involvement in international business, owning or controlling facilities in more than one country • Global company - integrates operations from different countries, and views world as a single marketplace • Transnational company - seeks to combine the benefits of global-scale efficiencies with the benefits of local responsiveness 29

Some Global Strategies – International Strategy: uses exports and licenses to penetrate the global area – Multidomestic Strategy: uses decentralized authority with substantial autonomy at each business – Global Strategy: Uses a high degree of centralization, with headquarters coordinating to seek standardization and learning between plants – Transnational Strategy: Exploits economies of scale and learning, as well as pressure for responsiveness, by recognizing that core competencies reside everywhere in the organization 30

INTRODUCTION • Global competition is transforming the way products are produced and moved around the world. • A new structure namely global supply chain has evolved which is able to take advantage of the unique competitive advantages in different countries. • This structure needs to be properly tied with the procurement, processing, and distribution activities of a multinational firm. • Given the reduced trade barriers, it’s now possible to garner the competitive advantage that differing countries have to offer. • The various value adding activities of the supply chain can be strategically dispersed among various countries and coordinated to produce competitive advantage.

INTRODUCTION CONT…. • Global trade is the backbone of our modern, commercial world, as producers in various nations try to profit from an expanded market, rather than be limited to selling within their own borders. • There are many reasons that trade across national borders occurs, including lower production costs in one region versus another, specialized industries, lack or surplus of natural resources and consumer tastes.

Global Trade • This is exchange of capital, goods, and services across international borders or territories. • In most countries, it represents a significant share of gross domestic product (GDP). • While international trade has been present throughout much of history, economic, social, and political importance has been on the rise in recent times. • Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the global trade system. • Without global trade, nations would be limited to the goods and services produced within their own borders

Global Supply Chain • The supply chain incorporates all aspects of moving material from the vendor through the manufacturing process to the final customer. • The supply chain focuses on vendors, manufacturers, intermediaries, logistical services and the customer. • The supply chain is no longer contained within countries borders, but encompasses all nations, whether they are vendors, manufacturers or customers. • Economists predict that the some of the current developing nations will be some of the most important economic powers in the next decade.

• As the global supply chain becomes more complex with every passing year, companies must adapt to this change and incorporate them into their supply chain strategies. • This change could mean using vendors from developing nations or exporting goods to new markets. • Companies that have traditionally operated within national or regional trading groups may feel ill-equipped to extend their global supply chain. • Businesses have to understand that cultural difference play a deciding role in the success or failure of a venture in a new global region.

Supply Chain Defined: - • The facilities, functions, and activities involved in producing and delivering a product or service, from suppliers to customers.

Global Supply Chain Defined: • An integrated process where several business entities such as supplies, manufacturers, distributors and retailers work together to plan, coordinate and control material, parts and finished goods from suppliers to customers. One or more of these business entities operate in different countries.

What is a Global Supply Chain • The global supply chain is made up of the interrelated organizations, resources, and processes that create and deliver products and services to end consumers. • In the instance of global supply, the chain is extended to many different countries around the world.

Formal Definition of 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).

Supply Chain Utilities TIME PLACE POSSESSION

Network of Relationships Finland Sweden Germany Denmark Norway Netherlands Iceland

Ford Example Belfast Carburetors and distributors Enfield Instruments, fuel and water gauges, plugs Treforest Basildon Radiators, water pump assembly, engine components Genk Body Spark plug insulators panels, road wheels Leamington Wülfrath Foundry production of engine components Transmissio n parts, engine components Cologne Diecast transaxle casings, gear and engine components Dagenham Final assembly Bordeaux Transmissions Valencia Saarlouis Final assembly

Types of International Sourcing Strategy A company procures major components inhouse 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

International Supply Chain 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.

International SCM Theory Actor Bonds Resource Ties Activity Links

Practicality and Usefulness • Help companies compete all over the world. • Expand business operations. • Offer new services and applications to meet global customers needs. • Give company a competitive advantage. • Falling International Trade Barriers Mean Rising Profits.

Goal of the Global Supply Chain • Prompt and reliable delivery of high-quality products and services at the least cost. • To effectively meet rising customer expectations

• • • Recent changes effecting the global supply chain Internet and technological change Proliferation of trade agreements Falling Trade Barriers Increase in international trade groups New Markets

Advantages of global supply chain • • • • Reduced total costs Inventory reduction Improved fulfillment cycle time Reduce cycle time Increased forecast accuracy Productivity increase Improved capacity Expand international connections Increase intellectual assets Delivery improvement Diversified business and trading Competitive advantage Untapped markets Enhance speed and efficiency

Potential Global Supply Chain Obstacles • • • • Member nations VS. Non member nations Inefficient transportation and distribution systems Market instability Different languages Differences in Currencies Differences in Measurement Systems (metric versus decimal) Different Customs, beliefs and cultures Political turmoil Trade imbalances Export surges and recessions Greater distance Tax Policies Operational Threats Strategic Challenges Technological capabilities

Combating Obstacles • • • Duty specialists and trade specialists Join nation groups Banding together Form consortiums Vertically integrate Be innovative & Be flexible Research New technology Infrastructure improvements Reduce the number of “stops” in the chain

Recent changes affecting the global supply chain • Internet and technological change. • Proliferation of trade agreements. • Falling Trade Barriers. • Increase in international trade groups. • New Markets.

Brainstorming Exercise • Increase sales • Satisfy shareholders • Falling tariffs • Increase in International Trade • Increase in internet use throughout the world.

Components of a supply chain • Structures • Processes • Linkages

• • Issues/considerations when designing a global supply chain Strategic plan or Objective goals Uncertainty Communication and information flow Types and numbers of facilities and location

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 Support Activities Firm Infrastructure Human Resource Management n gi ar M Technology Development PROCUREMENT ar gi M Service Marketing & Sales OUTBOUND LOGISTICS Operations INBOUND LOGISTICS n Information Technology Primary Activities Source: Porter 1985

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 SCM Factors Continued • Export Regulations • Denied parties list • Export licenses • Time • • • Lead time Cycle time Transit time Export license approval cycle Customs clearance

Global SCM Factors 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?

Exercise • Make a list of pros and cons for developing a global supply chain. • What are the different costs your company will encounter? • Do the benefits or global business outweigh the costs?

TOPIC THREE: GLOBALL VALUE CHAIN MANAGEMENT 71

SUPPLY CHAIN MANAGEMENT • Value Chain • Supply side- raw materials, inbound logistics and production processes • Demand side- outbound logistics, marketing and sales.

WHAT IS SUPPLY CHAIN MANAGEMENT " Is the strategic management of activities involved in the acquisition and conversion of materials to finished products delivered to the customer" Supplier Management Schedule / Resources Material Flow Information Flow Conversion Customer Management Stock Deployment Leads to Business Process Integration Delivery

• Supply chain is the system by which organizations source, make and deliver their products or services according to market demand. • Supply chain management operations and decisions are ultimately triggered by demand signals at the ultimate consumer level. • Supply chain as defined by experienced practitioners extends from suppliers’ suppliers to customers’ customers.

• SUPPLY CHAIN INCLUDES : – MATERIAL FLOWS – INFORMATION FLOWS – FINANCIAL FLOWS

• SUPPLY CHAIN MANAGEMENT IS FACILITATED BY : – PROCESSES – STRUCTURE – TECHNOLOGY

• Supply chain serves two functions: – Physical – Market mediation

• Supply chain objectives may differ from situation to situation. • For functional products, cost efficiency is the critical factor. • For innovative products, responsiveness is the important factor. • Leanness + Agility together make up Leagility

Supply Chain Structure SUPPLIER Raw Materials FACTORY DC RETAILER Finished Goods Information Flow

Supply Chain and Demand Chain • Demand chain is defined as the system by which organizations manage sales and distribution of products and services to end users. • Conceptually incorrect to look at demand chain separately • Look at the pipe as a whole.

• But is there a pipe at all? – More a network – Not necessarily linear • Value chain orchestration rather than controlling the flow through the pipe • A network of independent and interdependent organizations mutually and cooperatively working together to control, manage and improve the flow of materials and information from suppliers to end users

SUPPLY CHAIN DRIVERS Not new. Value system of Michael Porter • Why sudden interest? – Demanding customers – Shrinking product life cycles – Proliferating product offerings – Growing retailer power in some cases – Doctrine of core competency – Emergence of specialized logistics providers – Globalization – Information technology

SUPPLY CHAIN ELEMENTS Strategic • Supply Chain Design • Resource Acquisition • Long Term Planning (1 Year ++) Tactical • Production/ Distribution Planning • Resource Allocation • Medium Term Planning (Qtrly, Monthly) Operational • Shipment Scheduling • Resource Scheduling • Short Term Planning (Weekly, Daily)

• Supply Chain Goals Efficient supply chain management must result in tangible business improvements. It is characterized by a sharp focus on – Revenue growth – Better asset utilization – Cost reduction.

Supply Chain Management Underlying Principles Compression (Planning/Manufacturing/Supply) Conformance (Forecasts/Plans/Distribution) Co-operation (Cross -Functional) Communication (Real Time Data) Reduce Overall Cycle Time : Improve Response

Changing Paradigm • Functional vs Process • Products vs Customers • Revenues vs Performance • Inventory vs Information • Transactions vs Relationships

Critical Success Factors today • Cross functional management and planning skills • Ability to define, measure and manage service requirements by market segment • Information systems • Relationship management and win orientation

PUTTING IN PLACE A WELL OILED SUPPLY CHAIN • Supply chain as an efficient customer satisfying process • Effectiveness of the whole supply chain is more important than the efficiency of each individual department.

. The steps involved • Step 1 - Designing the supply chain – Determine the supply chain network – Identify the levels of service required

Step 2 - Optimizing the supply chain • Determine pathways from suppliers to the end customer Customer markets to Distribution centers to production plants Raw material sources to production plants Identify constraints at vendors, plants and distribution centers – Get the big picture – Plan the procurement, production and distribution of product groups rather than individual products in large time periods- quarters or years – –

Step 3 - Material flow planning • Determine the exact flow and timing of materials • Arrive at decisions by working back from the projected demand through the supply chain to the raw material resources • Techniques • ERP

Step 4 - Transaction processing and short term scheduling • Customer orders arrive at random • This is a day to day accounting system which tracks and schedules every order to meet customer demand • Order entry, order fulfillment and physical replenishment

Information flows in Supply Chain Management • Information is overriding element • Need for databases • Master files: Information about customers, products, materials, suppliers, transportation, production and distribution data- do not require frequent processing • Status files- heart of transaction processing- track orders and infrastructure status- updated daily. • Essentially using the same information to make all plans right from structuring the network to processing every day supply chain tasks.

THE VIRTUAL VALUE CHAIN • The value chain connects a company’s supply side with its demand side. • Traditionally information has been a supporting function. • Information however can be managed far more creatively. • There are various stages of using value added information processes.

• Visibility : See physical operations more effectively through information. Information can be used for effective coordination of value chain activities. • Mirroring capability : In this stage, virtual activities are substituted for physical ones. A parallel value chain is created. • New customer relationships : The company can draw on the flow of information in the virtual value chain to deliver value to customers in new ways.

Dealer Management Conventional functions • • Inventory ownership and management Sales and technical support Order handling Credit

Contemporary Trends • Channels being divided into two- Fulfillment and Franchised agent • Fulfillment channel- responsible for getting the manufacturer’s product from the plant to the end user through a highly efficient logistics and inventory management system

Contemporary Trends • Fulfillment channel may not take ownership of the product but may perform these functions on a per box fee structure • Franchised agents responsible for sales and sales support but will not write the order or supply the product

Issues in customer management • Penetration vs Spread • Concentration is necessary to commit the necessary resources for true customer integration • Depth of customer contact – R&D - sharing information vs developing new products together – Logistics - Pros and cons of methods of transportation vs reengineering the logistics process

Implementation: Points to keep in mind • Recognize the difficulty of change. • Prepare a blueprint for change that maps linkages among initiatives. • Assess the entire supply chain from supplier relationships to internal operations to the market place, including customers, competitors and industry as a whole.

IS THE SUPPLY CHAIN WORKING? • Does our manufacturing strategy increase product line flexibility while continuing to drive down overall production costs? • When was the last time we measured lost sales to end customers? • Do we have an efficient system to get POS data from retailers? • Are we testing our products with end customers? Do we use the resulting data to adjust our forecasting and supply positions? • Is the ratio of returned orders to sales increasing?

The New Model of Relationships • Hard bargaining vs shared destiny • Exit vs Voice • Arms length relations vs Involving dealers and suppliers in product development • Piling up vs Replenishing dealer inventory more frequently • In short working together as partners to cut costs, boost efficiencies, innovate and share value

• • • Adversarial vs partnerships Short term vs long term contracts Large vs small order quantity Full truck load vs small parcels Inspection vs no inspection

• Written order vs understanding • Many vs few suppliers • Design and then invite quote from vendor vs involving vendor in development • Bargaining, holding cards close to chest vs Shared destiny, transparency

Summary • Segmentation of customers based on service needs • Customization of logistics network • Listen to signals of market demand plan accordingly. • Differentiate product close to the customer • Source strategically • Develop a supply chain wide technology strategy • Accept channel spanning performance measures

• The Bullwhip Phenomenon • Volatility amplification along the network • Increase in demand variability as we move upstream away from the market • Mainly because of lack of communication and coordination • Delays in information and material flows

• • Bullwhip effect occurs because of various reasons: Order Batching - Accumulate orders Shortage gaming- Ask for more than what is needed Demand forecast updating

Important points to keep in mind • Segment customers based on service needs. • Modify the supply chain to meet these service requirements profitably. • Customize the logistics network. • Develop forecasts collaboratively involving every link of the supply chain. • Locate the leverage point where the product is unalterably configured to meet a single requirement • Delay product differentiation till the last possible moment.

• Assess options such as modularized design or modification of manufacturing processes that can increase flexibility. • Cultivate warm relationships with suppliers. • Efficient supply chain management has to be accompanied by a technology strategy.

ITALIAN CLOTHING MANUFACTURE • • • Warehousing and transportation 6 Inventory Late delivery returns Obsolescence Lost sales 60 • Need to minimize obsolescence costs • Minimize product range flexibility • Reduce product development cycle 5 2 20

Dell’s Direct Business Model of Virtual Integration • Advantages of a tightly coordinated supply chain traditionally facilitated by vertical integration. • Combined with focus and specialization. • Leveraging on investments others have made and focusing on delivering solutions and systems to customers • Fewer things to manage - fewer things go wrong • Suppliers’ engineers part of Dell’s Design team • Have only a few partners

Dell’s Direct Business Model of Virtual Integration • Share information with partners in Real time fashion. • Stitch together a business with partners that are treated as if they are inside the company. • Change focus from how much inventory there is to how fast it is moving • Assets collect risks around them one way or the other. • Limited or no testing - Eg. Sony Monitors

Dell’s Direct Business Model of Virtual Integration • Only three Manufacturing centers - Austin, Ireland Malaysia. • Inventory levels and replenishment needs sometimes conveyed to vendors on hourly basis. • Substitute information for inventory and ship only when we have real demand from real end customers • Clever segmentation - Focus on institutional markets - 70% to very large customers with annual purchases exceeding $1 million.

Dell’s Direct Business Model of Virtual Integration • Exit from retail business after wrong entry in 1989. • Segmentation - closeness to customers and access to valuable information. • Demand forecasting as a critical sales skill • Help global customers, manage their total purchase of PCs by selling them a standard product • Dell server loads software on customers’ computers • Meet customers’ needs faster and more efficiently than any other model.

Li and Fung, Hong Kong • • • Founded in 1906 Today 35 offices in 20 countries 1997 revenues of $ 1. 7 billion Largest export trading company in Hong Kong Customers- American and European retailers Sources clothing and other consumer goods ranging from toys to fashion accessories to luggage

Order from Europe Buy yarn from Korea Weave and dye in Taiwan Buy Japanese zippers made in China Make the garments in Thailand in five different factories • Pulling apart the value chain and optimizing at each step • • •

• Victor Fung “ Today, assembly is the easy part. The hard part is managing your suppliers and the flow of parts. “ Good supply chain management strips away time and cost from product delivery cycles. Our customers have become more fashion driven, working with six or seven seasons a year instead of just two or three. Once you move to shorter life cycles, the problem of obsolete inventory increases dramatically. With customer tastes changing rapidly and markets segmenting into narrow niches, it’s not just fashion products that are becoming increasingly time sensitive. ”

• Endorsement by Stan Shih, CEO, Acer • Buying right things • Reaching into suppliers to ensure that certain things happen on time and at the right quality level.

Buyer informs five weeks before delivery. Reserve undyed yarn from yarn supplier. Lock up capacity in weaving and dyeing mills. Outsourcing not same as leaving suppliers to do the worrying. • Single factories are too small to have much buying power and to demand faster deliveries from suppliers. • To shorten delivery cycle, need to go upstream to organize production. • Li & Fung able to delay commitment to a particular fashion trend. • •

• Integrated logistics management • Elimination of consolidators in container shipments • Smokeless factory – – – – Design Procurement Inspection of raw materials Production planning Line balancing Inspection of finished goods No worker ownership No labour management

“ If we don’t own factories, can we say we are in manufacturing? Absolutely, because of the 15 steps in the manufacturing value chain, we probably do 10. ” • Basic operating unit is the division. • Divisions focused on serving single customers or groups of small customers. • Less emphasis on geographic grouping • Merchandising decisions decentralized • Financial controls and operating procedures tightly centralized. • Strong focus on inventory and working capital management.

• “As far as I am concerned, inventory is the root of all evil. At a minimum, it increases the complexity of managing any business. So it’s a word we don’t tolerate around here. ” • Need for sophisticated information systems. Li & Fung working to create a database to systematically track all supplier relationships. • “ Someone might steal our database but when they call up a supplier, they don’t have the long relationship with the supplier that Li & Fung has. It makes a difference to suppliers when they know that you are dedicated to the business, that you have been honoring your commitments for 90 years. ”

• Broadening the middle • Better prices and better margins for customers • Tackling the soft $3 in the cost structure. $3 represents the inefficiency in the supply chain for a consumer product priced at $4. Look at costs throughout distribution channels than just in factory

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Topic 3: Global Supply Chain Planning and Outsourcing

What is Supply Chain Planning ? Supply Chain is a set of activities (e. g. purchasing, manufacturing, logistics, distribution, marketing) that perform the function of delivering value to end customer Traditionally, all the business units along a supply chain have their own objectives and these are often conflicting There is no single plan to carry out supply chain activities

What is Supply Chain Planning ? There is need for a mechanism through which the execution of various business activities along a supply chain can be planned in an integrated fashion. The supply chain planning is an effort to achieve the primary goal of “producing and distributing the merchandise at the right quantity, to the right locations, and at the right time with minimum system wide cost” in the presence of conflicting goals of various business units

Supply Chain Planning Processes Material Requirement Planning Component Requirement Supplier Demand Forecasting Demand Planning Production Plant Warehouse Logistics Order Management Retailer

Supply Chain Planning Decisions STRATEGIC TACTICAL OPERATIONAL Procurement Manufacturing Distribution Logistics

Supply Chain Planning Decisions Selection • Allocation of Suppliers to the Plants • Location, Number, Capacity of Plants • What Products to Produce • Which Plants to Produce them • Procurement Policy • Warehouse Allocation • Inventory Decisions • Manufacturing Policy • Customer Allocation • Distribution Policy • Production Schedule • Scheduling on Machines • Workload Balancing • Finished Goods Inventory • Supplier • Location, Number, Size of Warehouses • Mode of Shipment • Port Selection • Vehicle Routing • Fleet Size • Vehicle Routing

Conclusions Ø Supply Chain Planning: A critical factor in the success and profitability of a company Ø Short Product Life Cycle: Improper planning can take the company out of business Ø Bad News: Planning is an hard problem to formulate as well as solve Ø Good News: Plethora of Commercially available software for supply chain planning

Strategic global sourcing • The coordination and integration of procurement requirements across worldwide business unit looking at common items, processes, technologies and suppliers. • Sourcing no longer equates to instant cost gratification, but is now defined as a strategic component used to drive maximum competitive advantage. • Strategic sourcing is itself a benchmark. It relates to getting the best products and services at the best value. • It is designed to segment external spend and ensure that procurement resources are focused on the most important categories. • What sets strategic sourcing apart is its continuous attention to improving and re-evaluating the purchasing activities of a company, thus enabling organizations to adapt to changing market forces.

Strategic global sourcing • Global sourcing is a sense of competativeness • It can cover the cost of Raw materials and enhance quantity • It offers a company an ******* to quickly enter new markets and new products

Strategic global sourcing • Any organization most therefore determine an appropriate enter selecting suppliers for its SC to remain steady and Robost • Global sourcing therefore provides an opportunity to foster a relationship with antoehr supplier, to build bridges in other countries where both companies are stakeholders is the success or trade of profits • Consistence in production, lower SC costs, health quality goods and motivation to staff is a SC are thus they objectives and decision areas in SCM. • The total cost of ownership is also key when selecting suppliers

Strategic global sourcing • The question that must be utilized when making sourcing decisions in GSCs includes; • • (i) What is the process of selecting a high quality global supplier • (ii) How do we balance between the total cost of ownership and the selection criteria • (iii) What are the steps in building a costing relationship with global suppliers • (iv) What is the sensitivity of the inputs in the SC • (v) What is the total cost of ownership in the global sourcing •

Strategic global sourcing • Supplier selection process • Choosing the right global supplier in cruised in the success of global sourcing • Developing a process flow for the supplier selection process lays an important role in determining low to select a high quality suppliers. • The process must be determined by benchmarking against companies that have been successful is global sourcing for a period of time • Domestically, its easier to identify, negotiate and communicate with the lowest unit cost supplier • • While in global sourcing is more complex and compromise need to be made

Strategic global sourcing • There are many factors to be analyzed during the supplier selection process • Availability of the technological pace to produce the required material / service • Availability of selected labor force necessary to produce / provide service / goods • A requisite standard quality / quantity programmes

Strategic global sourcing • The technical support for maintaining the components / service ******* flexibility to management different hot sizes • Effectiveness in protecting the management from proprietary • Reliability of transportation company between the supplier location and that of the management • The lower country risks especially the political power national / mass made disasters and cover commodity risk.

Strategic global sourcing • • The actual steps involved in selecting a supplier in global SCS involved – Pre selection of two global suppliers – utilize the in country consultants to help identify suppliers that have the capacity to produce / provide tax goods / services • Any supplier is considered a potential candidate • The size of the company can be considered length of time in the industry and capacity • – Prepare a request for quote (RFQ ) – Ac RFQ is critical to the decision making process as it ensures fair and accurate companies across suppliers • It is ****** of a questionnaire used to borrow the number of suppliers that but the general criteria • RFQ, allows the supplier to be innovative and give them room to offer act structure that could further reduce costs • • Contents of RFQ • Back good information • Evaluation criteria • Lost of key contacts • Confidentiality and conditions agreement

Strategic global sourcing • • RFQ instructions Technical specification Material handling instructions - The information requested from supplier company include; The company information The technological support Customer service Quality control

Strategic global sourcing • • Cost sheets (iii) Analyze RFQ response After all the RFQ response have been received they must be checked for commissions and consistency

Strategic global sourcing • Estimate the overall costs and benefits including the strengths and weaknesses • It should be done with experienced and unbiased view points • Strategic considerations can be made with recommendations on cost benefit analysis.

GLOBAL SOURCING • Global sourcing is a strategic sourcing strategy that effectively broadens the scope of the procurement process to include companies that operate in other countries. • The use of global sourcing has been the driving force behind the development and expansion of the global economy. • Including suppliers from around the world in the bidding process for large contracts reduces prices and increases competition. • The creation of this type of infrastructure allows firms to create subsidiary offices in locations around the world. • There are three main industries that are ideal for global souring: manufacturing, skilled services and telephone call centers

Motives of buying overseas: 1. Changes in business environment e. g. : – Intense international competition. – Pressure to reduce costs. – Need for manufacturing flexibility. – Need for shorter product development cycle. – Stringent quality standards. – Ever changing technology.

2. Factors relating to the needs and competitiveness of the enterprise e. g. : – Unavailability of raw materials locally. – Insufficient domestic capacity to meet demand insurance reasons such as buying abroad to ensure continuity of supplies when domestic sources are threatened by shortages or strikes. – Competitiveness of oversee sources, including lower prices, improved delivery and better quality. – Reciprocal trading and countertrade resulting from policy reasons or government pressure due to balance of payment considerations. – Access to worldwide technology. – To obtain a penetration of growth market.

Benefits of international sourcing: 1) Access to lower priced goods. 2) Enhanced competitive position. 3) Access to high quality goods. 4) Access to world wide technology. 5) Better delivery performance. 6) Better customer service. 7) Increased number of suppliers. 8) Helps meet countertrade obligations.

Challenges on international souring: 1) JIT sourcing requirements. 2) Finding qualified foreign sources. 3) Logistics support for longer supply links. 4) Culture and language differences. 5) Duty and customs.

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TOPIC Information Technology and the Global Supply Chain

Role of Information Technology in a Supply Chain • Information is the driver that serves as the “glue” to create a coordinated supply chain • Information must have the following characteristics to be useful: – Accurate – Accessible in a timely manner – Information must be of the right kind

Role of Information Technology in a Supply Chain • Information technology (IT) – Hardware and software used throughout the supply chain to gather and analyze information – Captures and delivers information needed to make good decisions • Effective use of IT in the supply chain can have a significant impact on supply chain performance

The Importance of Information in a Supply Chain • Relevant information available throughout the supply chain allows managers to make decisions that take into account all stages of the supply chain • Allows performance to be optimized for the entire supply chain, not just for one stage – leads to higher performance for each individual firm in the supply chain

Characteristics of Useful Supply Chain Information • • Accurate Accessible in a timely manner The right kind Provides supply chain visibility

Use of Information in a Supply Chain • Information used at all phases of decision making: strategic, planning, operational • Examples: – Strategic: location decisions – Operational: what products will be produced during today’s production run

Use of Information in a Supply Chain • Inventory: demand patterns, carrying costs, stockout costs, ordering costs • Transportation: costs, customer locations, shipment sizes • Facility: location, capacity, schedules of a facility; need information about trade-offs between flexibility and efficiency, demand, exchange rates, taxes, etc.

The Supply Chain IT Framework • The Supply Chain Processes – Customer Relationship Management (CRM) – Internal Supply Chain Management (ISCM) – Supplier Relationship Management (SRM) – Plus: Transaction Management Foundation

Supply Chain IT Framework Supplier Relationship Management (SRM) Internal Customer Supply Chain Relationship Management (ISCM) (CRM) Transaction Management Foundation (TFM)

Customer Relationship Management • The processes that take place between an enterprise and its customers downstream in the supply chain • Key processes: – Marketing – Selling – Order management – Call/Service center

Internal Supply Chain Management • Includes all processes involved in planning for and fulfilling a customer order • Eg – Demand Planning – Supply Planning – Fulfillment – Field Service • There must be strong integration between the ISCM and CRM macro processes

Supplier Relationship Management • Those processes focused on the interaction between the enterprise and suppliers that are upstream in the supply chain • eg – Design Collaboration – Source – Negotiate – Buy – Supply Collaboration

The Transaction Management Foundation • Known as Enterprise software systems (ERP) • Earlier systems focused on automation of simple transactions and the creation of an integrated method of storing and viewing data across the enterprise • TMF enables integration across the three macro processes

Implementing Supply Chain Information Technology Systems • Select an IT system that addresses the company’s key success factors • Take incremental steps and measure value • Align the level of sophistication with the need for sophistication • Use IT systems to support decision making, not to make decisions • Think about the future

GREEN SUPPLY CHAIN MANAGEMENT

Green Supply Chain Management • Management of Materials and Resources from Suppliers to Manufacturer/Service Provider to Customer and Back, with the Natural Environment Explicitly Considered

Green Supply Chain Management • GSCM is an integrating environment thinking into supply chain management, including product design, material sourcing and selection, manufacturing processes, delivery of the final product to the consumers, and end-of-life management of the product after its useful life.

Green Supply Chain Management • The supply chain has been traditionally defined as a one way, integrated manufacturing process wherein raw materials are converted into final products, then delivered to customers. • Nowadays due to recent changing environmental requirements affecting manufacturing operations, increasing attention is given to developing environmental management (EM) strategies for the supply chain.

Factors Drive A Company To Adopt GSCM – Government – Environmentally aware customer – Market and competitor – Company

Designing The Green Supply Chain Supplier Distribution Consumer Manufacturer Retailer

Why Do it? (Benefits) • • • Economic benefits from increased efficiency. By reducing wastes, companies decrease handling expenses, fines, and even costly inputs. Supplier's savings may be passed along to buyer companies. Competitive advantage through innovation. Efficient production is enhanced through the use of cleaner technologies, process innovation, and waste reduction. Reduction in wastes equals dollars earned. Improved product quality. Supply chain partnerships help maintain relationships between buyers and suppliers leading to increased control over product quality. Consistent corporate environmental goals. In an era of multi-faceted, non-vertical manufacturing, companies include supplier outreach to address corporate environmental goals. Improved public image. Consumers, investors, and employees respond positively to companies with a reputation for good environmental performance.

Some ways of greening supply chains • • • Product Packaging Design for Upgradeability Design for Recyclability Materials Innovation Energy Efficiency /Green/Alternative sources of energy Environmental cleaning and greening e. g tree planting

TOPIC SIX: GLOBAL SUPPLY CHAIN MANAGEMENT ISSUES 171

Issues in Global trade and Supply Chain When considering the global trade there a number potential issues looming that could disrupt global supply chains, sourcing strategies and the flow of working capital. If not properly addressed, importers and exporters may face significant unexpected costs and increased disruptions to their supply chain. Some of the issues are: •

1) Going green concept • The world focuses on environmental safety and public health and much focus has been given to global warming phenomenon consequently businesses are driven towards production /supply of goods that are environmentally friendly and pursue recycling products laws and trade regulations have also been established. • Fuel companies for example have had to produce unleaded fuel that is more environmentally friendly. • Similarly electrical companies have had to conform to production of electrical products not harmful to the environment e. g. production of refrigerators that are CFC free, component harmful to the ozone layer. • The concept of green supply chain has moves from public relations strategy to a necessary means of deriving real economic value and compliance

2) Lack in manufacturers compliance • A number of regulations are usually passed from time to time e. g. environmental regulation. • Majority of manufacturers take time to comply this regulations that leads to lost revenue, stalled supply chains, fines and ruined cooperate reputations • An organizations has to confirm that supply chain partners are shipping products compliant to the regulations and carry out audits to ensure compliance measures are observed

3) Sourcing shifts by manufacturers • Shift sourcing strategies depending on where they see the next bubble is. factors including increased energy costs , falling price of dollar , limited trade agreements and rising costs of production forces the organization to rethink their sourcing strategies. • E. g. China which has of late been adversely mentioned in terms of production of toxic products and use of child labour. This bad press has made organizations to rethink sourcing from elsewhere

4) Safety initiatives • Over the years there has been product recall for defective goods. This has lead governments to enact safety laws and measures that protect the consumer and increase safety of increasing volumes of imports. • This measures may include third party certifications, raising consumer safety penalties and strengthening reinforcement actions to ensure accountability. Firms therefore constantly ask themselves whether their imports are safe.

Opportunities cropping from Global trade and Supply Chain issues. a) Environmentally Aware Consumers – As the public becomes more aware of environmental issues and global warming, consumers will be asking more questions about the products they are purchasing. – Companies will have to expect questions about how green their manufacturing processes and supply chain are, their carbon footprint and how they recycle.

b) Profiting from going green – Some companies have seen that this not a bad thing and indeed have been able to convert the public’s interest in all things green into increased profits. – A number of companies have shown that there is a proof of the link between improved environmental performance and financial gains. – Companies have looked to their supply chain and seen areas where improvements in the way they operate can produce profits. – E. g. General Motors reduced disposal costs by $12 million by establishing a reusable container program with their suppliers. – Maybe General Motors may have been less interested in green issues if they were making record profits, but in an attempt to reduce costs in their supply chain, GM found that the cost reductions they identified complemented the company’s.

c) Unaware of Potential Benefits – By re-evaluating the company's supply chain, from purchasing, planning, and managing the use of materials to shipping and distributing final products, savings are often identified as a benefit of implementing green policies. – Despite the public’s focus on the environment, benefits attributed to reducing a company’s environmental impact are not in the forefront of supply chain executive’s minds. – It appears that many executives are still unaware that improved environmental performance means lower waste-disposal and training costs, fewer environmental-permitting fees, and, often, reduced materials costs. – Hopefully the interest in green issues and environmental concern by the public will not wane as economic issues become more important due to the faltering economy.

FREIGHT AGENTS • Companies who have been selling products within a domestic market do not have the skills or knowledge to sell items in a foreign country. • Fortunately there are facilitators and intermediaries who, for a fee, will aid the launch and marketing of products in a new market. • Because of the complexities of the global supply chain companies can quickly become successful in new markets when they use the experience of facilitators and intermediaries. • NB: However these services do add an additional cost to the price of the items being exported.

1) Freight Forwarders. – The freight forwarder is concerned with organizing transportation for companies. Their primary task is to combine smaller shipments to create a single large shipment to minimize the shipping costs. – Companies using a freight forwarder will benefit as they are charged a much smaller shipping cost than if they had shipped their product independently. The freight forwarder provides other services which are beneficial to the exporting company. The services include documentation, payment and carrier selection. 2) Export Management Company (EMC) – The export management company offers services to companies that have not exported items before. The EMC offers all the services that a company would have if they had an internal export department. – The EMC deals with export documents and operate as the company’s agent in the overseas market. This may include selling the items directly or operating a sales department to process sales orders.

3) Export Trading Company – It is a company that exports goods for companies who hire them. – It identifies and works with companies in the foreign country who will market and sell the products. – The export trading company will provide services including export documentation, logistics and transportation. 4) Export Packers – The export packing company provides a service to companies unfamiliar with exporting. – Some countries require specific packaging specifications and the export packer’s knowledge in these matters are invaluable to the novice exporter. – In addition the export packer can advise companies on appropriate design and materials for the packaging of their items. – Packing companies can also assist companies in minimizing packaging so that they can maximize the number of items to be shipped and reduce shipping costs.

5) Customs Brokers – The customs broker helps companies to avoid the pitfalls involved with customs regulations and dealing with the complete customs process. – The customs requirements of many countries can be difficult to understand for the novice exporter and the knowledge and experience of the customs broker is vital. – Many countries have specific laws and documentation requirements for importing items that are not always obvious to the exporter. – The customs broker can offer a company a complete package of services that are essential when a company is exporting to a large number of countries.

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