Global SCM Management

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).

Supply Chain Utilities

TIME PLACE POSSESSION

Network of Relationships

Sweden

Denmark

Germany

Finland

Norway Netherlands

Iceland

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.

International SCM Theory

Actor Bonds

Resource TiesActivity Links

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?


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


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


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


Global Supply Chain Structure After Reorganization


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).