11th LECTURE - Global Supply Chain Management.docx

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11th Lecture – Global Supply Chain Management

Supply Distribution

AT HERS A T HERSHEY’S

Hershey’s global supply chain starts in the jungles of countries like Brazil,Indonesia, the Ivory Coast, and Ghana, where the cacao tree grows !he cacaotree’s "elon#like fruit is harvested by hand and inside the fruit are about $% to &%seeds, or cocoa beans !hese beans fer"ent in large piles for about a week andare then dried !he beans are used to produce cocoa products including cocoali'uor, cocoa butter, and cocoa powder, which are the "ost signi(cant raw"aterials Hershey’s uses to produce its chocolate products Hershey’s purchasesthese cocoa products directly fro" third#party suppliers that source cocoa beansin )ar *astern, +est frican, and -outh "erican e'uatorial regions +est frican

accounts for appro.i"ately /%0 of the world’s supply of cocoa beans

Hershey’s also procures other raw "aterials like "ilk, sugar, and nut productsfro" suppliers in the 1nited -tates and around the world Hershey’s pri"ary"anufacturing and distribution facilities are in the states, but it also"anufactures, i"ports, "arkets, and sells products in Canada, 2e.ico, Brazil, andIndia It also has a "anufacturing agree"ent with another co"pany to produceproducts for its sian "arket, particularly China

-tarting in $%%/ Hershey’s initiated a three#year global supply chaintransfor"ation project at a cost of 34%% "illion that, when co"pleted, will

enhance Hershey’s "anufacturing, sourcing, and custo"er service capabilities,and reduce inventories resulting in i"prove"ents in working capital and generatesigni(cant resources to invest in various growth initiatives !he transfor"edsupply chain progra" will signi(cantly increase "anufacturing capacity utilizationby reducing the nu"ber of production lines by "ore than one#third, outsourcingproduction of low value#added ite"s, and constructing a 5e.ible, cost#e6ectiveproduction facility in 2onterrey, 2e.ico, to "eet e"erging "arketplace needs

In this chapter we will discuss how global co"panies like Hershey’s "anagesupply chains that stretch around the world

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GLOBAL SUPPLY CHAIN MANAGEMENT

In this chapter we are going to focus more closely on two processes—procurement and distribution,which also includes transportation; this entails a more micro-view of supply chains. We will begin witha discussion of procurement; the process of obtaining supply of the goods and services that are used in

the production process. The purchase of goods and services from suppliers, or procurement, plays acrucial role in supply chain management.

PROCUREMENT

In an attempt to minimize inventory levels, companies frequently require that their suppliers

provide on-demand, also referred to as direct-response, delivery to support a just-in-time (JIT)

or comparable inventory system. In continuous replenishment, a company shares real-time

demand and inventory data ith its suppliers, and !oods and services are provided as they are

needed. "or the supplier, these forms of delivery often mean ma#in! more frequent, partial

deliveries, instead of the lar!e batch orders suppliers have traditionally been used to fillin!.

$hile lar!e-batch orders are easier for the supplier to mana!e, and less costly, they increase the

customer%s inventory. They also reduce the customer%s fle&ibility to deal ith sudden mar#et

chan!es because of their lar!e investment in inventory.

Every part used at onda!s "arysville, #hio, plant is delivered on a daily basis. $ometimes partsdeliveries are re%uired several times a day. This often requires that suppliers move their location to

be close to their customer. "or e&ample, over ' of the *.+. suppliers for onda are ithin a

-mile radius of their /arysville, 0hio, assembly plant. Each day grocers send &ampbell!s $oup&ompany demand and inventory data at their distribution centers via electronic data interchange 'E(I),which &ampbell!s uses to replenish inventory of its products on a daily basis.

These demands require the supplier to improve its on processes and ma#e its on supply chain

more efficient. +uppliers require of their on suppliers hat has been required of them 1 hi!h

quality, loer prices, process improvement, and better delivery performance.

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The selection of suppliers is called sourcin!2 suppliers are literally the 3source4 of supply.

0utsourcin! is the act of purchasin! !oods and services that ere ori!inally produced in-house

from an outside supplier. #utsourcing is nothing new; for decades companies have outsourced as ashort-term solution to problems such as an une*pected increase in demand, brea+downs in plants ande%uipment, testing products, or a temporary lac+ of plant capacity. owever, outsourcing has become along-term strategic decision instead of simply a short-term tactical one. 5ompanies, especially lar!e,

multinational companies, are movin! more production, service, and inventory functions into the

hands of suppliers. igure below shows the three maor categories of goods and services thatcompanies tend to outsource.

/any companies are outsourcin! as a strate!ic move so that they can focus more on their core

competencies, that is, hat they do best. The company and supplier enter into a partnership in whichthe supplier agrees to meet the customer!s %uality standards for products and services and helps lower the customer!s costs. The company can also stipulate delivery schedules from the supplier that enablesthem to reduce inventory. In return, the company enters into a long-term relationship with the supplier,

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providing the supplier with security and stability. It may seem that all the benefits of such anarrangement are with the customer, and that is basically true.

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6urchases can be classified accordin! to to broad cate!ories7 manufacturin! inputs (direct

products) and operatin! inputs (indirect products).

8irect products are the ra materials and components that !o directly into the production

process of a product. ecause they tend to be uni%ue to a particular industry, they are usually

purchased from industry- specific suppliers and distributors. They also tend to require

specialized delivery2 /0$ does not typically deliver engine bloc+s.

Indirect products do not !o directly into the production of finished !oods. They are the

maintenance, repair, and operation (/90) !oods and services we mentioned in igure below.They tend not to be industry specific2 they include thin!s li#e office supplies, computers,

furniture, janitorial services, and airline tic#ets. :s a result they can often be purchased from

vendors li#e +taples, and they can be delivered by services li#e *6+.

/ore companies tend to purchase indirect !oods and services over the Internet than direct

!oods. 0ne reason is that a company does not have to be as careful about indirect !oods since

they typically cost less than direct products and they do not directly affect the quality of the

company%s on final product. &ompanies that purchase direct goods over the Internet tend to do sothrough suppliers with whom they already have an established relationship.

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EMAR!ET PLACES

;-mar#etplaces or "#ubs $onsoli%&t" suppli"rs’ 'oo%s &n% s"r(i$"s &t on"Int"rn"t sit" li)" & $&t&lo'u"* +or ",&-pl". "#ubs /or MROs in$lu%"$onsoli%&t"% $&t&lo'u"s /ro- & 0i%" &rr&y o/ suppli"rs t#&t "n&bl"buy"rs to pur$#&s" lo0(&lu" 'oo%s &n% s"r(i$"s 0it# r"l&ti("ly #i'#tr&ns&$tion $osts -or" $#"&ply &n% "1$i"ntly o("r t#" Int"rn"t*

*#"arketplaces like riba provide a neutral ground on the Internet whereco"panies can strea"line supply chains and (nd new business partners n e#"arketplace also o6ers services such as online auctions where suppliers bid onorder contracts, online product catalogues with "ultiple supplier listings thatgenerate online purchase orders, and re'uest#for#'uote =9)>? service throughwhich buyers can sub"it an 9)> for their needs and users can respond

RE2ERSE AUCTIONS

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: process used by e-mar#etplaces for buyers to purchase items is the reverse auction. In a

reverse auction, a company posts contracts for items it ants to purchase that suppliers can bid

on. The auction is usually open for a specified time frame, and vendors can bid as often as they

ant in order to provide the loest purchase price. $hen the auction is closed, the company can

compare bids on the basis of purchase price, delivery time, and supplier reputation for quality.

$ome e-mar+etplaces restrict participation to vendors who have been previously screened or certifiedfor reliability and product %uality. 1everse auctions are not only used to purchase manufacturing items

but they are also being used to purchase services. or e*ample, transportation e*changes hold reverseauctions for carriers to bid on shipping contracts and for air travel.

DISTRIBUTION

8istribution encompasses all of the channels, processes, and functions, includin! arehousin!

and transportation, that a product passes throu!h on its ay to the final customer (end user) . Itis the actual movement of products and materials between locations. 8istribution mana!ement

involves mana!in! the handlin! of materials and products at receivin! doc#s, storin! products

and materials, pac#a!in!, and the shipment of orders. The focus of distribution, hat it

accomplishes, is referred to as order fulfillment. It is the process of ensurin! on-time delivery of

the customer%s order.

8istribution and transportation are also often referred to as lo!istics. 2ogistics management isfre%uently more narrowly defined as bein! concerned ith just transportation and distribution, inwhich case logistics is a subset of supply chain management. In this decade total /.$. businesslogistics is over 34 trillion.

SPEED AND 3UALITY

(istribution is not simply a matter of moving products from point 5 to point . The drivin! force

behind distribution and transportation in today%s hi!hly competitive business environment is

speed. 0ne of the primary quality attributes on hich companies compete is speed of service.&ustomers have gotten used to instant access to information, rapid Internet-based order transactions,and %uic+ delivery of goods and services. 5s a result, wal+ing ne*t door to chec+ on what!s in thewarehouse is not nearly fast enough when customers want to buy a product now and a company has tolet them +now if it!s in stoc+. That demands real-time inventory information. &alling a truc+ing firmand as+ing it when it will have a truc+ in the vicinity to pic+ up a delivery is not nearly fast enoughwhen a customer has come to e*pect delivery in a few days or overnight. That also re%uires real-timeinformation about carrier location, schedules, and capacity. Thus, the #ey to distribution speed is

information, as it has been in our discussion of other parts of the supply chain.

INTERNET COMPANIES4 AMA5ON*COM

8istribution is a particularly important supply chain component for Internet companies li#e

:mazon.com, hose supply chains consist almost entirely of supply and distribution. These

companies have no production process2 they simply sell and distribute products that they acquire

from suppliers. They are not driven from the front end of the supply chain1the $eb site1they

are driven by distribution at the bac# end. Their success ultimately depends on the capability to

ship each order hen the customer needs or ants it.

igure below illustrates the order fulfillment process at 5ma6on.com when one of its millions of customers places an order via the Internet 'or by phone). The order is transmitted to the closest

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distribution center, where items are stored in a warehouse in shelved bins. 5omputers send or#ers

to retrieve items from the shelves, and they place each item in a crate ith other orders. When thecrate is full, it moves by conveyor through the plant to a central point. 5t this central sorting area, bar codes are matched with order numbers to determine which items go with which order, and the itemsthat fulfill an order are sorted into chutes. The items that ma+e up an order are placed in a bo* as theycome off the chute with a new bar code that identifies the order. The bo*es are then pac+ed, taped,weighed, and shipped by a carrier, for e*ample, the /.$. 0ostal $ervice or /0$.

8rder )ul(ll"ent at "azonco"

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8istribution centers (85s), hich typically incorporate arehousin! and stora!e, are buildin!s

that are used to receive, handle, store, pac#a!e, and then ship products.

$ome of the lar!est business facilities in the *nited +tates are distribution centers. (istributioncenters for The 7ap in 7allatin, Tennessee, Target in 5ugusta &ity, 8irginia, and ome (epot in$avannah, 7eorgia, each encompass more than 4.9 million s%uare feet of space—about : times bigger than the area of a football field.

5s in other areas of supply chain management, information technology has a significant impact ondistribution management. To fill Internet orders successfully, arehouses and distribution centers

must be set up as 3flo-throu!h4 facilities, usin! automated material handlin! equipment to

speed up the processin! and delivery of orders. 9etailers have shifted from buyin! !oods in bul#

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and storin! them, to pushin! inventory and stora!e , bac#ards in supply chain (upstream).

They e*pect suppliers 'and<or distributors) to ma+e fre%uent deliveries of merchandise that includes ami* of different product items in small %uantities 'referred to as =mi*ed-pallet>), properly labeled, pac+ed, and shipped in store-ready configurations. "or e&ample, some clothin! retailers may ant

seaters delivered already folded, ready for the store shelf, hile others may ant them to be on

their on han!ers. To adequately handle retailer requirements, distribution centers must be able

to handle a variety of automated tas#s.

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6ostponement, moves some final manufacturin! steps li#e assembly or individual product

customization into the arehouse or distribution center. <eneric products or component parts

(li#e computer components) are stored at the arehouse, and then final products are built-to-

order (=T0), or personalized, to meet individual customer demand. It is a response to the =saying>that whoever can get the desired product to the customer first gets the sale. 6ostponement actually

pulls distribution into the manufacturin! process, alloin! lead times to be reduced so that

demand can be met more quic#ly. owever, postponement also usually means that a distributor muststoc+ a large number of inventory items at the warehouse to meet the final assembly or customi6ation

re%uirements; this can create higher inventory-carrying costs. The manufacturing and distributionsupply chain members must therefore wor+ together to synchroni6e their demand forecasts andcarefully manage inventory.

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In order to handle the ne trends and demands of distribution mana!ement, companies employ

sophisticated, hi!hly automated arehouse mana!ement systems ($/+) to run day-to-day

operations of a distribution center and #eep trac# of inventories.

The $/+ places an item in stora!e at a specific location, locates and ta#es an item out of stora!e

pac#s the item, and ships it via a carrier.

#rders flow into a W"$ through an order management system '#"$). The #"$ enables thedistribution center to add, modify, or cancel orders in real time. When the #"$ receives customer order information online, it provides a snapshot of product availability from the W"$ and fromsuppliers via E(I. If an item is not in stoc+, the #"$ loo+s into the supplier!s production schedule tosee when it will be available. The #"$ then allocates inventory from the warehouse site to fill anorder, establishes a delivery date, and passes these orders onto the transportation management systemfor delivery.

The transportation management system 'T"$) allows the (& to trac+ inbound and outbound

shipments, to consolidate and build economical loads, and to select the best carrier based on costand service. ?ard management controls, activities at the facility!s doc+ , while schedules doc+ appointments to reduce bottlenec+s. 2abor management plans, manages, and reports the performancelevel of warehouse personnel. Warehouse optimi6ation optimi6es the warehouse placement of items,called =slotting,> based on demand, product groupings, and the physical characteristics of the item. 5W"$ also creates custom labeling and pac+aging. 5 W"$ facilitates cross-doc#in!, a system thatWalmart originated which allows a (& to direct incoming shipments straight to a shipping doc+ to filloutgoing orders, eliminating costly putaway and pic+ing operations. In a cross-doc+ing system, products are delivered to a warehouse on a continual basis, where they are stored, repac+aged, and

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distributed to stores without sitting in inventory. 7oods =cross> from one loading doc+ to another,usually in 9@ hours or less.

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$ith vendor-mana!ed inventory (>/I), manufacturers, instead of distributors or retailers,

!enerate orders. *nder >/I, manufacturers receive data electronically via ;8I or the Internet

about distributors% sales and stoc# levels. /anufacturers can see hich items distributors carry,as ell as several years of point-of-sale data, e&pected !roth, promotions, ne and lost business,

and inventory !oals, and use this information to create and maintain a forecast and an inventory

plan. >/I is a form of 3role reversal41usually the buyer completes the administrative tas#s of

orderin!2 ith >/I the responsibility for plannin! shifts to the manufacturer.

8"I is usually an integral part of supply chain collaboration. The vendor has more control over the

supply chain and the buyer is relieved of administrative tas#s, thereby increasin! supply chain

efficiency. oth manufacturers and distributors benefit from increased processing speed, and fewer data entry errors occur because communications are through computer-to-computer E(I or theInternet. 8istributors have feer stoc#outs2 plannin! and orderin! costs !o don because

responsibility is shifted to manufacturers2 and service is improved because distributors have theri!ht product at the ri!ht time. "anufacturers benefit by receiving distributors! point-of-sale data,which ma+es forecasting easier.

C8DDB89!I* D8GI-!IC-5ompanies are also findin! ays to collaborate in distribution. They have found that by poolin!their distribution resources, hich can create !reater economies of scale, they can reduce their

costs.

or e*ample, Aabisco discovered it was paying for too many half-empty truc+s so they moved tocollaborative logistics. /sing the Web as a central coordination tool between producers, carriers, andretailers, Aabisco can share truc+s and warehouse space with other companies, even competitors, thatare shipping to the same retail locations. Aabisco and other companies, including 7eneral "ills and0illsbury, started using a collaborative logistics networ+ from Aistevo &orporation. 5t Aistevo.com

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companies post the warehouse space they need or have available and share space, truc+s, and e*penses.The goal is that everyone, from suppliers to truc+ers to retailers, shares in the savings.

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5nother recent trend in distribution is outsourcing. 0roducers and manufacturers are increasinglyoutsourcing distribution activities. #utsourcing allows the company to focus on its core competencies.

It also ta+es advantage of the e*pertise that distribution companies have developed. 0utsourcin!distribution activities tends to loer inventory levels and reduce costs for the outsourcin!

company.

Aabisco Inc., with annual sales of 3B billion, delivers C types of coo+ies, more than 4, candies,and hundreds of other food items to @, buyers and has incoming shipments of countless rawingredients. It outsources many distribution and transportation activities to third-party logistics ':02)companies. #utsourcing is more cost-effective and allows Aabisco to focus on core competencies.

TRANSPORTATION

In a supply chain, transportation is the movement of a product from one location to another as itma#es its ay to the end-use customer. :lthou!h supply chain e&perts a!ree that transportation

is a si!nificant cost, it receives least attention in supply chain mana!ement. or some retailcompanies primarily involved in the distribution of goods, li+e 2.2. ean and 5ma6on.com,transportation is not only a maor cost of doing business, it is also a maor determinant of promptdelivery service.

The principal modes of transportation ithin the *nited +tates are railroads, air, truc#,

intermodal, ater, pac#a!e carriers, and pipeline. The greatest volume of freight is shipped byrailroad 'appro*imately one-third of the total), followed by truc+ing, pipeline, and inland waterways.

9ailroads are cost effective for transportin! lo-value, hi!h-density, bul# products such as ramaterials, coal, minerals, and ores over lon! distances. 1ailroads operate on less fle*ible and slower schedules than truc+s, and they usually cannot go directly from one business location to another astruc+s can. 1ail freight service has the worst record of %uality performance of all modes of freighttransport, with a higher incidence of product damage and almost 4 times more late deliveries thantruc+ing.

Truc#s provide fle&ible point-to-point service, deliverin! small loads over short and lon!

distances over idely dispersed !eo!raphic areas. Truc#in! service is typically more reliable and

less dama!e-prone then railroads. Truc+ing generates over DC of the nation!s total freight cost eachyear.

:ir frei!ht is the most e&pensive and fastest mode of frei!ht transportation2 it is also the fastestgrowing segment of the airline industry. "or companies that use air frei!ht, service is more

important than price. 0roduction stoppages because of missing parts or components, are much moree*pensive than the cost of air freight. "or hi!h-value !oods such as pharmaceuticals, hi!h

technolo!y, and consumer electronics, speed to mar#et is important, and in addition, shorter

shippin! times reduce the chances for theft and other losses. The !eneral rule for international

air frei!ht is that anythin! that%s physically or economically perishable has to move by air

instead of by ship. The major product !roups that are shipped by international air frei!ht, from

lar!est to smallest, are perishables, construction and en!ineerin! equipment, te&tiles and

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earin! apparel, documents and small pac#a!e shipments, and computers, peripherals, and

spare parts.

:ir frei!ht is !roin! particularly fast in :sia and specifically 5hina. The lac+ of groundinfrastructure ma+es rail and truc+ing transport difficult between countries in 5sia and regions in&hina. 5ompanies ith manufacturin! plants in one place in :sia and suppliers in another are

increasin!ly usin! air frei!ht to connect the to. 6ac#a!e carriers such as *6+, "ed;&, and the

*.+. 6ostal +ervice transport small pac#a!es, up to about pounds. The !roth of e-businesshas si!nificantly increased the use of pac#a!e carriers. 6ac#a!e carriers combine various modes

of transportation, mostly air and truc#, to ship small pac#a!es rapidly. They are not economicalfor large-volume shipments; however, they are fast and reliable, and they provide uni%ue services thatsome companies must have. 0ac+age carriers have been innovative in the use of bar codes and theInternet to arrange and trac+ shipments. The edE* Web site attracts D of its customer orderselectronically, and the company delivers D.C million pac+ages daily in over FF countries.

$ater transport over inland aterays, canals, the <reat ?a#es, and alon! coastlines is a slo

but very lo-cost form of shippin!. It is limited to heavy, bul# items such as ra materials,

minerals, ores, !rains, chemicals, and petroleum products. Water transport is the primary means of international shipping between countries separated by oceans.

Intermodal transportation combines several modes of transportation to move shipments. The mostcommon intermodal combination in the /nited $tates are;

4. truc+GrailGtruc+, andF. the truc+G waterGrail<truc+ combination

Intermodal truc#@ rail shippin! can be as much as A cheaper than lon!-haul truc#in!. The

#ey component in intermodal transportation is the container. 5round the world over 4@ millioncontainers ma+e over F million trips each year, with over FC originating from &hina alone.

6ipelines in the *nited +tates are used primarily for transportin! oil and petroleum products.

0ipelines called slurry lines carry other products such as coal and +aolin that have been pulveri6ed andtransformed into li%uid form. #nce the product arrives at its destination, the water is removed, leavingthe solid material. :lthou!h pipelines require a hi!h initial capital investment to construct, they

are economical because they can carry materials over terrain that ould be difficult for truc#s

or trains to travel across, for e&ample, the Trans-:las#a pipeline. 0nce in place, pipelines have a

lon! life and are lo cost in terms of operation, maintenance, and labor.

!H* GD8BD -1;;D CHI:

The dissolution of communism opened up new mar+ets in 1ussia and "iddle and Eastern Europe, andthe creation of the European &ommunity resulted in the world!s largest economic mar+et—9 million people. Europe, with a total population of @C million is the largest, best-educated economic group inthe world. Emerging mar+ets in &hina, growing 5sian e*port-driven economies, e*panding globaltrading centers in ong Hong and $ingapore, and a newly robust economy in India have lin+ed withthe rest of the world to form a vigorous global economic community. <lobal trade no e&ceeds BC

trillion per year. <lobalization is no lon!er restricted to !iant companies. Technolo!y advances

have made it possible for middle-tier companies to establish a !lobal presence. &ompanies previously regional in scope are using the Internet to become global overnight. Information technologyis the =enabler> that lets companies gain global visibility and lin+ disparate locations, suppliers, andcustomers. owever, many companies are learning that it is not an easy process.

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OBSTACLES TO GLOBAL SUPPLY CHAIN MANAGEMENT

Glob&l supply $#&in -&n&'"-"nt. t#ou'# 'lob&l in n&tur". -ust stillt&)" into &$$ount n&tion&l &n% r"'ion&l %i6"r"n$"s* Custo-s. busin"sspr&$ti$"s. &n% r"'ul&tions $&n (&ry 0i%"ly /ro- $ountry to $ountry &n%"("n 0it#in & $ountry* )oreign "arkets are not ho"ogeneous and often re'uirecusto"ized service in ter"s of packaging and labeling >uality can be a "ajorchallenge when dealing with !hird +orld "arkets in countries with di6erentlanguages and custo"ers -o"e of the other "ajor di6erences between do"esticand global supply chain transactions include

Increased docu"entation for invoices, cargo insurance, letters of credit, and inspections *ver changing regulations that vary fro" country to country !rade groups, tari6s, duties, and landing costs Di"ited shipping "odes Ai6erences in co""unication technology and availability Ai6erent business practices as well as language barriers Govern"ent codes and reporting re'uire"ents that vary fro" country to country

:u"erous players, including forwarding agents, custo" house brokers, (nancialinstitutions, insurance providers, "ultiple transportation carriers, and govern"entagencies -ince F77, nu"erous security regulations and re'uire"ents

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N&tions #&(" 7oin"% to'"t#"r to /or- tr&%in' 'roups. &lso $&ll"% n&tion'roups. &n% $usto-s unions. &n% 0it#in t#"s" 'roups pro%u$ts -o("/r""ly 0it# no i-port t&,. $&ll"% t&ri6s or %uti"s. $#&r'"% on -"-b"rpro%u$ts* T#" -"-b"rs o/ & 'roup $#&r'" uni/or- i-port %uti"s to

n&tions outsi%" t#"ir 'roup. t#us r"-o(in' t&ri6 tr&%" b&rri"rs 0it#int#" 'roup &n% r&isin' b&rri"rs /or outsi%"rs* !he group adopts rules andregulations for freely transporting goods across borders that, co"bined withreduced tari6s, give "e"ber nations a co"petitive advantage over non"e"bersT#"s" tr&%" &%(&nt&'"s &-on' -"-b"r n&tions lo0"r supply $#&in$osts &n% r"%u$" $y$l" ti-"8t#&t is. t#" ti-" r"9uir"% /or pro%u$ts to-o(" t#rou'# t#" supply $#&in* NA+TA is t#" Nort# A-"ri$&n +r"" Tr&%"A'r""-"nt. &n% EU is t#" Europ"&n Co--unity tr&%" 'roup. 0#i$#in$lu%"s -&ny o/ t#" $ountri"s o/ :"st"rn Europ"* T#" :orl% Tr&%"Or'&ni;&tion <:TO= is &n int"rn&tion&l or'&ni;&tion %"&lin' 0it# t#"'lob&l rul"s o/ tr&%"* It "nsur"s t#&t tr&%" >o0s &s s-oot#ly &n% /r""ly

&s possibl" &-on' its ?@ -"-b"rs* !he trade agree"ents and rules arenegotiated and signed by govern"ents, and their purpose is to help e.portersand i"porters conduct business Most/&(or"%n&tion tr&%" <M+N= st&tus is&n &rr&n'"-"nt in 0#i$# :TO -"-b"r $ountri"s -ust ",t"n% to ot#"r-"-b"rs t#" -ost /&(or&bl" tr"&t-"nt 'i("n to &ny tr&%in' p&rtn"r* +or",&-pl". M+N st&tus /or C#in& tr&nsl&t"s into lo0"r %uti"s on 'oo%s"nt"rin' t#" Unit"% St&t"s. &n% /"0"r tr&%" r"'ul&tions /or $o-p&ni"s*

To o("r$o-" t#" obst&$l"s &n% probl"-s o/ 'lob&l supply $#&in-&n&'"-"nt. -&ny $o-p&ni"s #ir" on" or -or" int"rn&tion&l tr&%"

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sp"$i&lists* +i'ur" b"lo0 su--&ri;"s t#" &$ti(iti"s o/ t#" %i6"r"nt typ"so/ tr&%" sp"$i&lists*

D:A*A C8-!

In global trade l&n%"% $ost is the total cost of producing, storing, andtransporting a product to the site of consu"ption or another port 2ost i#e E@0

of landed cost co"prises of two broad categories

=7? transportation cost and duty, and=$? govern"ental charges such as (&lu" &%%"% t&, <2AT= and e.cise ta.

An&lysis o/ %uti"s by (&rious 'o("rn-"nts is i-port&nt to un%"rst&n%l&n%"% $osts. &n% t#"s" (&ry /ro- $ountry to $ountry )or e.a"ple, for 1-i"ports, transportation costs fro" the point of entry into the 1nited -tates, to thefactory destination are not calculated as part of the i"port duty charge and dutyis charged free on board =)8B? However, in other countries the duty assessed

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can include the cost of transportation fro" beginning to end T#us poorlypro7"$t"% l&n%"% $osts $&n b&lloon t#" pri$" o/ & pro%u$t -o("*A$$ur&t"ly "sti-&tin' tru" l&n%"% $osts #"lps &(oi% $li$)"r s#o$)*Cli$)"r s#o$) o$$urs 0#"n &n o("rs"&s $usto-"r pl&$"s &n or%"r 0it# &$o-p&ny t#&t %o"s not #&(" t#" $&p&bility o/ $&l$ul&tin' l&n%"% $ost*T#"n t#" or%"r '"ts s#ipp"%. &n% &lon' t#" 0&y t&ri6s '"t &%%"% on top8in so-" $&s"s it $&n %oubl" t#" ori'in&l pur$#&s" pri$"*

+*B#B-*A I:!*9:!I8:D !9A* D8GI-!IC- --!*2-

s we have indicated global supply $#&in -&n&'"-"nt in(ol("s &stunnin'ly $o-pl", -&tri, o/ l&n'u&'" b&rri"rs. $urr"n$y $on("rsions.int"rn&tion&l tr&%" &'r""-"nts. t&,"s. t&ri6s. "-b&r'o"s. %uti"s.9uot&s. %o$u-"nt r"9uir"-"nts. lo$&l rul"s. &n% n"0 tr&%in' p&rtn"rs*T#"s" /&$tors r"9uir" &n &uto-&t"%. in/or-&tion t"$#nolo'y solution /or&ny $o-p&ny 0it# &ny r"&l (olu-" o/ int"rn&tion&l s#ip-"nts*

Int"rn&tion&l tr&%" lo'isti$s <ITL= $o-p&ni"s us" :"bb&s"% so/t0&r"

pro%u$ts t#&t lin) %ir"$tly to $usto-"rs’ :"b sit"s to "li-in&t" orr"%u$" t#" obst&$l"s to 'lob&l tr&%"*

!hey convertJ

• language and currency fro" the 1- syste" into those used by "any of the

1nited -tates’s trading partners

• I!D syste"s also provide infor"ation on tari6s, duties, and custo"s

processes and so"e link with (nancial institutions to facilitate letters of credit and pay"ent

• !hrough the use of e.tensive databases these syste"s can attach theappropriate weights, "easure"ents, and unit prices to individual products

ordered over the +eb• !hese syste"s can also incorporate transportation costs and conversion

rates so that purchasers can electronically see the landed cost of ordering aproduct and having it delivered

• -o"e I!D syste"s use a landed cost search engine that calculates shipping

costs online while a co"pany enters an order so it will know e.actly whatthe costs will be in 1- funds

• !hey also track global ship"ents !hrough their +eb sites and software

products, I!D co"panies do "any of the things international tradespecialists do

•

!hey let their custo"ers know which international co"panies they can dobusiness with the"

• !hey identify e.port and i"port restrictions between buyers and vendors

!hey provide the docu"ents re'uired to e.port and i"port products, andthey deter"ine the duties, ta.es, and landed costs and other govern"entcharges associated with i"porting a product

P Mor'&n C#&s" 2&st"r&. & 'lob&l tr&%" -&n&'"-"nt $o-p&ny. "n&bl"s$usto-"rs t#rou'# its 0"bb&s"% so/t0&r" pro%u$ts to $&l$ul&t" l&n%"%$osts. s$r""n /or r"stri$t"% p&rti"s. '"n"r&t" s#ip-"nt %o$u-"nt&tion.

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&n% -&n&'" %uti"s. &n% it &lso #&n%l"s r"p&irs &n% r"turns* It #&s &nonlin" libr&ry o/ tr&%" r"'ul&tions /or %i6"r"nt $ountri"s. &n% it’s$usto-"rs in$lu%" +or%. D"ll. &n% Tos#ib&* Ot#"r ITL r-s in$lu%" Tr&%"B"&- &n% Nist"(o*

RECENT TRENDS IN GLOBALI5ATION +OR U*S* COMPANIES

To si!nificant chan!es that prompted many *.+. companies to e&pand !lobally ere thepassa!e of D:"T: almost a decade a!o and the admission of 5hina into the $orld Trade

0r!anization in C. D:"T: opened up business opportunities ith /e&ico , which in FFreplaced apan as the /nited $tates! second leading trading partner, with cross-border trade e*ceeding3F9 billion. :ppro&imately ' of the Fortune companies have a portion of their

operations, production components, or affiliates in /e&ico. =esides cheap labor, /e&ico is also

close to the *nited +tates, and thus /e&ican companies can meet the just-in time requirements of

many *.+. companies. owever, "e*ico!s economic gains also lead to more obs and increasedwor+er s+ills, and as a result, higher wages, which in turn has led /.$. and foreign companies awayfrom "e*ico to &hina with its even lower wage rates.

The wage rate for uns+illed labor in &hina is around 34.C per hour compared to appro*imately 3:. per hour in "e*ico, 3C per hour in $ingapore, and 3FC per hour in apan. In CE 5hina replaced

/e&ico as the number to e&porter of !oods to the *nited +tates. =oth /e&ico and 5hina have

positive and ne!ative aspects in terms of supply chain development for *.+. companies. ?ou canship from "e*ico to the /nited $tates in about eight hours; however, it ta+es F4 to F: days to shipfrom &hina. "any people spea+ English in "e*ico, and many 5mericans spea+ $panish; the samesituation does not e*ist in &hina. 7overnment regulations, especially in terms of business ownership,are sometimes restrictive in &hina, but in &hina a company can wor+ F9 hours a day, D days a wee+ compared to an average wor+wee+ in "e*ico of appro*imately 99 hours. Trade regulations and tariffsare increasingly being lowered in "e*ico and &hina. Juality is a problem in both "e*ico and &hinawhere it can vary dramatically between companies. &hinese and "e*ican suppliers generally lac+

%uality-management systems and do not often use statistical process control or have I$# certification.

CHINA’S INCREASING ROLE IN THE GLOBAL SUPPLY CHAIN

In recent years "ore and "ore co"panies in the 1nited -tates and abroad are seeking todevelop a global supply chain by sourcing in low#cost countries, and today China hasbeco"e one of the world’s pre"ier sources of supply 2any suppliers are also relocatingto China Co"panies are looking to China and other e"erging low#cost sources of supplysuch as Central*astern *urope, 2e.ico, India, and ;aci(c 9i" countries for severalreasons )irst there is an &bun%&n$" o/ lo00&'" l&borJ China has a labor "arket of /@% "illion people, and the country’s average hourly wage, is still lower than "ost othere"erging "arkets l"ost #&l/ o/ C#in&’s popul&tion #&s & -i%%l"s$#ool or

'r"&t"r "%u$&tion 2ost co"panies also want to position their source countries asfuture "arkets, and China is one of the world’s fastest growing "arkets China’s e.portsincreased by over @%%0 in the past decade

Dike "ost low#cost e"erging countries doJ ra"p up with labor#intensive "anufacturingand then "igrate slowly toward "ore skilled, higher#value products and services, China isalso "oving fro" its traditional e.ports of consu"er goods, clothing and te.tilesJ toproducts with a higher technology content No0 #i'#t"$# in%ustri"s &r" loo)in' toC#in& &s & lo0$ost suppli"r. to -&int&in t#"ir t#in -&r'ins. 0#i$# &r" &$ons"9u"n$" o/ int"ns" $o-p"tition &n% ("ry /&st pro%u$t li/"$y$l"s* !he

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2icrosoft Kbo. ga"e syste" was (rst built in 2e.ico and Hungary, but production wasshifted to China Daptop co"puter "anufacturing in !aiwan is "oving to China

Unit"% St&t"s $o-p&ni"s '"n"r&lly /ollo0 on" o/ s"("r&l -o%"ls in %oin'busin"ss in C#in&* On" option is to "-ploy lo$&l t#ir%p&rty tr&%in' &'"nts to#"lp i%"nti/y lo$&l suppli"rs* Anot#"r &lt"rn&ti(" is & 0#olly o0n"% /or"i'n"nt"rpris" li)" Si"-"ns. t#&t in r"turn /or & l&r'"r in("st-"nt 0ill typi$&llypro(i%" opportuniti"s to /or- b"tt"r lon't"r- r"l&tions#ips 0it# suppli"rs*

+in&lly. $o-p&ni"s $&n %"("lop t#"ir o0n int"rn&tion&l pro$ur"-"nt o1$"s<li)" IBM %i%= t#&t #&(" sp"$i&li;"% t"&-s p"r/or-in' %i6"r"nt sour$in'/un$tions li)" lo'isti$s* O/ t#" t#r"" -o%"ls. t#" "st&blis#-"nt o/ &nint"rn&tion&l pro$ur"-"nt o1$" #&s pro("n to b" t#" -ost su$$"ss/ul"sp"$i&lly /or l&r'" -&nu/&$turin' r-s*

Sour$in' /ro- C#in& is not 0it#out $#&ll"n'"s* Dr&-&ti$ %i6"r"n$"s inor'&ni;&tion. $ultur&l r"l&tions#ips. &n% t"$#nolo'y $&n r"sult in si'ni$&ntprobl"-s to o("r$o-" Cultural relationships are "ore diLcult to establish in Chinathan in the 1nited -tates Guanxi =or personal relationships? will fre'uently e6ectbusiness considerations +orker turnover rates a"ong low#skilled workers are e.tre"elyhigh, averaging <%M&%0 annually, and the turnover rate a"ong new university graduates

is also e.tre"ely high co"pared to industrialized nations

:#il" C#in& #&s b"$o-" & l"&%in' 'lob&l suppli"r -&r)"t. t#" $ountry’sun%"r%"("lop"% tr&nsport&tion in/r&stru$tur". /r&'-"nt"% %istributionsyst"-s. l&$) o/ sop#isti$&t"% t"$#nolo'y, li"ited logistics skills, r"'ul&toryr"stri$tions. &n% lo$&l prot"$tionis- #in%"r "1$i"nt lo'isti$s &n% -&)" supply$#&in -&n&'"-"nt & $#&ll"n'"* Co-p&ni"s "nt"rin' t#" C#in"s" -&r)"t o/t"nn% t#"y $&nnot -&n&'" tr&nsport&tion &n% %istribution &s t#"y -i'#t in t#"ir#o-" $ountry* !he govern"ent#controlled r&il s"r(i$" is China’s $#"&p"st%istribution -o%"J however, $&p&$ity s#ort&'"s &r" routin" Ro&%s are thepreferred "ode of distribution for packaged (nished goodsJ however, %"-&n% ",$""%s$&p&$iti"s, and China’s road transport industry is very frag"ented Air/r"i'#t is

pl&'u"% by #i'# pri$"s. in&%"9u&t" $&p&$ity. /r&'-"nt"% rout"s. &n% li-it"%in/or-&tion ",$#&n'" b"t0""n &irlin"s &n% /r"i'#t /or0&r%"rs* O$"&n &n%inl&n% 0&t"r tr&nsport is t#" -ost %"("lop"% %istribution -o%" in C#in&. &n%C#in&’s s#ippin' $o-p&ni"s r&n) &-on' t#" 0orl%’s l&r'"st* Ho0"("r. inl&n%0&t"r %istribution is un%"rutili;"% because ports often cannot process and "anagecargo eLciently, bur"&u$r&ti$ %"l&ys &n% t#"/t &r" $o--on. &n% -&ny ports$&nnot &$$o--o%&t" l&r'"r ("ss"ls* Distribution is &lso #&-p"r"% by poor0&r"#ousin'. 0#i$# is pr"%o-in&ntly 'o("rn-"nt $ontroll"%* :&r"#ous"%"si'ns &r" in"1$i"nt 0it# lo0 $"ilin's &n% poor li'#tin'. &n% 'oo%s &r"usu&lly #&n%l"% -&nu&lly 0it#out 0&r"#ous" &uto-&tion*

2ost supply chain functions in China are not logically linked to govern"ent depart"ents

Co"plicated and e.cessive regulatory controls are also co""on +or"i'n tr&%"$o-p&ni"s -ust s"ll 'oo%s t#rou'# %istributors &n% $&nnot s"ll %ir"$tly tostor"s. &n% t#"y &r" /orbi%%"n to o0n %istribution $#&nn"ls* A /or"i'n $o-p&ny$&n s"ll 'oo%s -&nu/&$tur"% in C#in&. but it $&nnot s"ll or %istribut" 'oo%si-port"% into t#" $ountry. in$lu%in' t#os" pro%u$"% by & $o-p&ny’s pl&ntsoutsi%" o/ C#in&* T#us. /or"i'n $o-p&ni"s -ust r"ly on s-&ll lo$&l %istribution$o-p&ni"s to -o(" 'oo%s* 9egulations also have created a shortage of third#partylogistics providers

owever, moderni6ation of logistics and transportation was on one of the top three priorities in &hina!s Tenthive ?ear 0lan that ended in FC. illions of dollars are being spent annually on new highways, airport

7@




construction and e*pansion, inland water transportation, and the construction of distribution and logisticscenters. &hina!s admission to the World Trade #rgani6ation has forced the country to progressively removeregulations and restrictions that prevent foreign companies from participating in transportation and distributionfunctions, which has made it possible for foreign companies to establish subsidiaries and offices that manage avariety of supply chain functions. The demand for third-party logistics service providers has also e*panded theoutsourcing of logistics and transportation.

SOME !EY TERMS4

$ontinuous r"pl"nis#-"nt supplying orders in a short period of ti"e according to a predeter"inedschedule

$or" $o-p"t"n$i"s the activities that a co"pany does best

"-&r)"t pl&$"s +eb sites where co"panies and suppliers conduct business#to#business activities

"pro$ur"-"nt business#to#business co""erce in which purchases are "ade directly through asupplier’s +eb site

int"r-o%&l tr&nsport&tion co"bines several "odes of transportation

l&n%"% $ost total cost of producing, storing, and transporting a product to the site of consu"ption

lo'isti$s the transportation and distribution of goods and services

n&tion 'roups nations joined together into trading groups

on%"-&n% <%ir"$tr"spons"= %"li("ry re'uires the supplier to deliver goods when de"anded bythe custo"er

or%"r /ulll-"nt the process of ensuring on#ti"e delivery of a custo"er’s order

outsour$in' purchasing goods and services that were originally produced in#house fro" an outsidesupplier

postpon"-"nt "oving so"e (nal "anufacturing steps like (nal asse"bly or product custo"izationinto the warehouse ordistribution center

pro$ur"-"nt purchasing goods and services fro" suppliers

r"("rs" &u$tion a co"pany posts ite"s it wants to purchase on an Internet e#"arketplace forsuppliers to bid on

sour$in' the selection of suppliers

supply $#&in the facilities, functions, and activities involved in producing and delivering a product orservice fro"suppliers =and their suppliers? to custo"ers =and their custo"ers?

supply $#&in -&n&'"-"nt <SCM= "anaging the 5ow of infor"ation through the supply chain inorder to attain the levelof synchronization that will "ake it "ore responsive to custo"er needs while lowering costs

t&ri6s <%uti"s= ta.es on i"ported goods

tr&%" sp"$i&lists specialists who help "anage transportation and distribution operations in foreigncountries

(&lu" &%%"% t&, <2AT= an indirect ta. on the increase in value of a good at any stage in the supplychain fro" raw "aterial to(nal product

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("n%or-&n&'"% in("ntory <2MI= a syste" in which "anufacturers instead of distributorsgenerate orders

0&r"#ous" -&n&'"-"nt syst"- <:MS= an auto"ated syste" that runs the day#to#dayoperations of a warehouse or distribution center and keeps track of inventory

Documents

11th LECTURE - Global Supply Chain Management.docx