DPS 601: GLOBAL SUPPLY DPS 601: GLOBAL SUPPLY CHAIN MANAGEMENTCHAIN MANAGEMENT MBA PROGRAMME MBA PROGRAMME

BY:BY:MAGUTU O.PMAGUTU O.P

Department Of Department Of Management ScienceManagement ScienceSchool Of BusinessSchool Of Business

SEPT DEC 2011SEPT DEC 2011

TOPIC FIVE: TOPIC FIVE: GLOBAL SITE LOCATION GLOBAL SITE LOCATION

OutlineOutline

Objectives you should be able to do the following:

Strategic Roles of a Facility Be aware of key locational determinants, both

national/regional and site specific, and the impact they may have on prospective locational alternatives.

A strategic framework for facility location Describe the different types of modeling approaches that

may be used to gain insight into logistics/supply chain network design and facility location decision making.

Apply the simple “grid” or center-of-gravity approach to facility location.

Discuss certain ways in which transportation alternatives and transportation costs may affect the location decision.

Strategic Roles of a Strategic Roles of a FacilityFacilityOffshore facility: Low cost facility for

export productionSource Facility: Low cost facility for

global productionServer Facility: Regional Production

FacilityContributor Facility: Regional Production

Facility with Development SkillsOutpost Facility: Regional Production

Facility built to gain local skillsLead Facility: Facility that leads in

development and process technologies

Key Locational Determinants: Key Locational Determinants: Technological FactorsTechnological FactorsCharacteristics of available production

technologies have a significant impact on the network design:◦ If production technology provide significant

economies of scale, few high capacity locations are the most effective

◦ If facilities have lower fixed costs, many local facilities are preferred.

Flexibility of the production technology impacts the degree of consolidation in the network:◦ If the production technology is inflexible,

build many local facilities◦ Else, build few but large facilities

Key Locational Key Locational Determinants: Determinants: Macroeconomic FactorsMacroeconomic FactorsTariffs and tax incentives

◦Tariffs: Any duties that must be paid when product, equipment are moved across an international, state or city boundry.

◦Developing countries have free trade zones

Exchange rate and demand risk◦Valuable TRL and textile industry in

Turkey

Key Locational Determinants: Key Locational Determinants: Infrastructure FactorsInfrastructure FactorsAvailability of sitesAvailability of laborProximity to transportation

terminals, railservice, airports, seaports,

Highway accessCongestionLocal utilities

Key Locational Determinants: Key Locational Determinants: Competitive FactorsCompetitive FactorsPositive externalities between firms

◦Ex: Gas stations and retail shops Auto Repair Districts

Locating to Split the market◦When firms do not control price, but

compete on distance from the customer, they can maximize market share by locating close to each other and splitting the market

Key Locational Determinants: Key Locational Determinants: SCM FactorsSCM Factors

SCM must consider the following trends, improved capabilities, & realities:◦ Consumer Expectations and Competition –

power has shifted to the consumer◦ Globalization – capitalize on emerging

markets◦ Government Regulations and E-

Commerce – issues of Internet government regulations

◦ Environment Implications of E-Commerce – recycling, sustainable eco-efficiency, and waste minimization

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Key Locational Determinants: Key Locational Determinants: Global SCM FactorsGlobal SCM Factors

Managing extensive global supply chains introduces many complications◦ Geographically dispersed members - increase

replenishment transit times and inventory investment

◦ Forecasting accuracy complicated by longer lead times and different operating practices

◦ Exchange rates fluctuate, inflation can be high◦ Infrastructure issues like transportation,

communication, lack of skilled labor, & scarce local material supplies

◦ Product proliferation created by the need to customize products for each market

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The Role of PurchasingThe Role of Purchasing

Purchasing role has attained increased importance since material costs represent 50-60% of cost of goods sold ◦ Ethics considerations is a constant concern◦ Developing supplier relationships is

essential◦ Determining how many suppliers to use◦ Developing partnerships

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The Traditional Purchasing The Traditional Purchasing ProcessProcess

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The E-purchasing ProcessThe E-purchasing Process

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Costs and Number of Costs and Number of FacilitiesFacilities

Costs

Number of facilities

Inventory

Transportation

Facility costs

A Framework forA Framework forGlobal Site LocationGlobal Site Location

PHASE ISupply Chain

Strategy

PHASE IIRegional Facility

Configuration

PHASE IIIDesirable Sites

PHASE IVLocation Choices

Competitive STRATEGY

INTERNAL CONSTRAINTSCapital, growth strategy,existing network

PRODUCTION TECHNOLOGIESCost, Scale/Scope impact, supportrequired, flexibility

COMPETITIVEENVIRONMENT

PRODUCTION METHODSSkill needs, response time

FACTOR COSTSLabor, materials, site specific

GLOBAL COMPETITION

TARIFFS AND TAXINCENTIVES

REGIONAL DEMANDSize, growth, homogeneity,local specifications

POLITICAL, EXCHANGERATE AND DEMAND RISK

AVAILABLEINFRASTRUCTURE

LOGISTICS COSTSTransport, inventory, coordination

Models for Facility Location and Models for Facility Location and Capacity AllocationCapacity AllocationGoal is to maximize the overall

profitability while providing the appropriate responsiveness.

Managers use network design models in two different ways:◦ Decide on locations and capacities of facilities◦ Decide on the market share of each facility

and identify lanes of transportationModels are two types:

◦ Network optimization models◦ Gravity models

The Required Inputs for the ModelsThe Required Inputs for the Models

Location of suppliersLocation of potential facility sitesDemand forecast by marketFacility, labor, material costsTransportation costs between sitesInventory costs by site and unitSale prices in different regionsTaxes and tariffs between locationsDesired response time and other

service measures

Optimization Models

◦ precise mathematical procedures that are guaranteed to find the “best,” or optimum, solution

◦ optimization approaches essentially select an optimal course of action from a number of feasible alternatives

Simulation Models:

◦ Simulation is defined as “the process of designing a model of a real system and conducting experiments with this model for the purpose either of understanding the behavior of the system or of evaluating various strategies within the limits imposed by a criterion or set of criteria for the operation of the system

Heuristic Models

◦ Heuristic models are able to accommodate broad problem definitions, but they do not provide an optimum solution.

◦ The use of a heuristic approach can help to reduce a problem to a manageable size and search automatically through various alternatives in an attempt to find a better solution.

◦ To reduce the number of location alternatives, the decision maker should incorporate into the heuristic program site characteristics considered to be optimal.

Potential Supply Chain Modeling Pitfalls to Avoid◦ Short-term horizon

◦ Too little or too much detail

◦ Thinking in two dimensions

◦ Using published costs

◦ Inaccurate or incomplete costs

◦ Use of erroneous analytical techniques

◦ Lack of appropriate robustness analysis

Gravity Methods for Gravity Methods for LocationLocationTon Mile-Center

Solution◦ x,y: Warehouse

Coordinates

◦ xn, yn : Coordinates of delivery location n

◦ dn : Distance to delivery location n

◦ Fn : Annual tonnage to delivery location n

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The Grid Technique◦ Advantages

The grid technique’s strengths are in its simplicity and its ability to provide a starting point for location analysis.

The grid technique also provides a starting point for making a location decision.

◦ Limitations It is a static approach, and the solution is optimum for only

one point in time. The technique assumes linear transportation rates, whereas

actual transportation rates increase with distance but less than proportionally.

The technique does not consider the topographic conditions.

Other Transportation Factors:

◦ Commercial Zone is a specific blanket area, the transportation definition of a particular city or town.

◦ Foreign Trade Zone (FTZ) is a geographic area into which importers can enter a product and hold it without paying duties—and only paying duties or customs when is it shipped into U.S. customs territory.

◦ Transit Privilege permits the shipper to stop a shipment in transit and to perform some function that physically changes the product’s characteristic.

Network Optimization Network Optimization ModelsModels

Allocating demand to production facilities

Locating facilities and allocating capacity

Which plants to establish? How to configure the network?

Key Costs:

• Fixed facility cost• Transportation cost• Production cost• Inventory cost• Coordination cost

Demand Allocation ModelDemand Allocation Model

Which market is served by which plant?

Which supply sources are used by a plant?

xij = Quantity shipped from plant site i to customer j 0

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Plant Location with Multiple Plant Location with Multiple SourcingSourcing

yi = 1 if plant is located at site i, 0 otherwise

xij = Quantity shipped from plant site i to customer j

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Capacity Investment Capacity Investment StrategiesStrategies

Speculative Strategy◦Single sourcing

Hedging Strategy◦Match revenue and cost exposure

Flexible Strategy◦Excess total capacity in multiple

plants◦Flexible technologies

Summary of Learning Summary of Learning ObjectivesObjectives

Describe a strategic framework for facility location.

How are the following optimization methods used for facility location and capacity allocation decisions?◦ Gravity methods for location◦ Network optimization models

TOPIC SIX: TRANSPORTATION IN THE GLOBAL SUPPLY CHAIN

OutlineOutline

The role of transportation in the supply chainFactors affecting transportation decisionsModes of transportation and their

performance characteristicsDesign options for a transportation networkTrade-offs in transportation designTailored transportationRouting and scheduling in transportationMaking transportation decisions in practice

OutlineOutlineThe Fundamentals of TransportationThe interrelatedness of transportation, logistics & warehousingLegal Forms of Transportation Modes of Transport Intermodal TransportationTransportation PricingTransportation SecurityTransportation Regulation & DeregulationFactors Influencing Choice Transportation ModeContract TermsLogistics Management IssuesWarehousing & DistributionImportance & Types of WarehousesRisk Pooling & Warehouse Location

The Fundamentals of The Fundamentals of TransportationTransportation

The Objective of TransportationMaximize value to firm through negotiation to provide profit contribution Make sure service is provided effectively Satisfy customer needs

Legal Forms of Legal Forms of TransportationTransportation

Transportation service companies are classified legally as either common, contract, exempt, or private carriers.

Common carriers- offer transportation services to all shippers at published rates between designated locations without discrimination.Contract carriers- not bound to serve the general public. Contract carriers serve specific customers under contractual agreements.Exempt carriers- exempt from regulation of services & rates & if they transport certain exempt products like produce, livestock, coal, or newspapers.Private carrier- not subject to economic regulation & typically transports goods for the company owning the carrier.

TransportationTransportation

Physical distribution managers must ALSO decide on which mode of transport is Best to distribute Products to the Customers.

Modes Of TransportModes Of TransportAvailable modes of transport are:-Road transport (cars, trucks),-Railway transport,-Water transport (ships),-Air transport, and-Pipelines (oil, natural gas).

Modes Of TransportModes Of TransportAir transport is very expensive

and limited in Space availability.Therefore, It is usually preferred

for small-quantity, high-value products, which require fast delivery (e.g., highly fragile electronic parts).

Modes Of TransportModes Of TransportOn the contrary, Water or

Railway transportation is slower BUT cheaper. Therefore, they are used for carrying Large Quantities of raw materials (e.g., coal and iron).

Modes Of TransportModes Of Transport

Modes Of TransportModes Of TransportThere may be some limitations

on these modes of transport, as well.

For example, only Gas and Liquids can be conveniently transported by Pipelines.

Similarly, very large products (such as building sections) would not fit in most Aircrafts.

Motor CarriersMotor CarriersMotor Carriers (trucks)- most flexible mode of transportation & carries > 80% of U.S. freight. Competes w/rail & air for short-to-medium hauls.

◦ Less-than-truckload (LTL) & truck-load (TL) carriers. LTL carriers move small shipments & fees are higher.

◦ General freight carriers carry the majority of goods shipped & include common carriers.

◦ Specialized carriers transport liquid petroleum, household goods, building materials, & other specialized items.

Rail CarriersRail Carriers

Rail Carriers- compete when the distance is long & the shipments are heavy or bulky.

◦Rail slow & inflexible, but have begun purchasing motor carriers & can thus offer point-to-point pickup & delivery service known as trailer-on-flatcar (TOFC) service.

◦Rail companies use each other’s rail cars. Keeping track of rail cars & getting them where needed can be problematic.

◦Railroad infrastructure & aging equipment are also problems for the railroads.

Air CarriersAir Carriers

Air Carriers- Expensive relative to other modes but fast. Air carriers transport about 5 % of U.S. freight.

◦Airlines cannot carry extremely heavy or bulky cargo.

◦For light, high value goods over long distances quickly. Most small cities & towns do not have airports.

◦Half of the goods transported by air are carried by freight–only airlines, FedEx.

Water CarriersWater Carriers

Water Carriers- Inexpensive, slow & inflexible. Includes inland waterway, coastal & intercoastal, & deep-sea.

◦Inland waterway transportation is used for heavy, bulky, low-value materials (e.g., coal, grain).

◦Competes w/rail & pipeline. ◦Water carriers are paired w/trucks for

door-to-door delivery.◦Supertankers are +1,500 ft long & 200

ft wide.

Pipeline CarriersPipeline Carriers

Pipeline Carriers- Limited in variety they can carry.

◦Little maintenance once pipeline is running.

◦Materials hauled in a liquid or gaseous state.

Intermodal Intermodal TransportationTransportationIntermodal Transportation

Combinations of the various transportation modes, is becoming a popular method.

◦ Trailer-on-flatcar (TOFC), container-on-flatcar (COFC), piggy-back service. The same containers can be placed on board containerships & airliners.

◦ RO-ROs or roll-on-roll-off containerships truck trailers & containers to be directly driven on & off the ship, without the use of cranes.

Transportation PricingTransportation PricingTransportation Pricing

◦ Cost-of-service pricing- varies based on fixed & variable costs.

◦ Value-of-Service Pricing- services priced at market bearing competitive levels.

◦ Terms of Sale- includes transportation FOB (free on board) destination.

◦ Pricing Negotiation- Since deregulation, negotiating prices has become more common.

◦ Rate Categories- Classified as line haul rates, class rates, exception rates, commodity rates, & miscellaneous rates.

Transportation Transportation SecuritySecurityTransportation Security

◦ Particularly important regarding airline security since Sept. 11 2001

◦ Aviation & Transportation Security Act (2001)- Transportation Security Administration (TSA) to oversee transportation security which oversees 429 US airports

◦ Department of Homeland Security (DHS) (2003) created to provide overall U.S. security leadership.

◦ Not all measures have improved security as envisioned

Transportation Transportation Regulation & Regulation & DeregulationDeregulation

◦Pro- Regulation tends to assure adequate transportation service throughout the country while protecting consumers from monopoly pricing, safety, & liability.

◦Con- Deregulation encourages competition & allows prices to adjust as demand & negotiations dictate.

◦Today, U.S. transportation industry remains essentially deregulated

Transportation Transportation RegulationRegulation

◦ Granger laws (1870s)- regulate the RRs.◦ Interstate Commerce Act of 1887- Created

the Interstate Commerce Commission (ICC). ◦ Transportation Act of 1920- Changes to IC

Act.◦ Motor Carrier Act of 1935- brought motor

carriers under ICC control.◦ Transportation Act of 1940- established ICC

control over domestic water transportation. ◦ Federal Aviation Act of 1958 created air

traffic & safety regulations & national airport system.

◦ Department of Transportation Act 1966- Coordination of all transportation-related matters.

Transportation Transportation DeregulationDeregulation

◦ Railroad Revitalization & Regulatory Reform Act (1976)- RRs could change rates w/o ICC approval.

◦ Air freight deregulated in 1977.◦ Motor carriers deregulated in 1980 to promote

competitive, safe & efficient motor transportation.

◦ Shipping Act of 1984 allowed ocean carriers to pool shipments, assign ports, publish rates, & enter into contracts with shippers.

◦ ICC Termination Act of 1995 & the Ocean Shipping Reform Act of 1998- ICC was eliminated, requirement for ocean carriers to file rates also came to an end.

Factors Influencing Factors Influencing Choice Transportation Choice Transportation ModeModeHowever, the mode of transport is

usually Chosen with reference to the Relative Importance of the following factors:

- Delivery speed- Delivery dependability (reliability)- Quality deterioration- Transportation cost, and- Route flexibility.

Factors Influencing Factors Influencing Choice Transportation Choice Transportation ModeModeThe following table gives a

ranking of each mode of transport based on these factors:

(1 = Best Performance; 5 = Worst Performance)

Factors Influencing Factors Influencing Choice Transportation Choice Transportation ModeMode

Factors Influencing Factors Influencing Choice Transportation Choice Transportation ModeMode

The selection of the transportation mode will also affect other decisions related to the management of operations.

For example, firms may choose to locate their facilities near to ports or airports, or railway sidings, or close to motorways depending on the selected mode of transport.

Contract TermsContract TermsIn any exchange between buyers

and suppliers, both sides have to agree on Who will Pay for the transportation.

This becomes a particular issue in international trade Where knowledge of international trade agreements and legislation are critical to purchasing Successfully from other Countries.

Contract TermsContract TermsInternationally recognized

shipping terms are now in operation which are applied to international transportation by sea or air.

The main definitions of these terms are as follows:

Ex-works ContractsEx-works ContractsEx-works: In an ex-works contract, the

purchaser accepts full responsibility for arranging transportation from the supplier’s location.

This involves: (1) Arranging transportation, insurance, and documentation to move the goods to the required source port (air or sea), (2) Have them loaded on to the mode of transport, (3) Transported to, and unloaded at the destination port, (4) Cleared through customs and transported to the purchaser’s location.

Ex-works ContractsEx-works Contracts

Ex-works ContractsEx-works Contracts

More recently, purchasers and suppliers have sub-contracted this transportation function to specialists such as Federal Express.

Free alongside (FAS) Free alongside (FAS) ContractsContracts

Free alongside (FAS): In this arrangement, the supplier agrees to deliver to the (source) port specified by the purchaser

and is responsible for the transportation and insurance of the goods Until that point.

However, the purchaser has to arrange and pay for loading on to the vessel and all onward transportation, insurance, and documentation.

Free alongside (FAS) Free alongside (FAS) ContractsContracts

Free on Board (FOB) Free on Board (FOB) ContractsContractsFree on board (FOB): Here the

supplier pays for and arranges loading on to the outward-bound transportation and thereafter the purchaser becomes responsible.

Free on Board (FOB) Free on Board (FOB) ContractsContracts

Cost and Freight (C&F) Cost and Freight (C&F) ContractsContractsCost and Freight (C&F): This is a

split responsibility arrangement in that the supplier arranges and pays for transportation to an agreed point,

But the purchaser has to pay insurance from when the goods are loaded on board.

Cost and Freight (C&F) Cost and Freight (C&F) ContractsContractsThe purchaser has to acquire any

documentation required by the country of origin.

Once the goods have been unloaded at the port of entry, the purchaser is responsible for all ongoing transportation and insurance.

Cost and Freight (C&F) Cost and Freight (C&F) ContractsContracts

Cost, Insurance, and Cost, Insurance, and Freight (CIF) ContractsFreight (CIF) ContractsCost, Insurance, and freight (CIF):

This is similar to C&F But here the insurance during transportation is responsibility of the supplier.

Delivered Contract Delivered Contract TermsTermsDelivered: This is the opposite of

ex-works in that the supplier has total responsibility for the goods, their transportation, insurance, and all documentation until they are delivered to the purchaser.

LogisticsLogistics

Logistics originated during the Second World War when it related to the movement and co-ordination of troops to the required location.

LogisticsLogisticsWhen adopted by the business world as a concept It referred to the movement and coordination of finished products.

Logistics is necessary to: ◦ Move goods from suppliers to buyers ◦ Move finished goods to the customer

Products have little value to the customer until they are moved to the customer’s point of consumption ◦ Time utility- products are delivered at the

right time. ◦ Place utility- products are delivered to the

desired location.

LogisticsLogisticsLogistics is:

“…the process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements.“

LogisticsLogisticsLogistics function manages the

total flow of products from the plant to the customers.

As contrary to the materials management, Logistics provides an emphasis on physical distribution management.

LogisticsLogisticsHowever, These minor

differences are present because of the backgrounds of the two groups who have originated the concepts.

Generally, the logisticians tend to come from marketing discipline.

LogisticsLogisticsOn the other hand, The materials

managers come from operations management,

(Particularly from purchasing).During the last twenty years, an

even broader, and statistically significant concept emerged:

LogisticsLogisticsLogisticians have devoted little

attention to managing the chain of supply up to the purchasing function.

And similarly, materials managers have ignored the management of the flow of products down to the customers through distribution channels.

LogisticsLogisticsOn the contrary Supply Chain

Management views the entire chain as a system to be managed.

It can be defined as “managing the entire chain of raw material supply, manufacture, assembly and distribution to the end customer.”

LogisticsLogistics

Third Party Logistics (3PL) ◦ Provide reliable & timely delivery required

by SCM◦ Used to significant degree by international

logistics◦ Favored by small businesses◦ Some firms outsource all of their logistics

needs to a lead logistics provider or fourth party logistics provider (4PL)

Logistics Management Logistics Management IssuesIssuesEnvironmental Sustainability in

Logistics◦ Green logistics is a response to the need

for reducing carbon emissions and by doing so can also save money for the firm

3PL Supply Base Reduction ◦ by reducing the 3PL supply base a firm can

achieve lower prices and better service as it becomes a larger customer

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Logistics Management Issues Logistics Management Issues (Cont.)(Cont.)Mode & 3PL Selection

◦ firms identify the optimum transportation services to minimize costs & improve customer service

Firms often use weighted factor analysis & transportation intermediaries, such as:◦ Freight forwarders◦ Transportation brokers ◦ Shipper Associations◦ Intermodal marketing companies

(IMCs)80

Logistics Management Issues Logistics Management Issues (Cont.)(Cont.)

Logistics Management Software ApplicationsTransportation management systems-

used to select the best mix of transportation services & pricing.

Warehouse management- track & control the flow of goods from receiving dock to outbound shipment. New technologies, such as RFID tags, facilitate tracking.

Returns management systems (RMS) provide global visibility, standardization, & documentation of product returns, while minimizing reverse logistics costs.

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Logistics Management Issues Logistics Management Issues (Cont.)(Cont.)

Measuring Logistics Performance◦ Allows the firm to identify problems &

make improvements◦ Measures- derived from benchmarks or

previous performance & are similar to those used to select 3PLs.

Creating Strategic 3PL Alliances ◦ Effective SC networks often include

strategic alliances with providers of logistics services

Performing Logistics Audits◦ To monitor change firms often conduct an

audit by a multifunctional team82

Logistics Management Issues Logistics Management Issues (Cont.)(Cont.)

Use of e-Commerce Technologies in LogisticsElectronic Invoice Presentment &

Payment (EIPP)- sending & receiving invoices online.

Supply Chain Visibility- time-related benefits that lead to SC success. Visibility allows better communication across org boundaries

Third Party Electronic Transaction Platforms- Internet based transaction systems providing freight-matching services, auctions, & on-line marketplaces

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International LogisticsInternational Logistics

International Freight Security- ◦ Transportation across national

boundaries introduces added complexity, particularly security.

◦ Since 9/11 there is more conflict between U.S. govt. & industry toward more security & restrictions for inbound shipments.

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International Logistics International Logistics (Cont.)(Cont.)International Logistics Intermediaries

◦ Customs Brokers- move through customs & handle documentation.

◦ International Freight Forwarders- move goods to foreign destination

◦ Trading Companies- Put buyers & sellers together & handle export/import arrangements.

◦ Non-Vessel-Operating Common Carriers- operate like freight forwarders but use scheduled ocean liners.

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International Logistics International Logistics (Cont.)(Cont.)Foreign Trade Zones-

◦Secure sites in U.S. under supervision of U.S. Customs.

◦FTZs offer storage, exporting, manufacturing, assembly, repacking, testing, & repairing services.

North American Free Trade Agreement (NAFTA)

◦Created in 1994 & removes most barriers to trade & investment among U.S., Canada & Mexico.

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Reverse LogisticsReverse Logistics

◦ Backwards flow of goods from customers in SC when goods are returned by a customer in the supply chain

◦ Retail returns range 6% to 40% of sales◦ Often is an unwanted SC activity◦ Poor reverse logistics can hurt firm◦ Green reverse logistics programs-

designed to return unneeded products for recycling. These programs reduce environmental impact on landfills & deal with dangerous contaminants.

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Warehousing & DistributionWarehousing & Distribution

Warehousing ◦ allows firms to store purchases, WIP, & finished

goods and perform break bulk and assessment services

◦ provides faster & more frequent deliveries & better customer service

Crossdocking: ◦ to receive, breakdown, repackage, & distribute

components to a manufacturing location or finished products to customers warehouse. This description more accurately refers to a distribution center

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Importance & Types of Importance & Types of WarehousesWarehouses

Importance & Types of Warehouses◦ Support purchasing, production, & distribution. ◦ Consolidation warehouses collect LTL

shipments for transport in TL or CL quantities. Private Warehouses

◦ owned by the firm storing goods. ◦ Pro- Reduces the cost, offers greater control,

provides better workforce utilization, & can generate income & tax advantages through leasing of excess capacity &/or asset depreciation.

◦ Con- Owning a private warehouse represents a financial risk & loss of flexibility.

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Importance & Types of Importance & Types of WarehousesWarehouses

Public Warehouses- ◦ Owned by for profit orgs & contracted out ◦ Breakbulk: shipments are broken down & items are

combined into specific customer orders.◦ Repackaging◦ Assembly ◦ Incoming & outgoing quality inspections.◦ Material handling, equipment maintenance, &

documentation services◦ Storage ◦ Pro- Provides flexibility & investment cost savings ◦ Con- Lack of control.

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Importance & Types of Importance & Types of WarehousesWarehouses

Risk Pooling & Warehouse Location◦ As the # of warehouses increases, the

system becomes more decentralized. Responsiveness & delivery service increase.

◦ However, warehousing operating & inventory costs also increase. Trade-off between costs & customer service must be considered.

Risk Pooling◦ Describes the relationship between the # of

warehouses, inventory, & customer service.◦ Risk pooling is estimated by square-root

rule

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Risk Pooling & Warehouse Risk Pooling & Warehouse LocationLocation

Risk Pooling & Warehouse Location (Cont.)

◦ square-root rule

Where:

S1 = Total system stock for the N1 warehouses

S2 = Total system stock for the N2 warehouses

N1 = # of warehouses in the existing system, &

N2 = # of warehouses in the proposed system

S2 = (S1)

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Warehouse LocationWarehouse Location

Edgar Hoover◦Market-positioned strategy- warehouses

close to customers to maximize distribution svcs & improve transp. economies of scale.

◦Product positioned strategy- close to supply source for firm to collect goods & consolidate.

◦Intermediately positioned strategy- midway between supply source & customers when distribution requirements are high & product comes from various locations.

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Warehouse LocationWarehouse Location

Warehouse Location◦ Von Thunen - transportation costs should

be minimized when considering facility location. Market prices & production costs would be identical regardless of warehouse location

◦ Greenhut- based on profit instead of transportation costs. The optimum location is one that maximizes profits, which may not be min. cost location.

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Warehouse LocationWarehouse Location

Just-in-Time Warehousing

Emphasis on warehousing to support JIT operations:

◦Commitment to customers & service quality

◦Reduced lot sizes & shipping quantities

◦Emphasis on cross docking◦Increased automation◦Increased assembly operations

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Choice of Transportation Choice of Transportation ModeMode

A manager must account for inventory costs when selecting a mode of transportation

A mode with higher transportation costs can be justified if it results in significantly lower inventories

Inventory Aggregation: Inventory Aggregation: Inventory vs. Transportation Inventory vs. Transportation CostCost

As a result of physical aggregation◦ Inventory costs decrease◦ Inbound transportation cost decreases◦Outbound transportation cost increases

Inventory aggregation decreases supply chain costs if the product has a high value to weight ratio, high demand uncertainty, or customer orders are large

Inventory aggregation may increase supply chain costs if the product has a low value to weight ratio, low demand uncertainty, or customer orders are small

Trade-offs Between Trade-offs Between Transportation Cost and Transportation Cost and Customer ResponsivenessCustomer Responsiveness

Temporal aggregation is the process of combining orders across time

Temporal aggregation reduces transportation cost because it results in larger shipments and reduces variation in shipment sizes

However, temporal aggregation reduces customer responsiveness

Risk Management in TransportationRisk Management in Transportation

Three main risks to be considered in transportation are:◦Risk that the shipment is delayed◦Risk of disruptions◦Risk of hazardous material

Risk mitigation strategies:◦Decrease the probability of disruptions◦Alternative routings◦In case of hazardous materials the use of

modified containers, low-risk transportation models, modification of physical and chemical properties can prove to be effective

Making TransportationMaking TransportationDecisions in PracticeDecisions in Practice

Align transportation strategy with competitive strategy

Consider both in-house and outsourced transportation

Design a transportation network that can handle e-commerce

Use technology to improve transportation performance

Design flexibility into the transportation network

Summary of Learning Summary of Learning ObjectivesObjectives

What is the role of transportation in a supply chain?

What are the strengths and weaknesses of different transport modes?

What are the different network design options and what are their strengths and weaknesses?

What are the trade-offs in transportation network design?

TOPIC SEVEN: GLOBAL SUPPLY CHAIN MEASUREMENT, AUDIT AND BENCHMARKING

Outline Outline Measuring supply chain

performanceEliminating Sources of Waste in

Supply ChainBalanced Score CardSCOR Model Integrated Supply Chain MetricsApproaches to BenchmarkingThe Responsibility For The Audit

Introduction Introduction A company needs to evaluate the

performance of its supply chain. Regular performance metrics (ROI, profitability, market share, customer service levels, etc.) and other measures that reflect the objectives of the SC are used.

The emergence of net marketplaces has significantly affected SCM. As supply chains become longer, it is likely that supply chain velocity will decrease. It is possible that a more strategic and integrated approach is needed to advance SCM to the next level.

Supply Chain Supply Chain MeasurementsMeasurements

Measuring supply chain performance◦Traditional measures include;

Return on investment Profitability Market share Revenue growth

◦Additional measures Customer service levels Inventory turns Weeks of supply Inventory obsolescence

105

Supply Chain Performance Supply Chain Performance MeasurementMeasurement

Customer demands for better-quality requires company’s to develop ways to measure improvements

Some measurements include◦Warranty costs◦ Products returned◦Cost reductions allowed because of product

defects◦Company response times◦Transaction costs

106

Eliminating Sources of Waste Eliminating Sources of Waste in Supply Chainin Supply Chain

Overproduction: don’t build product before needed

Delay between activities in chain: eliminate them

Unnecessary transport or conveyance of product: includes both internal and external movement

107

Eliminating Sources of Waste Eliminating Sources of Waste in Supply Chain con’tin Supply Chain con’tUnnecessary movement of people:

includes travel or reaching due to poorly designed work space

Excess inventory ready and in position: includes early deliveries, excess inventory, etc.

Suboptimal use of space: trailer loads, warehouses, etc.

Errors that cause rework: billing errors, inventory discrepancies, etc.

108

Performance Performance MeasurementsMeasurements The measurement, monitoring and control of

Supply chain operations is often approached in a relatively unsophisticated and unplanned way. Control Measures are adopted as problems arise, almost as a form of crisis management. It is important to adopt a more formal approach.

There are several systematic approaches that have been developed and these have varying degrees of sophistication and detail. The key approaches are described below;

Balanced Score Card The balanced scorecard was initially put forward

by Kaplan and Norton in 1996. It is a broad business approach that translates the strategic mission of a business operation into tangible objectives and measures.

Balanced Score CardBalanced Score Card

This can be cascaded up and down the enterprise so that realistic and useful KPIs can be developed to support the business. This should represent balance between external measures for shareholders and customers and also the internal measures of critical business process, innovation and learning.

Balanced Score CardBalanced Score Card The financial perspective concerns the

relationship with the shareholders and is aimed at improving the profits and meeting financial targets

The Customer perspective is designed to enhance customer relationships using better processes to keep existing customers and attract new ones.

The internal element is to develop new ideas to improve and enhance operational competitiveness.

Innovation and Learning should help to generate new ideas and to respond to customer needs and developments.

A series of critical success factors is identified that relate directly to the main business perspectives. These are then used as the basis for creating the critical cost and performance measurement that should be used regularly to monitor and control the business operations in all the key areas identified.

SCOR Model SCOR Model The SCOR model ( Supply Chain Operations

Reference Model) is an important approach that has been developed as an aid to cost and performance monitoring. It is a hierarchical Model, consisting of four different levels:

Competitive advantage, Strategy implementation and process definition Detailed process elements and Implementation.It is very much a process oriented approach where

the initial aim is to benchmark, refine and improve key operational processes and then to identify and introduce key measures that monitor set cost and performance targets. Eventually, the major company performance attributes are identified and the appropriate metrics are developed.

SCOR; Typical Performance SCOR; Typical Performance Metric DevelopmentMetric Development

Performance Attributes Attribute Definition Metrics

Supply chain delivery reliabilityThe performance of the supply chain is delivering against the perfect delivery criteria

Delivery performance Picking AccuracyPerfect Order fulfillment

Supply chain responsiveness The speed at which the supply chain provides products to the

Order fulfillment leadtime Ease of order placement

Supply chain flexibilityThe agility of the supply chain in responding to market place changes to gain or maintain competitive edge.

Supply Chain response timeProduction response time.

Supply chain costs The costs associated with the operating the supply chain

Cost of goods soldSupply chain management costsValue added productivity

Supply Chain asset management The ability to manage assets to support customer satisfaction

Capacity UtilizationEquipment utilization.

SCOR; Typical Performance SCOR; Typical Performance Metric DevelopmentMetric DevelopmentSCOR metrics are generally arranged under

a number of categorizations. This main categories are:

Assets (such as capacity utilization, equipment availability)

Cost (ordering, inventory holding ,invoicing);Data ( Forecast accuracy, visibility); Flexibility (order,returns)Inventory (Availability,obsolescence)Order (fulfillment, accuracy, invoice errors);Productivity (direct vs indirect labor,

vehicle subcontracting);Time (Lead-times, order cycle times, on time

delivery)

Integrated Supply Chain Integrated Supply Chain ApproachApproachThis approach recognizes that a total

systems approach can be adopted for the whole business or supply chain and that any performance metrics should be developed on this. It is also a process oriented approach that attempts to enable cost and performance Monitoring to be based on horizontal view of a business rather than the traditional, vertical, silo-based functional structure that is traditionally used.

Integrated Supply Chain Integrated Supply Chain ApproachApproach

Time; Supply chain response time

Financial (costs): total logistics costs Value added per employee

Financial (assets); Cash to cash cycle time Asset turn

Quality: faultless ordering/order processingFaultless invoicing

Customer Satisfaction: Delivery to Customer request date.

Order Entry

Order approval and confirmation

Delivery Invoice and collection

Order Capture

Customer Need Met

Customer NeedIdentified

This approach to the development of supply chain metrics is outlined in the figure below;

Integrated Supply Chain Integrated Supply Chain MetricsMetricsThis type of frame work can be used initially to help identify required

outcomes that need to be measured and subsequently for establishing any relevant diagnostic measures. Suitable and accurate diagnostic measures are essential to enable the reasons for any problems to be identified and rectified. This is a vital element of good cost and performance monitoring that is often neglected.

Metric Type Outcomes Diagnostics

Customer satisfaction/quality

Perfect order fulfillmentCustomer satisfactionProduct quality

Delivery-to-commit dateWarranty Costs, returns and allowancesCustomer enquiry response time

Time Order fulfillment lead timeSource/make cycle timeSupply chain response timeProduction plan achievement

Costs Total Supply Chain costs Value added productivity

Assets Cash-to-cash cyle timeInventory days of supplyAsset performance

Forecast accuracyInventory obsolescenceCapacity utilization

BENCHMARKINGBENCHMARKING Benchmarking is where an organization measures its

performance against industry leaders in a number of areas such as performance, quality control and procedures.

Measuring your performance against that of best –in-class companies, determining how the best –in-class achieve these performance levels and using information as a basis for your company’s targets, strategies and implementation. Pryor (1989).

Benchmarking analysis can yield results that inform an organization’s own KPI’s which could be used to transform the SCs performance.

Harrison (1994) identifies three types of benchmarking which can be used at different times.

Internal benchmarking- enabling the organization to learn from the best practices within the organization

Competitive benchmarking – a systematic check against key competitors

Best practice benchmarking - where comparisons are made against world class organizations

The Importance Of The Importance Of BenchmarkingBenchmarking It provides information on what standards create or

contribute to a competitive advantage. All organizations need to seek methods by which a competitive advantage is secured

It enables the establishment of standards and targets that have to be achieved

It motivates employees and overcomes resistance if achievable and improving goals become possible

It prevents the organization from becoming insular and stagnating

David et al (1999) identify a number of benchmarks that are attributable to a purchasing organization within the US. The list is extensive but it also shows how it might be possible to segment the market in more detail, and against virtually any criteria

Purchase dollars as a percentage of sales dollars. Purchasing operating expenses as a percentage of sales

dollars Cost to spend a dollar

The Importance Of The Importance Of BenchmarkingBenchmarkingPurchasing employees as a percentage of

company employeesActive suppliers per employeePurchasing operating expense dollar per

active supplierPercentage dollars spent with women

owned suppliersPercentage of service purchasers handled

by the purchasing department.Percentage of annual training hours per

professional purchasing departmentPercentage of purchase transaction

processed via procurement

Approaches to Approaches to BenchmarkingBenchmarkingThere are a number of approaches to

benchmarking, broken down into a number of stages.

Stage 1. Decide what aspects of purchasing or logistics to benchmark

This should happen where there are perceived differences between the company and the competitors in the current policies and procedures. Costs are always a benchmarking matter as is the need to improve competitive advantage

Stage 2. Plan the benchmarking project- A leader and a skilled team must be put together.

Stage 3. Create the baseline for benchmarking; A quantitative statement has to be prepared which shows the current position.

Approaches to Approaches to BenchmarkingBenchmarkingStage 4. Decide who to benchmark against.

The process of gathering information wil depends upon the relationship between suppliers and customers and the possibility of restraints due to confidentiality.

Stage 5. How we will collect the information. High level contacts may have to be used to extract the more pertinent information

Stage 6. Analyze the information obtained. This about making judgments of the appropriateness of the information.

Stage 7. Use the findings. The final report will include implementation strategies which embed the better practices into the functions and provide monitoring and evaluative tools.

The value of The value of benchmarkingbenchmarking Benchmarking is not industrial spying but an

open gathering of information with the full cooperation of the company against which the benchmark is undertaken. Any confidential information should not be asked for.

Benchmarking should consider all factors that make another organization successful, including the training and skills base. Resources in terms of investment in capital and people are obviously a major contributor to success. People skills and the accumulation of knowledge are often the most difficult to identify and imitate

It has to be remembered that benchmarking is not a static activity but is part of the overall strategy to be the best SC partner.

SCM AUDITINGSCM AUDITING SCM audits add la layer of controls in that they, Police the extent to which the procurement policies laid

down by the strategic plan and senior management are adhered to.

Help to ensure that the organization is using techniques, procedures and methods which conform to the best working methods are best practice

Monitor and measure the extent to which resources are used effectively.

Assist in the prevention and direction of fraud and malpractice.

If the internal processes and procedures are operating at highest standard this provides a suitable framework for improving the supplier network and performance.

The procurement function is particularly vulnerable to fraud action and auditing can assist the organization establish vigorous procedures for directing and eliminating potential fraud.

SCM AUDITINGSCM AUDITINGStandard controls include,Ensuring a separation between recording

and custodian practicesControls on employee requisition and spend

limitsA check on all requisitionsSpecially designed and controlled goods

inward areasA random check on invoicesA mixture of systems and organizational

controls that act as gatekeepers to unacceptable procedures

A control system that makes it difficult for individuals to undertake a fraudulent activity.

The Responsibility For The Responsibility For The AuditThe Audit The audit is usually carried out by senior personnel

within the organization or by external auditors selected by the company. External auditors are often used as they carry greater authority. To be effective it’s important that those selected to carry out the audit have a detailed knowledge of the procurement perspective and problems

Area for the audit include Procurement procedures, there is a scope to

examine the whole of the administrative processes including the use made technology as well as the speed and efficiency of documentation and how it is effective in different procurement procedures.

Reporting processes, the extent to which reports are used, cost, internals in different procurement scenarios.

The Responsibility For The Responsibility For The AuditThe Audit The supply process. It involves an examination of

the budget in terms of quantities and a spend breakdown of the supplier base, relationships with suppliers and style of management, pricing strategies, savings and costs.

Inventory. There is substantial scope to look at the inventory level and how analyzed by the organization, with efficiency, costs and wastage all specific items for attention

Reporting to management Senior management will be the recipient of any audit

reports. Recommendations will address the extent to which efficiency and effectiveness can be improved. Also a good report will highlight current good practices and strengths within the procurement environment.

Constructive proposals based on a wider projection of the impact of the findings can provide substancial ideas for the new courses of action.

TOPIC EIGHT: GLOBAL SUPPLY CHAIN RISK MANAGEMENT

IntroductionIntroductionAbout one-fifth of the output of U.S.

firms is produced overseas.One-quarter of U.S. imports are

between foreign affiliates and U.S. parent companies.

Since the late 1980s, over half of U.S. companies increased the number of countries in which they operate.

International Supply Chain International Supply Chain ManagementManagement

Dispersed over a larger geographical area

Offers many more opportunities than just the domestic supply chain

Risk factors are also present

International Supply ChainsInternational Supply Chains International distribution systems

◦ Manufacturing still occurs domestically, but distribution and typically some marketing take place overseas.

International suppliers◦ Raw materials and components are furnished by foreign

suppliers◦ Final assembly is performed domestically. ◦ In some cases, the final product is then shipped to

foreign markets.Offshore manufacturing

◦ Product is typically sourced and manufactured in a single foreign location

◦ Shipped back to domestic warehouses for sale and distribution

Fully integrated global supply chain◦ Products are supplied, manufactured, and distributed

from various facilities located throughout the world.

Global SC Risk ManagementGlobal SC Risk ManagementOutsourcing and offshoring imply that the

supply chain is geographically more diverse and hence more exposed to various risks.

Recent trends toward cost reduction, lean manufacturing and just-in-time imply that in a progressive supply chain, low inventory levels are maintained. ◦ In the event of an unforeseen disaster, adherence

to this type of strategy could result in a shutdown of production lines because of lack of raw material or parts inventory.

Sources of RisksSources of Risks

FIGURE 10-1: Risk sources and their characteristics

Factors Impacting Exposure to Factors Impacting Exposure to RisksRisksCustomer reactions Competitor reactions Supplier reactionsGovernment reactions

Managing the Unknown-Managing the Unknown-UnknownUnknown Invest in redundancy Increase velocity in sensing and

responding Create an adaptive supply chain

community

RedundancyRedundancyRespond to unforeseen eventsCareful analysis of supply chain trade-offsExample:

◦CPG company with 40 facilities over the world◦Initial analysis for reduction of cost by $40M a

year shut down 17 of its existing manufacturing facilities leave 23 plants operating satisfy market demand all over the world.

Decision Was RiskyDecision Was RiskyNew design left no plant in North America

or Europe◦ Long and variable supply lead times◦ Higher inventory levels.

Remaining manufacturing facilities in Asia and Latin America fully utilized◦ Any disruption of supply from these countries,

due to epidemics or geopolitical problems, would make it impossible to satisfy many market areas.

How can one design the supply chain taking into account epidemics or geopolitical problems that are difficult to quantify?◦ Analyze the cost trade-offs

Trade-OffsTrade-Offs

Cost trade-offs in supply chain design

Analysis of the Trade-OffsAnalysis of the Trade-OffsClosing 17 plants and leaving 23

open will minimize supply chain costs.

Total cost function is quite flat around the optimal strategy.

Increasing the number of open plants from 23 to 30 facilities ◦increases total cost by less than $2.5M ◦increases redundancy significantly.

Sensing and RespondingSensing and RespondingSpeed in sensing and responding can

help the firm overcome unexpected supply problems

Failure to sense could lead to:◦Failure to respond to changes in the

supply chain ◦Can force a company to exit a specific

market

Sensing and RespondingSensing and RespondingExampleExample

Different responses of Nokia and Ericsson on a fire at one of the supplier’s facility◦ Supplier was Philips Semiconductors in

Albuquerque, NMNokia:

◦ Changed product design to source components from alternate suppliers

◦ For parts that could not be sourced from elsewhere, worked with Philips to source it from their plants in China and Netherlands

◦ All done in about five days

Sensing and RespondingSensing and RespondingExampleExampleEricsson’s experience was quite different

◦ Took 4 weeks for the news to reach upper management

◦ Realized five weeks after the fire regarding the severity of the situation.

◦ By that time, the alternative supply of chips was already taken by Nokia.

◦ Devastating impact on Ericsson $400M in potential sales was lost Part of the loss was covered by insurance.

Led to component shortages Wrong product mix and marketing problems caused:

$1.68B loss to Ericsson Cell Phone Division in 2000 Forced the company to exit the cell phone market

AdaptabilityAdaptabilityThe most difficult risk management

method to implement effectively. Requires all supply chain elements

to share the same culture, work towards the same objectives and benefit from financial gains.

Need a community of supply chain partners that morph and reorganize to better react to sudden crisis

AdaptabilityAdaptabilityExampleExampleIn 1997, Aisin Seiki the sole supplier of 98%

of brake fluid proportioning valves (P-valves) used by Toyota

Inexpensive part (about $7 each) but important in the assembly of any car.

Saturday, February 1, 1997:Fire stopped Aisin’s main factory in the industrial area of Kariya, ◦ Two weeks to restart the production◦ Six months for complete recovery

Toyota producing close to 15,500 vehicles per day. ◦ JIT meant only 2-3 days of inventory supply

Recovery Effort by Toyota Recovery Effort by Toyota Blueprints of valves were distributed among all

Toyota’s suppliersEngineers from Aisin and Toyota relocated to

supplier’s facilitiesOther manufacturers like Brother were also

brought in Existing machinery adapted to build the valves

according to original specificationsNew machinery acquired in the spot marketWithin days, firms with little experience with P-

valves were manufacturing and delivering parts to Aisin◦ Aisin assembled and inspected valves before shipment to

Toyota ◦ About 200 of Toyota’s suppliers were involved

Vehicle Production & P-Valves Vehicle Production & P-Valves InventoryInventory

FIGURE 10-3: Vehicle production and P-valve inventory levels

OutcomeOutcomeAccident initially cost:

◦7.8B Yen ($65M) to Aisin◦160B Yen (or $1.3B) to Toyota

Damage reduced to 30B Yen ($250M) with extra shifts and overtime

Toyota issued a $100M token of appreciation to their providers as a gift for their collaboration

Single Sourcing and Single Sourcing and AdaptabilityAdaptabilitySingle sourcing is risky

◦Achieves economies of scale ◦High quality parts at a low cost

JIT mode of operation builds a culture of:◦Working with low inventories◦Ability to identify and fix problem quickly◦Entire supply chain was stopped once

the fire occurred◦Prompted every company in the chain to

react to the challenge

Managing Global RisksManaging Global RisksSpeculative StrategySpeculative StrategyA company bets on a single scenario

◦Spectacular results if the scenario is realized

◦Dismal ones, otherwise. Example

◦Late 1970s and early 1980s◦Japanese automakers bet that exchange

rate benefits, rising productivity would offset higher labor costs

◦Had to build plants overseas later when this equation changed

Managing Global RisksManaging Global RisksHedge StrategyHedge Strategy

Losses in part of the supply chain will be offset by gains in another part

Example: ◦Multiple Volkswagen plants in different

countries. ◦Certain plants more profitable at times

than others◦Move production between plants to be

successful overall.

Managing Global RisksManaging Global RisksFlexible StrategyFlexible Strategy

Allows a company to take advantage of different scenarios

Designed with multiple suppliers and excess manufacturing capacity in different countries

Factories designed to be flexible◦ Products can be moved at minimal cost from

location to locationFactors to consider:

◦ Is there enough variability in the system to justify the use of flexible strategies?

◦ Do the benefits of spreading production over various facilities justify the costs?

◦ Does the company have the appropriate coordination and management mechanisms in place?

Approaches to Flexible StrategyApproaches to Flexible StrategyProduction shifting

◦ Flexible factories and excess capacity/suppliers◦ Shift production from region to region

Information sharing◦ Larger presence in many regions and markets

increases availability of information◦ Can be used to anticipate market changes/find

new opportunitiesGlobal coordination

◦ Multiple worldwide facilities allows greater market leverage

◦ Increased leverage limited by international laws/political pressures

Political leverage ◦ Higher political leverage in overseas operations

with global operations

Global Integration Global Integration ImplementationImplementation

Product development ◦ Design products that can be modified easily for

major markets◦ Products can be easily manufactured in various

facilities◦ May be possible to design a base product or

products that can be more easily adapted to several different markets

◦ An international design team may be helpful Purchasing

◦ Management teams should purchase important materials from many vendors around the world

◦ Quality and delivery options from suppliers have to be compatible

◦ Qualified team should compare pricing of various suppliers

◦ Sufficient suppliers required in different regions to ensure flexibility

Global Integration Global Integration ImplementationImplementation

Production◦ Excess capacity and plants in several regions are

essential◦ Effective communications systems must be in place ◦ Centralized management is essential ◦ Inter-factory communication needs to be established◦ Centralized management should make each factory

aware of the system status. Demand management

◦ Setting marketing and sales plans based on projected demand and available product

◦ Has to have at least some centralized component. ◦ Sensitive, market-based information best supplied by

analysts in each region. ◦ Communication is critical

Order fulfillment◦ Centralized system ◦ Regional customers must be able to receive deliveries

from the global supply chain with the same efficiency as they do from local or regionally based supply chains

SUMMARYSUMMARYTypes of global supply chains risksBoth advantages and risks are inherent in

global supply chains◦ Unknown-unknown risks to known-unknown

risks◦ Variety of strategies to deal with the risks

TOPIC NINE: INFORMATION TECHNOLOGY ISSUES IN GSM

GLOBAL STRATEGIES & GLOBAL STRATEGIES & BUSINESS ORGANIZATIONBUSINESS ORGANIZATION

DOMESTIC EXPORTER: Centralization in Home Country

MULTINATIONAL: Central Home Base; Decentralized Production, Sales, Marketing in Other Countries

FRANCHISER: Product Created, Initially Produced in Home Country; Relies Heavily on Local Workers to Produce, Market in Other Countries

TRANSNATIONAL: Truly Global Firm; No National Headquarters; Value-added Activities Managed From Global Perspective; Optimizes Supply & Demand, Taking Advantage of Local Competitive Strengths

*TM -157

GLOBAL (INTERNATIONAL, GLOBAL (INTERNATIONAL, TRANSNATIONAL) INFORMATION TRANSNATIONAL) INFORMATION SYSTEMS INFRASTRUCTURESYSTEMS INFRASTRUCTURE

BASIC INFORMATION SYSTEMS

REQUIRED TO COORDINATEWORLDWIDE TRADE& OTHER ACTIVITIES

TM -158

GLOBAL INFORMATION SYSTEMS GLOBAL INFORMATION SYSTEMS INFRASTRUCTUREINFRASTRUCTURE

TECHNOLOGICAL PLATFORMTECHNOLOGICAL PLATFORM

CORPORATE GLOBAL STRATEGIESCORPORATE GLOBAL STRATEGIES

ORGANIZATIONAL STRUCTUREORGANIZATIONAL STRUCTURE

MANAGEMENT & BUSINESS PROCEDURESMANAGEMENT & BUSINESS PROCEDURES

GLOBAL ENVIRONMENT: BUSINESS DRIVERS & CHALLENGESGLOBAL ENVIRONMENT: BUSINESS DRIVERS & CHALLENGES

The Impact of Information The Impact of Information Technology on Transnational Technology on Transnational FirmsFirms

Redesigning IS will also redesign the organization -- the new technologies of the past decade have affected the ways and places where firms do work in many ways, and their impact will be even greater in the coming decade as the technologies evolve and firms gain experience in implementing the changes enabled by them.

Geographic transfer of workGlobal networking and expertise sharingGlobal service levelsTime-based competitionCost reduction

The Impact of Information The Impact of Information Technology on Transnational Technology on Transnational FirmsFirmsGeographic transfer of work

- from areas with high-cost labor pools to areas with high quality and low cost (e.g., India, China)

Global networking and expertise sharing- email, groupware, conferencing technology (IBM, PricceWarehouse)- Identifying expertise and then sharing it globally (using broad-band, fiber-based global communication) are allowing some transnational firms to differentiate themselves in the late 19990s

Global service levels- new technologies (satellite on the top of each truck) allow company develop world-class global service standards with up-to-the-minute information (e.g., cargo locations, reliable delivery promises, and flexibility in handling emergencies)

Time-based competition-The required response time in the global community is dramatically shrinking. -”Competing on the basis of time is done not just by speeding up the mess, but by enabling the construction of very different infrastructures that challenge every aspect of the firm’s procedures.”

-”Global time-based competition will be a major item for world business in the next decade”

Cost reduction: Among overseas operations, suppliers, and customers

Country DiversityCountry Diversity A number of factors inherent in a culture, government,

and economy determine: (1) which IT applications are feasible within the country, (2) how they should be implemented, and (3) how they should be directed by a corporate IT function located in another country.

Sociopolitical - priority: food, medical care or IT Language- senior management use the same language

as in the parent company that help facilitate technical communication and sharing of relevant information

Local constraints- union agreements, holidays, tax regulations, and customs procedures all force major modifications of software like accounting and personnel

- centralized vs. distributed (geography and demographics)

Economics (mature industrial vs. developing countries)- wage rates vary ; - human talent and economic incentive toward IT

Country DiversityCountry Diversity Currency issues - cost-effective locations become cost-ineffective

(Mexican peso and Japanese Yen) Autonomy -(same spoken) language and (unique) culture drive

autonomy in units within a country National Infrastructure - cost, availability of utilities, electric power, and a

transportation systems can place important constraints on feasible alternatives

- Their absence may provide an opportunity to experiment with certain emerging technology

Most multinationals have had to develop special staff and organizational approaches for these issues

Issues in the National IT Issues in the National IT EnvironmentEnvironment

Availability of IT professional staff - English-speaking IT professionals become targets for

recruiters from more industrialized countries (India, Singapore)

- Need both technically and managerially competent Central telecommunications- Price, quality, and

availability of telecommunications support vary widely from one country to another country (human factors also affect them - my own SPARK MIS experience)

National IT strategy- buying products from local manufacturer as both evidence of good citizenship and as an opportunity to build credit for later dealings with the government

General level of IT sophistication- Speed and ease with which companies can implement or develop an IT are linked to the general level of IT activity in the country (staff mobility factor, culture)

Issues in the National IT Issues in the National IT EnvironmentEnvironment

Size of local market: -Small size: no better supplier, no better services

Data export control-individual privacy, weak security, low-quality controls over data

Technological awareness- It spreads very rapidly around the globe with IT magazines, journals, consultants distributed globally

- It poses problems in less IT-sophisticated countries since they neither understand, need, nor are capable of managing it. However, they may gain advantages of exploiting IT in the subsidiaries than are used in home offices.

Border opportunities: Mexico, Canada (NATRADE) These factors severely constrain the way in which

policies and controls can be implemented in its international activities.

Corporate FactorsCorporate Factors

Within the context of the different national cultures and the current state of the IT profession in different countries, numerous factors inside a company influence: 1) how fast IT can be transferred internaionally, 2) how centralized its control of international IT activity should be.

Nature of firm’s business - degree of integration and on-line update e.g., airline reservation files: flight loading, seat availability shipping companies: container status Others: production schedules, order status Strategic impact of IT - If IT activity is strategic to the company, tighter corporate

overview (coordination and senior management perspective) is needed to ensure that new technology is rapidly and efficiently introduced to outlying areas. (e.g., Banks: strategic role vs. chemical: supporting role)

Corporate FactorsCorporate Factors Corporate organization- need different, appropriate forms of

coordination - vertical relationships (corporate IT and national IT activities)

and horizontal (divisional) Company technical and EFFECTIVE control

characteristics -(a) General level of functional control: traditional central control

find it both appropriate and relatively easy to implement line IT control worldwide

- (b) technology base: High-tech companies with traditions of spearheading technical change from a central research and engineering laboratory and disseminating it around the world have successfully used a similar approach with IT.

Companies with less experience have had more difficulty assimilating IT as well as more problems in transplanting IT developed in one location to other settings

- (c) corporate size: Smaller organizations: more difficult, complex to transfer due to limited and specialized nature of their application

Others: staff rotation, operating and financial requirements demand up-t-the-week reporting

Transnational IT Policy Transnational IT Policy IssuesIssues

The scope of policies and the amount of effort needed to implement them are influenced by (1) the degree of needed central control, (2) corporate culture and policies, and (3) strategic importance of IT and (4) others - e.g., politics

Guidance on architecture: The most important central IT role is to facilitate the development, implementation and acquisition of telecommunication technology on:

-a corporate international data dictionary, and -common communication technology and its architecture Central hardware/software concurrence or approval - objectives of a central policy: (1) cost-effective global

networking is acquired, (2) obvious mistakes in vendor viability are avoided, (3) purchasing decisions achieve economies of scale

- cost (Bargaining power), timely vs. local autonomy (takes too long)

Transnational IT Policy Transnational IT Policy IssuesIssues - who (degree of IT skills) set the technical and managerial

policies Central approval of software standards and feasibility

studies - ensure software will be in a maintainable, secure way so that

the company’s long-term operational position is NOT jeopardized

- decentralized (Small “support” investment OK here) vs. centralized (Large “strategic” investments should be subject to central review) culture will be conflict

Central software development -Success factors (1)well-established patterns of technology

transfer,(2)strong functional control over their subsidiaries,(3)substantial members of expatriates working in the overseas subsidiaries,(4)homogeneity in manufacturing, accounting and distribution practice

-Reasons of failure (1) developers did not understand local needs very well,(2)training people to get familiar with the I/O were underestimated, (3)cost were significantly underestimated, (4)flexibility and timeliness of response were problems

Transnational IT Policy Issues Transnational IT Policy Issues (Cont.)(Cont.)

IT communications-regular interunit meetings: annual or

biannual conference-corporate–subsidiary exchange visits: head

quarter, national, and local-newsletters: monthly or bimonthly newsletter

to communicate staffing shifts, new technical insights, major project completion, experience with software packages and vendors

-education: joint education programsStaff rotation: between national IT and

corporate IT is an important way of encouraging communication and sharing the experience

Transnational IT Policy Issues Transnational IT Policy Issues (Cont.)(Cont.)

-CONS: (1)moving from corporate headquarters to less IT-developed country may find themselves completely out of touch with contemporary technologies being used.(2) reallocation costs (3) resentment and feelings of nationalism of “Why aren’t our people good enough?”

Consulting services - The corporate IT is more aware of LEADING(cutting)-edge H/SW

technology and understand its strengths and weakness as well as have experience with large project management systems and other management methods

-The corporate IT audit group of a transnational frequently must take responsibility for conducting international IT audits and for helping to develop national IT audit staffs and capabilities. (IT auditing is a rapidly evolving profession - a serious staff shortage)

Central IT processing support -A central hub or a linked international network depends on the

firm’s industry and the dimensions along which it chooses to compete. Airline: used to be offensive weapon, now is defensive one. Paper industry is a national basis not international one due to shipping cost.

Information Technology and Information Technology and GlobalizationGlobalizationInformation Technology and Information Technology and GlobalizationGlobalization

Drivers ofChange

CompetitiveEnvironment

Business/ITStrategy Business

Implementation

Internetworking The GlobalEnterprise

Internetworking The GlobalEnterprise

EmergingGlobal

Markets

EmergingGlobal

Markets

Global BusinessOperations &

Alliances

Global BusinessOperations &

Alliances

InformationTechnologyInformationTechnology

GlobalizationGlobalization

Alignment of Global Vision with IT using Global DriversAlignment of Global Vision with IT using Global DriversGlobal companies operate in a competitive environment in which networked computer systems make possible global markets that can instantly and cheaply process business transactions. The role of information technology provides the fuel for global growth and the means for meeting global opportunities.Drivers of Change. Just as IT makes competing globally more strategically possible, it also drives the forces of change to move from a relatively domestic or regional view of business to one that sees the world as a single, actionable market.Competitive Environment. IT makes it possible for companies, even small companies, to manage and extend the effective range of their competitive reach far beyond the boundaries of their domestic markets. Competitive Response. IT provides managers with "real time" information, often linking suppliers, manufacturers, and retailers together to help manage the ideal distribution of supply and demand much more quickly than ever before. This helps develop agile competition -- the ability of a company to profitably operate in a competitive environment of continual and unpredictable changes in customer opportunities.Implementation. As decision processes and logistics speed up and become better informed and more integrated, businesses can implement their strategic plans more robustly.

Alignment of Global Vision with IT using Global DriversAlignment of Global Vision with IT using Global Drivers

N

Dr. Chen, Transnational IT Issues and IT Business TM -174

The Major Dimensions of Global The Major Dimensions of Global IT ManagementIT ManagementThe Major Dimensions of Global The Major Dimensions of Global IT ManagementIT Management

Managing global information technology requires taking into account the cultural, political, and geoeconomic challenges that exist in the international business community. The five areas of IT activity shown on the slide are considered from this broader perspective when addressing the IT needs of global businesses. The three areas of challenges for managing global IT include:

Political Challenges. Many countries have rules regulating or prohibiting transfer of data across their national borders. Other countries limit, tax, or prohibit importation of hardware and software. Local content laws specifying value added contributions to products required in-country and reciprocal trade agreements affecting the spending of revenue earned in the country, all complicate the management of IT in global contexts.

Geoeconomic Challenges. The uneven development of the world's economies make it difficult to take advantage of some opportunities (such as low labor costs) where other obstacles exist (such as poorly developed telecommunications and physical transportation infrastructure).

Cultural Challenges. Global IT managers must be thoroughly trained in and sensitive to the differences in cultural values, beliefs, and practices of the host country in which the global firm seeks to do business.

The Major Dimensions of Global The Major Dimensions of Global IT ManagementIT ManagementThe Major Dimensions of Global The Major Dimensions of Global IT ManagementIT Management

SystemsDevelopment

SystemsDevelopment

DataManagement

DataManagement

TechnologyPlatforms

TechnologyPlatforms

ApplicationPortfolios

ApplicationPortfolios

Business/ITStrategiesBusiness/ITStrategies

Global ITManagement

Global ITManagement

Cultural, Political,and Geoeconomic

Challenges

Cultural, Political,and Geoeconomic

Challenges

GLOBAL BUSINESS DRIVERSGLOBAL BUSINESS DRIVERSGeneral Cultural Factors:General Cultural Factors:GLOBAL COMMUNICATION &

TRANSPORTATION TECHNOLOGIESDEVELOPMENT OF GLOBAL

CULTUREEMERGENCE OF GLOBAL NORMSPOLITICAL STABILITYGLOBAL KNOWLEDGE BASE

GLOBAL BUSINESS DRIVERSGLOBAL BUSINESS DRIVERSSpecific Business Factors:Specific Business Factors:GLOBAL MARKETSGLOBAL PRODUCTION &

OPERATIONSGLOBAL COORDINATIONGLOBAL WORK FORCEGLOBAL ECONOMIES OF SCALE

CHALLENGES & OBSTACLES TO CHALLENGES & OBSTACLES TO GLOBAL BUSINESS SYSTEMSGLOBAL BUSINESS SYSTEMS

GENERAL:GENERAL:CULTURAL PARTICULARISMSOCIAL EXPECTATIONSPOLITICAL LAWSSPECIFIC:SPECIFIC:TELECOMMUNICATION STANDARDSNETWORK RELIABILITYDATA TRANSFER SPEEDSSHORTAGE OF CONSULTANTS

*

• Transnational IT Policies and Standards

• Specialized Workstation-Based Applications

• Integrated Systems

• Common Data

• Logically Consolidated, Physically Distributed

IT Characteristics of IT Characteristics of TransnationalTransnational

CompaniesCompanies

IT Characteristics of IT Characteristics of TransnationalTransnational

CompaniesCompanies

FUNCTION

DOMESTIC

EXPORTERMULTI-NATIONAL

FRANCHISERTRANS-NATIONAL

PRODUCTION CENTRALIZED DISPERSED COORDINATED COORDINATED

FINANCE/ACCOUNTING CENTRALIZED CENTRALIZED CENTRALIZED COORDINATED

SALES/MARKETING MIXED DISPERSED COORDINATED COORDINATED

HUMAN RESOURCES CENTRALIZED CENTRALIZED COORDINATED COORDINATED

STRATEGIC MANAGEMENT CENTRALIZED CENTRALIZED CENTRALIZED COORDINATED

STRATEGYSTRATEGY

GLOBAL BUSINESS STRATEGY & GLOBAL BUSINESS STRATEGY & STRUCTURESTRUCTURE

GLOBAL INFORMATION GLOBAL INFORMATION SYSTEMSSYSTEMSCENTRALIZED: Domestic Home

BaseDUPLICATED: Copies of Home

System Used in Foreign LocationsDECENTRALIZED: Each Unit has

Unique SystemNETWORKED: Integrated &

Coordinated at all Locations

Tariffs

GovernmentApproval

ImportRestrictions

Level of Local Service

Compatibilityand

Documentation

TransborderData Flows

GlobalIT

Issues

Global Considerations for ITGlobal Considerations for ITGlobal Considerations for ITGlobal Considerations for IT

Dr. Chen, Transnational IT Issues and IT Business TM -183

GLOBAL INFORMATION SYSTEMS GLOBAL INFORMATION SYSTEMS CONFIGURATIONSCONFIGURATIONS

STRATEGYSTRATEGY SYSTEMSYSTEM DOMESTICDOMESTIC MULTI-MULTI- TRANS-TRANS- CONFIGURATIONCONFIGURATION EXPORTEREXPORTER NATIONALNATIONAL FRANCHISERFRANCHISER NATIONALNATIONAL CENTRALIZEDCENTRALIZED X

DUPLICATEDDUPLICATED X

DECENTRALIZEDDECENTRALIZED x X x

NETWORKEDNETWORKED x X

X : DOMINANT PATTERN x : EMERGING PATTERN

REORGANIZE THE BUSINESSREORGANIZE THE BUSINESSOrganize Value-adding Activities

For Comparative AdvantageDevelop & Operate Systems At

Each Level: National; Regional, International

Establish Single World Headquarters: Have Global Chief Information Officer

STRATEGY: DIVIDE, CONQUER, STRATEGY: DIVIDE, CONQUER, APPEASEAPPEASEDefine Core Business Processes

Identify Core Systems To Coordinate Centrally

Choose An Approach: Incremental, Grand Design, Evolutionary

Make Benefits Clear

MAIN TECHNICAL ISSUESMAIN TECHNICAL ISSUESHardware & Software Integration

ConnectivitySoftware: Languages Can Be A

Barrier

Dr. Chen, Transnational IT Issues and IT Business TM -187

Technology Appraisal Technology Appraisal ProgramProgram

Technology appraisal program: as an audit function◦ first visit: appraise existing services and raise general

concerns that local management could effectively pursue

◦ second visit: assess problems of:1. Government restrictions2. Quality and quantity of available human skills3. Present and planned communication services

◦ at least three alternatives should be prepared Expansion of present system Transfer of all or portion of IT work to a neighboring country Transfer of all or portion of IT work to a regional headquarters.

Competitive ChallengesCompetitive Challenges

1. Consumers ignoring IT’s manufacturing and distributing capacity

2. Consumers failing to recognize that they have problems or opportunities that can be addressed by IT

To deal with 1., be prepared to limit manufacturing role and place resources with the consumer

To deal with 2., educate consumers as to benefits/costs of IT solutions, especially new technologies

SummarySummaryCoordinating international IT is extraordinary complex. Corporate

IT management may have maximum responsibility for, but only limited authority over, distant staff and technologies.

Demand leadership on:◦ persuasion and cajoling ◦ being will informed on new technologies◦ the corporate culture, and◦ the wide diversity of cultures existing in the world