Managing Global Supply ChainsFocus on China & GZIntroductory Course

Todays Schedule9:00 - 9:30 - Welcome, trip Logistics, syllabus

review9:30 - 10:15 - Lecture on Global Sourcing &

Outsourcing; 10:15- 10:40 - Team prep10:40- 11:30ish - Review of the Scotts case -

Group presentations & discussion11:40 -12:30 - Lunch12:30-3:00 - Beijing portion coordinated by

Dr. Gillpatrick

Agenda - TopicsTrip Logistics – Linda & RachelSyllabus overview – Intro to classGlobalization Outsourcing as a business strategyDefinitions and conceptsRationales for outsourcingThe outsourcing processRisk assessmentSuccess factorsScott’s case – Team analysis

Globalization• Globalization can be cultural, political, &

economic.– Cultural: A new Universalism (laws versus

Jihad)– Political: policies regarding factors of

production (oil)– Economic: Markets and Production

• Globalization of Production – low-cost factors of production – Ricardo’s comparative advantage

Globalization• Globalization – Interdependent and integrated

world economy• All firms export and import – 97% of firms in US

<500 employees• 2006 over 2,500 trade treaties have been signed

vs. 181 in 1980. • Globalization of Production – low-cost factors of

production: China; “Weapons of Mass Production”

Globalization

- World Bank – states that by 2020 60% of econ activity by developing nations, today 35% (Viet Nam, Indonesia, etc)

- Foreign Direct investment is easier with technology - Multinationals moving east are not the only participants; Haier

& Li-Ning for ex.- Backlash against market economy in some nations (Russia)

- China is even different by province (Shenzhen vs. Hong Kong vs. Shanghai)

- Outsourcing & Jobs – Social Justice vs. Economics- Consumer savings vs. job displacement- Division of income widens

- Environment degradation in developing nations

Outsourcing as a sourcing strategyPreviously:

Mainly outsourcing of manufacturing activitiesTrend was for low-cost labor

Currently: Complete business functions are outsourcedCommon viable business strategyInnovation & design are now included

Definition of outsourcing

Characteristics of outsourcing:“Normal” In-house activities performed are

transferred to a third party Assets, knowledge and sometimes employees

are sent to the external partyExtended and long term embedded relationshipBoth parties experience new costs and risk

profiles

Forms of outsourcing services

Labor outsourcingMixed & consigned

outsourcingComplete turnkey

outsourcing

Contractor provides…

Facilities Some employees

Some or all of the following:

EmployeesMaterialsProcess and SystemsTechnology and

Equipment

Facilities

Management

Employees Materials Process and Systems Technology and

Equipment Facilities Management Decision rights Codified knowledge

Host firm provides…

Some employees Materials Process and Systems Technology and

Equipment Management

Some or all of the following:

EmployeesMaterialsProcess and SystemsTechnology and

Equipment

Facilities

Management

Program management Tacit knowledge

Chandrashekar, 2000

Definitions Off-shoring: Off-shoring relates to the commissioning of

work and ownership to another country. Maintain ownership.

Partial outsourcing: only a part of an integrated function is outsourced. The coordination of the function, activities, and decision rights still lie with the client (the buyer).

Turnkey outsourcing: applies when the responsibility for the execution of the entire function (or activities) lies with the external provider. This includes not only the execution of the activities, but also the coordination of these activities. May also include decision rights and design.

Rationales for outsourcing

Strategic reasons for outsourcing

1. Improve company focus2. Gain access to world class capabilities & Markets3. Get access to resources that are not available

internally4. Accelerate reengineering benefits5. Improve customer satisfaction6. Increase flexibility7. Sharing risks

Tactical reasons for outsourcing

1. Reduce control costs and operating costs2. Free up internal resources3. Receive an important cash infusion (next slide)4. Improve performance5. Ability to manage functions that are out of control

All these reasons underlie one overall objective: to improve the overall performance of the outsourcing firm

Why Outsource?

Cash-to-Cash Cycle Time0ENLI009

Inventory days + Days sales outstanding – Average payment of supply period for materials

Inventory0OPPLAN012

Forecast Accuracy

0OPPLAN008

Production Lead Times

0OPMAKE017

Perfect Order Fulfillment

0OPDEL061

Faultless Invoices

0OPDEL023

Scheduled Achievement

0OPMAKE022Delivery

Performance to Scheduled Commit Date

0OPDEL019

Returns0OPDEL067

Scrap0OPMAKE023

Fill Rates0OPDEL025

Order Fulfillment Lead Time

0OPPLAN030

Machine wait time0OPMAKE007

Yield0OPMAKE033

Number of Supply

Sources0OPSO012Total Source

Lead Time0OPSO041

0ENLI015

Sales0ENPR026

0ENLI0030OPPLAN017

One example of why to outsource

Three phases:Strategic phase (why, what, who?)Transition phase (how?)Operational phase (how to control?)

Figure 8.4

The outsourcing process

Competenceanalysis

Assessment & approval

Contractnegotiation

Project execution & transfer

Managingrelationship

Contracttermination

Strategic phase Transition phase Operational phase

Adapted from Momme, 2002

Strategic phase1. Motives for outsourcing

Focus on core competencesFocus on cost efficiency/ effectivenessFocus on service

2. Which activities or functions are outsourced

Transaction cost approach Core competence approach

3. Qualifications of the supplierTechnical and managerial qualities to achieve

demanded level of performance

Four phase modelPhase 1

•Market search•Preliminary assessment•Potential supplier list

Phase 2•Detailed audit•Confidentiality agreement•Approved supplier list

Phase 3•Contract negotiation•Order issue•Kick-off meeting•Execution

Phase 4•Supplier report card•Post contract review•Continuous improvement•Supplier validation

CustomerFocus

Marketbenchmark

Continuous improvement opportunities

Identification and assessment

Project execution

Audit and approval

Adapted from Momme, 2002

The Transition phase

Contract negotiation Contract forms a legal basis for relationshipContracts depends on characteristics of outsourced activityThe contract type has a great impact on the success of the joint

operation

Project execution and transfer Outsourcing transition can be very complexThe transfer should be conducted using project management

principlesTest phase before going ‘life’

The operational phaseIt is in the operational phase that the outsourcing will deliver

its expected resultsSuccessful outsourcing depends heavily on close cooperation

with the supplierSix core values as being critical to a successful outsourcing

relationship

Core values Supporting factorsShared goals and objectivesMutual dependenceOpen lines for communicationConcern for the other’s profitabilityMutual commitment to customer satisfactionTrust

•Developing a personal relationship•Having professional respect•Investment of effort by top management•Commitment to continuous improvement

McQuiston (2000)

Critical success factors of outsourcing

Understanding company goals and objectivesInclusion of outsourcing in the strategic vision and planSelecting the right supplierA properly structured contractOpen communication with the individual groups involvedOngoing management of the relationship (not embeddedness)Senior executive support and involvementCareful attention to personnel issues & resourcesConstant reflection on core competencies and IP versus

outsourcing, including decision and alienable rights

www.theoutsourcinginstitute.com

Outsourcing – factors to consider?-Labor efficiency – Lean applied? % of COGS?

-DFM 60% of cost is in design phase-Shipping & expediting – flexibility?-Training-Quality – eats up all savings (reputation & Warranty)-Capacity / utilization – if not >80%?-Cheap labor – Not static-Plant start-up costs?-Support & travel-Knowledge protection, transfer, & codification-Culture

Why design for manufacturability matters

Ma

na

ge

me

nt

inv

olv

em

en

t

100%

Cumulativepercent of

cost

0%

Product development

Total life cycle costs

Ability to control costs

Production Support

60% to 80% of total life cycle costs are largely determined during development

Outsourcing – factors to consider?-Where are the markets? Toyota in Silicon Valley, Boeing & Oakley in Calif.-Composition of COGS is direct labor? If <7-15% as with high tech, <3% of some apparel-Lean can drive down cycle times to hours, making offshore logistics the impediment-Build to order allows for less E&O as well as agility to customize products & lower lead-times-Consumer – Do they care if “built in USA?”

Where to Outsource?Factors to consider:-Costs: labor, infrastructure-Skill pool: labor, IT, language-Environment: regulations, bureaucracy, corruption-Quality of Infrastructure – Roads, Airports, ports-Risk: Earthquakes, war, politics-Market potential: China vs. Vietnam

China Labor Market – Relate to the NPI case?Facts:FDI-$500B; Directly Employ 16M people112M factory workers200 largest exporters, 153 were from FDIIs unrest growing? 280K labor disputes 2009Wages increased 9%/yr since 2002Surplus labor or shortage?Half the number of <16-29yrs by 2020

Final Alternatives

Near-shoring – Mfg located in low cost region, but supplier in local market

Best-shoring – MFG offers alternatives pending risk and complexity

Out-source / Co-located – Factory within a factory

Scotts Miracle Gro Case

In-House, Outsource, or Off-Shore?

Scotts Questions

•What is the purpose of the exercise in your opinion, why would a firm want to outsource / offshore this type of product in its portfolio?•What are the internal / external political and ethical issues associated with this decision? Are they relevant to the company, product, and global sourcing?•What are the strategic risks and benefits of outsourcing / offshoring production of the Temecula plant to a location in Mainland China? Include all “hard and soft” items in a risk & benefit format. •Financially compare the options of staying in Temecula and moving to China. Provide the “soft variables” when arguing against the quantifiable numbers in the analysis.

Scotts Questions

•Consider the following in your financial analysis:•5 year horizon, volumes & material costs are stagnant in Temecula•Taxes excluded, lease in Temecula could be cancelled•New molds in China are estimates only by students•Shipping rates•Exchange rates•Production Costs (Labor, overhead, plant / equip)•Governance Costs (Management Overhead & Start-up costs)

Break into Teams…..

Scott’s Case

My Numbers: - Temecula: $61,234,227 - Outsource: $55,003,263 - Offshore: $60,003,275

Scott’s CaseOffshore is burdened: by $8M up front investment

minus the savings in EMS GM%Outsourcing is burdened:

Risk for currency exchange of 5% annually Start-up costs of $1.5M Lease buy-back $1.5M Freight costs of $7M

Temecula is burdened:High labor, electricity, lease of building, etc.

What is beyond the numbers?????

Scott’s caseVariables:- Ramp- Inventory- SKU proliferation- Closing time of Temecula- Seasonality- Made in USA- China market?- What did they do? Keep Temecula