Supply Chain Management: From Vision to Implementation

Scanning and Global Supply Chain Design

Ellram, Fawcett

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Chapter 6: Learning Objectives

1. Discuss the emergence of SCM as a strategic response to a changing competitive environment.

2. Explain the transition from ownership (vertical) to relationship (virtual) integration strategies.

3. Discuss how managers can use scanning and planning processes to define the rules of competition.

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Chapter 6: Learning Objectives

4. Describe the forces driving change in today’s market and their effect on decision-making.

5. Identify the issues driving globalization. Explain how globalization has changed the rules of competition.

6. Discuss the critical issues involved in designing a global supply chain network.

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As the economy changes, as competition becomes more global, it’s no longer company versus company but supply chain versus supply chain.

-Harold Sirkin, Boston Consulting Group

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SCM – A Strategic Weapon

SCM enables winning business models by helping companies to: Meet the demanding needs of customers worldwide Build unique competencies to fend off fierce rivals Acquire the best resources globally Do it efficiently

To deliver unsurpassed customer value, companies must develop unique competencies, relying increasingly on capable supply chain partners.

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Vertical Integration

Henry Ford viewed the vertically integrated organization as the ideal business model.

Acquired critical production resources Hayes and Wheelwright identify the

following rationale:1. Desire to reduce cost2. Desire to increase control

Lack of focus actually contributed to decreased competitiveness

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Relationship Integration

Kieretsu provided Japanese companies with a competitive advantage

Toyota and Honda rely on suppliers for approximately 80% of a car’s value Compared with 30% for American manufacturers

Japanese model resulted in superior quality and a $2,000 per vehicle cost advantage

Relationship integration via collaboration

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A Changing SC World

All advantage is temporary. No capability is unassailable, no lead is uncatchable, no kingdom is unbreachable. Indeed, the faster the clockspeed, the shorter the reign. Sustainable advantage is a slow-clockspeed concept; temporary advantage is a fast-clockspeed concept. And, clockspeeds are increasing almost everywhere.

- Charles Fine, Professor at MIT

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Environmental Scanning Proactive companies use insight gained from internal and external scanning

to avoid surprises, identify opportunities and threats, and improve both tactical and strategic decision-making.

Identifies a firm’s strengths and weaknesses vis-à-vis competitor capabilities and customer expectations.

Scanning attempts to:

1. Detect important cultural, economic, legal, political, social, and technological events and trends.

2. Help managers accurately and objectively understand the company’s strengths and weaknesses.

3. Identify and define potential opportunities and threats implied by identified events and trends.

4. Provide a common and correct perception for tactical and strategic planning.

5. Promote an adaptable, forward-looking mindset among managers and employees.

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The Scanning Process

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SWOT Analysis

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Environmental Scanning - FailuresManager should seek to avoid the following common pitfalls of

environmental scanning: Failure to involve people who can act on the insight Failure to incorporate diverse sources of information Failure to use multiple methods of gathering information Failure to look at information from diverse viewpoints Failure to consider both internal and external issues and

perspectives Failure to understand interaction among environmental trends Superficial analysis Study to narrowly focused

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Forces of Change

1. Competitive Pressure

2. Corporate Social Responsibility

3. Customer Expectations

4. Role Shifting

5. Financial Pressure

6. Global Capacity

7. Globalization

8. Mergers and Acquisitions

9. Technology Innovation

10. Time Compression

Many industry-specific forces affect companies; however, ten generic forces are helping to shape how business is now conducted.

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Forces of ChangeIssue Competitive Imperatives

Competitive Pressure Must reduce costs relentlesslyMust seek innovation and non-imitable products/processesMust create switching costs via relationships

Corporate Social Responsibility

Must understand how customers define “good” or ethical business practiceMust understand global social norms and track working conditions in SCMust develop, implement, and communicate company codes of conduct

Customer Expectations Must get into the mind of downstream customersMust realize that the best way to adapt to the future is to create itMust build learning organization that thrives on continuous improvement

Role Shifting Must establish valued core competency to avoid dis-intermediationMust make supply chain visibleMust actively & formally evaluate role-shifting opportunities

Financial Pressure Must recognize that stock markets are not always rightMust establish viable long-term strategy & stick to itMust create incentives that will not lead to short-term decision making

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Forces of ChangeIssue Competitive Imperatives

Global Capacity Must reduce costs relentlesslyMust seek innovation and non-imitable products/processes

Globalization Must establish global reach—physically & via alliancesMust establish seamless outstanding performanceMust compete in rivals home country/region

Mergers & Acquisitions Must realize that mergers & acquisitions are hard to do successfullyMust formally evaluate soft issues—culture, processes, policies, people

Technological Innovation Must monitor technological developments closelyMust establish technology policy to guide adoption

Time Compression Must enhance internal & inter-organizational cooperationMust measure time explicitly

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Globalization of Markets

Technology has overcome much of the distance created by geography and culture.

The pace of globalization depends on:1. Advances in information and communication

technology

2. Availability of reliable transportation

3. Reduction of protectionist trade policies

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Globalization’s Implications

Business knows no national boundaries. Capital and work - your work! - can go anywhere on earth. The consequence of all this is painfully simple: If the world operates as one big market, every employee will compete with every person in the world who is capable of doing the same job. There are a lot of them, and many of them are very hungry.

- Andrew Grove, former CEO at Intel

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Importance of Global Markets 95% the world’s population lives outside the U.S. 80% of the world’s gross domestic product is

produced outside the U.S. 50%+ of the population is under 20 years old in

many countries Educational background and disposable income are

prime factors motivating consumption decisions US companies earned $315 billion profits overseas

in 2004, up 78% over the past decade This pace far outstrips domestic profit growth

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Importance of Global Markets

$299,490

$1,493,400

$1,820,641

$2,891,500

$387,401

$771,994$575,204

$219,183$147,832$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

1990 1995 2000

Years

$ in

mil

lio

ns

Global Sales of U.S. Foreign Affiliates U.S. Exports - Goods U.S. Exports - Services

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Global Business is Different

Managers must consider four differences between Global and domestic operations.

1. Politics –political stability and undercurrents that might jeopardize global business strategies.

2. Legalities – requires competent legal counsel

3. Finance – exchange rate risk and hedging; taxation issues

4. Culture –must adapt to local views on time, personal space, worker/manager relations, individual accountability, etc.

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Six Globalization Imperatives

Six imperatives are shaping the global competitive landscape:

1. Establish a Triadic Presence – companies need to operate in the three major world markets – U.S., E.U. and Asia

2. Utilized Beachheads – use operations in industrialized countries as bridges into emerging markets

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Six Globalization Imperatives

3. Achieve Seamless Performance Across Markets – deliver the same high quality product with the same excellent service everywhere

4. Extend Reach Through Alliances – alliance partners can provide market knowledge, technological expertise, operational know-how, and/or financial resources.

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Six Globalization Imperatives

5. Compete in Competitors Home Market – competition prevents cross profit subsidization

6. Coordinate Global Activities – cross-pollination of ideas creates synergy while reducing redundancy

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Designing a Global Network

To insure access to customers and worldwide resources, companies are increasingly creating worldwide supply chain networks.

Resources within the supply chain need not be owned by a single entity.

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Designing a Global Network

To insure supply chains are properly designed four criteria should be considered:

1. Compatibility – need to align network design decisions with company’s overall strategy

2. Configuration – need to identify and consider issues that will affect network performance when deciding where to locate value added activities

3. Coordination – need to direct and integrate geographically dispersed activities

4. Control – need for consistent and proper day-to-day decision-making at local value added facilities

Supply Chain Management: From Vision to Implementation

Supplement F: Facility Location

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Basic Center-of-Gravity Approach

Helps managers locate the geographic center of a group of locations

Determined by calculating the average North-South coordinate and the average East-West coordinate

Example: Managers are trying to locate a new store based on five existing competitor locations; where should the new store be placed?

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Retail Locations

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Coordinate Locations

2.25

21413

Stores ofNumber Total

East Distance East Distance East Distance East DistanceEast Distance 5 Store4 Store3 Store2 Store1 Store

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12345

Stores ofNumber Total

North Distance North Distance North Distance North DistanceNorth Distance 5 Store4 Store3 Store2 Store1 Store

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Central Location

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Unequal Shipment Size or Frequency

To minimize transportation costs, facility should be located closer to locations that require more frequent shipments.

Example: Assuming the data below, where should new facility be located?

Location East-West Coordinate North-South Coordinate Annual Tons

Store 1 3 5 200

Store 2 1 4 600

Store 3 4 3 400

Store 4 1 2 100

Store 5 2 1 300

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Coordinate Locations

2.1875 1600

3500 C

(weight)

eight)EastWest(w C

EastWest

EastWest

3.1875 1600

5100 C

(weight)

(weight)NorthSouth C

NorthSouth

NorthSouth

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Unequal Shipment Size or Frequency

To minimize total distribution costs, facility should be located closer to locations that have higher transportation costs.

Example: Assuming the data below, where should new facility be located?

LocationEast-West Coordinate

North-South Coordinate

Annual TonsRate$/ Ton-Mile

Store 1 3 5 200 $1.55

Store 2 1 4 600 $1.27

Store 3 4 3 400 $1.42

Store 4 1 2 100 $1.75

Store 5 2 1 300 $1.48

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Coordinate Locations

2.23 2259

5027 C

ate)(weight)(r

e)eight)(ratEastWest(w C

EastWest

EastWest

3.14 2259

7096 C

(rate)(weight)

rate)((weight)NorthSouth C

NorthSouth

NorthSouth

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Facility Location – Other Issues Proximity to major

highways and airports Proximity to labor force Education level of labor

force Degree of unionization Cost of land Construction costs Weather Quality of life Employment rates

State and local tax rates Proximity to competition Proximity to similar

industries Topography Environmental issues Availability of shippers or

carriers Management preferences Population characteristics Security