Global Supply Chain Management

Tomas Hult Director, International Business Center (MSU-CIBER) Associate Professor of Marketing and Supply Chain Management Michigan State University Email: hult@msu.edu

Its All About Leverage

Consider how to turn an aircraft. Aircrafts are steered through the use of a system of ailerons on the wings and the rudder at the tail of the aircraft. In comparison to the aircraft, the ailerons and the rudder are very small; however, leverage allows them to turn the large aircraft. In other words, putting the right combination of a little leverage on the right places allows incredible maneuvering.

What is a Supply Chain?

Supply chains are linkages of partially discrete, yet interdependent entities that collectively transform raw materials into finished products. Supply chains connect the functions of inbound activities (such as purchasing) with outbound activities (such as logistics and place activities).

A. . . . . . . . . . . . . . . End Customer

Formal Definition of a Supply Chain

A supply chain is a network of facilities and activities that performs the functions of product development, procurement of material from suppliers, the movement of materials between facilities, the manufacturing of products, the distribution of finished goods to customers, and aftermarket support for sustainment (Mabert and Venkataraman 1998).

Supply Chain Utilities

TIME PLACE POSSESSION

Network of Relationships

Finland Sweden Germany

Denmark
Norway Iceland Netherlands

Ford Example
Belfast
Carburetors and distributors

Enfield
Instruments, fuel and water gauges, plugs

Basildon
Radiators, water pump assembly, engine components

Treforest
Spark plug insulators

Genk
Body panels, road wheels

Leamington
Foundry production of engine components

Wlfrath
Transmission parts, engine components

Dagenham
Final assembly

Cologne
Die-cast transaxle casings, gear and engine components

Bordeaux
Transmissions

Valencia
Final assembly

Saarlouis
Final assembly

Types of International Sourcing Strategy

Sourcing Intra-Firm Sourcing Outsourcing

Domestic

International

Domestic

International

Domestic In-House Sourcing

Offshore Subsidiary Sourcing

Domestic Purchasing Arrangement

Offshore Outsourcing

A company procures major components inhouse by procuring them domestically

A company procures major components from its foreign subsidiary

A company buys major components from independent suppliers at home

A company buys major components from independent suppliers internationally

Source: Kotabe (2000)

International Supply Chain Organization

A supply chain organization is a relatively enduring interfirm cooperative that uses resources from international participants to accomplish shared and independent goals of its members.

International SCM Theory

Actor Bonds

Resource Ties

Activity Links

National Competitive Advantage

Firm Strategy, Structure, and Rivalry

The conditions in the nation governing how companies are created, organized, and managed and the nature of domestic rivalry.

Factor Endowments
A nations position in factors of production such as skilled labor or the infrastructure necessary to compete in a given industry.

Demand Conditions

The nature of home demand for the industrys product or service.

Related and Supporting Industries

The presence or absence in a nation of supplier industries and related industries that are internationally competitive.
Source: Porter 1990

The Value Chain

Michael Porter, professor at Harvard Business School, uses the value chain as a systematic means of displaying and categorizing business activities.
The term value chain means that at each stage of the order-to-delivery system, value is added to the product or service.

Porters Value Chain

Firm Infrastructure

Support Activities
INBOUND LOGISTICS

Human Resource Management Technology Development

PROCUREMENT
Information Technology OUTBOUND LOGISTICS

Marketing & Sales

Primary Activities
Source: Porter 1985

Operations

Service

Primary Activities
Primary activities are the five basic functions needed to physically produce a product or service, deliver and market it to buyers, and support it after the sale. Each contributes value in specific ways.
Inbound logistics refers to activities/actions required before physical production of a product can begin or before service can be performed (inputs such as materials handling, warehousing, inventory control, vehicle scheduling and returns to suppliers).

Outbound logistics refers to all activities from the point of a finished product to its delivery to the market or customer or those activities that follow the completion of a service (such as distribution, delivery vehicle operations, order processing, and scheduling).

Support Activities
Support Activities provide inputs or infrastructure in support of primary activities. These supporting activities stretch across the entire value chain since they impact each primary activity.
Procurement is obtaining purchased inputs, such as raw material, parts, equipment, etc.

From the Value Chain

Five continuous and interactive steps are involved in developing a global supply chain strategy along the value chain:
1. Identify the separable links (R&D, manufacturing, and marketing) in the companys global value chain. In the context of those links, determine the global location of the companys competitive advantages, considering both economies of scale and scope. Ascertain the level of transaction costs (e.g., cost of negotiation, cost of monitoring activities, and uncertainty resulting from contracts) between links in the global value chain, both internal and external, and select the lowest cost mode that provides the most value.
Source: Kotabe and Helsen 2001

2.

3.

From the value chain

4. Determine the comparative advantages of countries (including the companys home country) relative to each link in the value chain and to relevant transaction costs.
Develop adequate flexibility in corporate decision making and organizational design so as to permit the company to respond to changes in both its competitive advantages and the comparative advantages of countries.

5.

Source: Kotabe and Helsen 2001

Competencies Needed for Efficient Global SCM

Positioning
The selection of strategic and structural approaches to guide global operations

Integration
Agility Measurement

The establishment of what to do and how to do it creatively

The achievement and retention of global competitiveness and global customer success The internal and external monitoring of global operations
Source: Michigan State University (1995)

Global SCM Factors

Costs
Local labor rates International freight tariffs Currency exchange rates

Customs Duty
Duty rates differ by commodity and level of assembly Impact of GATT/WTO: Changes over time

Source: Global Supply Chain Associates (GSCA) 1999

Global SCM Factors Continued

Export Regulations
Denied parties list Export licenses

Time
Lead time Cycle time Transit time Export license approval cycle Customs clearance

Global SCM Factors Continued

Taxes on Corporate Income
Different markups by country Tax havens and not havens Make vs. buy effect

Offset Trade and Local Content

Local content requirement for government purchases Content for preferential duty rates

Questions to Answer
Manufacturing Strategy:
How many plants do I need? Where should each plant be located? What products should each make? What process technologies should each have and how much of each process is needed? What part of the world should each plant serve?

Source: Global Supply Chain Associates (GSCA) 1999

Questions to Answer Continued

Supply Base Design / Vendor Consolidation:
How do I simultaneously perform supplier selection for all the parts in the same commodity group? How many suppliers is best and which suppliers should send which parts to which plants? Am I missing opportunities by sourcing one part at a time?

Outsourcing:
What parts of my supply chain should I keep "in-house" and what parts to outsource? What if a third party has a higher variable cost but a lower fixed cost than in-house production?

Questions to Answer Continued

Impact of Duty / Drawback, Taxes, Local Content & Offset Trade:
If the duty rates come down according to GATT/WTO, how should I change my supply chain design? Does it make sense to still locate production inside the Triad areas or what trading block areas should we consider? What is the best use of the tax havens (Singapore, Puerto Rico, Ireland)?

Spare Parts Logistics:

How many echelons of repair and stocking is best? How many repair shops are needed, where should they be located, what products should each handle, and what geographic area should each serve? How do the drivers of product value, weight, complexity, and frequency of repair affect this decision?

Questions to Answer Continued

New Product Pipeline Design:
What should the supply chain look like for a new product? How should I fit the new product into my current supply chain? Should I single or double source this product? How much do my fixed costs affect this decision? What is the cross-over point to open up a second and third source of supply?

Auto Parts Example in Japan

Automobile makers affiliated parts makers Independent parts makers Repair parts makers Automobile makers Wholesalers Special agents

Dealers

Cooperative sales companies

2nd-level wholesalers

Sub-dealers Large users

Retailers Gasoline stations Automobiles repair shops End users Source: McKinsey Industry Studies

Auto Parts Example in the U.S.

Manufacturer 51% Warehouse distributor 10% Jobber buying groups Jobber Installer Customer

18%

Mass merchandiser

21% Primary channel Secondary channel

Repair specialist

Source: McKinsey Industry Studies

Global SCM Example 1:

Large Computer Company
Goals
Reduce cost Improve ROA Simplify the worldwide supply chain

Source: Global Supply Chain Associates (GSCA) 1999

Objectives
Redesign the entire worldwide supply chain
Determine how many plants and where they should be located Determine what process technologies should be in each plant

Specify the loading on each plant and the service area

Global Supply Chain Structure Before Reorganization

Source: Global Supply Chain Associates (GSCA) 1999

Redesigned Global Supply Chain

Recommended plant closings and re-tooling Reduced number of facilities from 33 plants to 12 plants Created three relatively self-contained customer-oriented supply zones: Americas, Europe, Pacific Rim Estimated benefits:
Reduced manufacturing / logistics cost by $375 Mil. annually Improved Corporate ROA by 3.2 points

Source: Global Supply Chain Associates (GSCA) 1999

Global Supply Chain Structure After Reorganization

Source: Global Supply Chain Associates (GSCA) 1999

READINGS
Michigan State Universitys Global Logistics Research Team (1995), World Class Logistics: The Challenge of Managing Continuous Change, Oak Brook, IL: Council of Logistics Management (Sponsored by the Council of Logistics Management).
Locke, Dick (1996), Global Supply Management, Boston, MA: McGraw Hill (Sponsored by the National Association of Purchasing Management).