English Homework

Chapter 11. Global Supply Chain Operations and Risk Management

In the late 1980’s a considerable number of companies began to integrate global sources into their core business establishing global systems of supplier relationships and expansion of their supply chains across national boundaries and into other continents around the globe.

The globalization of supply chain management in organizations had the goals of increasing their competitive advantage, adding value to the customer and reducing costs through global sourcing.

In addition to sourcing globally, many companies sell globally and/or compete with other companies that do.

Ultimately, global supply chain management is about sourcing, manufacturing, transporting and distributing products outside of your native country. It ensures that customers get products and services that they need and want faster, better and more cost-effectively either locally or from around the world.

Thus we can define global supply chains as worldwide networks of suppliers, manufactures, warehouses, distribution centers and retailers through which raw materials are acquired, transformed and delivered to customers.

Growth of Globalization

In recent years, we have seen a change in how firms organize their production into global supply chains where companies are increasingly outsourcing some of their activities to third-parties and are locating parts of their supply chain outside their home country (known as “offshoring”).

They are also increasingly partnering with other firms through strategic alliances and joint ventures enabling not only large but also smaller firms and suppliers to become global.

These types of global business strategies have allowed firms to specialize on “core” competencies to sustain their competitive advantage.

This is not limited to just outsourcing manufacturing and supply chain operations but also includes business process outsourcing (BPO) and information technology (IT) services that are supplied from a large number of locations as well as other knowledge intensive activities such as R&D.

Factors Influencing Globalization

There are some key factors influencing the growth of globalization. They include:

Improvements in transportation - Larger container ships mean that the cost of transporting goods between countries has decreased. Economies of scale are found as the cost per item can reduce when operating on a larger scale. Transportation improvements also mean that both goods and people can travel more quickly.

Freedom of trade – There are a number of organizations like the World Trade Organization (WTO) that promote free trade between countries, helping to remove barriers between countries.

Improvements of communications - The internet and mobile technology has allowed greater communication between people in different countries.

Labor availability and skills – Less developed nations in Asia and elsewhere have lower labor costs and in some cases, also high skill levels. Labor intensive industries such as clothing can take advantage of cheaper labor costs and reduced legal restrictions in these less developed countries.

Transnational corporations - Globalization has resulted in many businesses setting up or buying operations in other countries. When a foreign company invests in a country, by building a factory or a shop, this is sometimes called inward investment. Companies that operate in several countries are often referred to as multinational corporations (MNC’s) or transnational corporations (TNC’s). The US fast-food chain McDonald's is a large MNC, having nearly 30,000 restaurants in 119 countries.

Many multinational corporations not only invest in other economically developed countries, but also invest in less developed countries as well (ex: Ford Motor Company makes large numbers of cars in the UK as well as India).

Reasons for a Company to Globalize

The reasons a company may choose to globalize vary but are usually influenced by global, technological, cost, political and economic influences. Some reasons to globalize within each of these influences include:

Global market forces

• Foreign competition in local markets.

• Growth in foreign demand.

• Global presence as a defensive tool.

• Companies forced to develop and enhance leading-edge technologies and products.

Technological forces

• Knowledge diffusion across national boundaries, hence need for technology sharing to be competitive.

• Global location of R&D facilities.

• Close to production (as product cycles get shorter).

• Close to expertise (ex: Indian programmers).

Global cost factors

• Availability of skilled or unskilled labor at lower cost.

• Integrated supplier infrastructure (as suppliers become more involved in design).

• Capital intensive facilities utilize incentives such as tax breaks, price breaks etc. which can influence the “make versus buy” decision.

Political and economic factors

• Trade protection mechanisms such as tariffs, quotas, voluntary export restrictions, local content requirements, environmental regulations, government procurement policies (discount for local).

• Customs duties which differ by commodity and the level of assembly.

• Exchange rate fluctuations and operating flexibility.

Global Supply Chain Strategy Development

Today, in most industries, it is necessary to develop a global view of your organization’s operations to survive and thrive. However, many companies find it difficult making the transition from domestic to international operations despite the fact that there have been significant improvements in transportation and technology over the past 25 years.

To be successful in the global economy, a company must have a supply chain strategy. This should include significant investments in ERP and other supply chain technology to prepare them to optimize global operations by linking systems across their businesses globally helping them to better manage their global supply chains.

Earlier in this book we discussed organizational strategies and how the supply chain must support them. It is no different when discussing a global supply chain. In general, an organization should have their global supply chain set up to maximize customer service at the lowest possible cost.

Kauffman and Crimi in their paper “A Best-Practice Approach for Development of Global Supply Chains” [ Kauffman et al; 2005] suggest that developing a global supply chain not only requires the same information as when developing one domestically, but also requires additional information on international logistics, law, customs, culture, ethics, language, politics, government and currency. Cross functional teams should be utilized that are supplied with detailed information including the “what, when and where” of the global supply chain as well as quantity demand forecasts. Supplier evaluations must include the ability for them to handle international operations and subsequent requirements.

To actually implement a global supply chain for your business, after identifying your supply chain partners, the team should document and test the required processes and procedures before implementing. All participants must be trained in the processes and procedures with metrics established to manage and control the global operations. The team must establish a project plan with responsibilities and milestones for the implementation.

The actual step by step approach for developing global supply chains recommended by Kauffman and Carmi is as follows:

“1.  Form a cross-functional global supply chain development team.

•  Include all affected parties, internal and external.

•  The team composition may change as development and implementation proceeds.

2.  Identify needs and opportunities for supply chain globalization.

•  Determine the requirements your supply chain must meet.

•  Commodities, materials, services required...dollar value of materials and services...importance of commodities, materials, and services...

•  Performance metrics for qualification and evaluation of suppliers.

•  Determine the current status of your supply chain “as is”.

•  Existing suppliers of materials and services.

•  Customers...

•  Commodity markets...

•  Current performance, problem areas.

•  Competitiveness...

•  “Fit” of your current supply chain with your operational requirements.

The main components of this particular framework...should include all operational dimensions of supply chains which must be identified, considered, and included in any determination of requirements and assessment of current status of supply chains.

3.  Determine commodity/service priorities for globalization consideration based on needs and opportunities.

4.  Identify potential markets and suppliers and compare to “as is” markets, suppliers, and supply chain arrangements, operations, and results.

5.  Evaluate/qualify markets and suppliers, identify supplier pool (determine best ones based on likely total cost of ownership (TCO), and best potential to meet or exceed expectations and requirements).

6.  Determine selection process for suppliers, e.g. request for proposal (RFP), negotiation, etc.

7.  Select suppliers or confirm current suppliers.

8.  Formalize agreements with suppliers.

9.  Implement agreements.

10.  Monitor, evaluate, review and revise as needed.” [ Kauffman et al; 2005]

Whatever your company’s global strategy, it must be supported by a strong transportation network.

International Transportation Methods

The primary methods of international transportation are ocean and air between countries and motor and rail within overseas countries.

Ocean

Ocean transport is perhaps the most common and important global shipment method and accounts for approximately two-thirds of all international movements. Some of the advantages of this mode of international transportation are low rates and the ability to transport a wide variety of products and shipment size.

It breaks up into three major categories of: 1) liner service, which have regular routes and operate to a schedule and operate as a “common carrier”, 2) charter vessels which are for hire to carry bulk (dry or liquid) or break bulk (cargoes with individually handled pieces) to any suitable port in the world and 3) private carriers.

Air

International air transportation is primarily used for premium or expedited shipments due to its fast transit times. However, as explained previously this mode is subject to high transportation rates.

Motor

When in a foreign country, like domestically, motor carrier is one of the most popular forms of transportation as its standardization reduces complexity. For example motor transport is the primary form of transportation when shipping goods to between the United States and Mexico or Canada and is very common in Europe. It also plays a major role in intermodal shipments, especially at ports when unloading container ships.

Rail

International railroad use is also highly similar to domestic rail use and intermodal container shipments by rail are increasing.

Global Intermediaries

In addition to the global intermediaries such as freight forwarders and customs brokers discussed in  chapter 7, there may be the need for storage and packaging expertise.

Storage Facilities

What are known as “transit sheds” can provide temporary storage while the goods await the next portion of the journey in a foreign land. In some cases, the carrier may provide storage on-dock, free of charge until the vessel’s next departure date. Public warehouses are available for extended storage periods.

Bonded warehouses, mentioned in  chapter 8, operate under customs agency’s supervision and can be used to store, repack, sort, or clean imported merchandise entered for warehousing without paying import duties while the goods are in storage.

Packaging

Export shipments moving by ocean transportation typically require stricter packaging than domestic shipments as the freight handling involves many firms, and the firms are located in different countries. As a result, the shipper may find settling liability claims for damage to export goods difficult.

Global Supply Chain Risks and Challenges

The global supply chain is fraught with risks and challenges.

As operations become more complex, logistics becomes more challenging, lead times lengthen, costs increase and customer service can suffer. With a global footprint, different products are directed to more diverse customers via different distribution channels, requiring different supply chains.

There are many other, additional issues to address such as the identification of sources capable of producing the materials in the quality and quantity required, the protection of a firm’s intellectual property, understanding import/export compliance issues, communication with suppliers and transportation companies, Differences in time zones, language and technology and product security while in transit.

Questions to Consider when going Global

All of this raises some initial questions that companies need to consider as their operations globalize as was pointed out in a PWC-MIT forum on supply chain innovation [ www.pwc.com, 2013].

The questions and findings from the forum were:

1. What are the drivers of supply chain complexity for a company with global operations?

Supply chains are exposed to both domestic and international risks. The more complex the supply chain, the less predictable the likelihood and the impact of disruption. Over recent years, the size of the supply chain network has increased, dependencies between entities and between functions have shifted, the speed of change has accelerated and the level of transparency has decreased.

Overall, developing a product and getting it to the market requires more complex supply chains needing a higher degree of coordination.

2. What are the sources of supply chain risk?

Risks to global supply chains vary from controllable to uncontrollable ones and include:

• Raw material price fluctuation

• Currency fluctuations

• Market changes

• Energy/fuel prices volatility

• Environmental catastrophes

• Raw material scarcity

• Rising labor costs

• Geopolitical instability

3. What parameters are supply chain operations most sensitive to?

Respondents replied that their supply chain operations were most sensitive to reliance on skill-set and expertise (31%), price of commodities (29%) and energy and oil (28%). For example, when U.S. diesel prices rose significantly in 2012, shippers rapidly adjust budgets in order to offset the increased costs higher fuel prices produce.

4. How do companies mitigate against disruptions?

A great majority of respondents (82%) said they had business continuity plans ready. Nissan, for example, had a well-thought out and exercised business continuity plan ready to kick into action to facilitate a quick recovery. Other major strategies by respondents included:

• Implement dual sourcing strategy

• Use both regional and global strategy

• Pursue (1st and 2nd tier) supplier collaboration

• Pursue demand collaboration with customers

Key Global Supply Chain Challenges

According to a survey by PRTM consultants for Supply Chain Digest [ www.scdigest.com; 2010], key global supply chain challenges include:

“ Supply chain volatility and uncertainty have permanently increased - Market transparency and greater price sensitivity have led to lower customer loyalty. Product commoditization reduces true differentiation in both the consumer and business-to-business (b2b) environments...

Securing growth requires truly global customer and supplier networks - Future market growth depends on international customers and customized products. Increased supply chain globalization and complexity need to be managed effectively...

Market dynamics demand regional, cost-optimized supply chain configurations - Customer requirements and competitors necessitate regionally tailored supply chains and product offerings. End-to-end supply chain cost optimization will be critical...

Risk management involves the end-to-end supply chain - Risk and opportunity management should span the entire supply chain—from demand planning to expansion of manufacturing capacity—and should include the supply chains of key partners...

Existing supply chain organizations are not truly integrated and empowered - The supply chain organization needs to be treated as a single integrated organization. In order to be effective, significant improvements require support across all supply chain functions.”

Risk Management

An organization’s supply chain is greatly impacted by globalization and its inherent logistical complexity. This has resulted in having risk beyond just the demand and supply variability, limited capacity and quality issues that domestic companies have traditionally faced, to now include other trends such as greater customer expectations, global competition, longer and more complex supply chains, increased product variety with shorter life cycles, security, political and currency risks.

As a result, it is important for global supply chain managers to be aware of the relevant risk factors and build in suitable mitigation strategies.

Potential Risk Identification and Impact

Before planning for risks in your supply chain, you must first identify potential risks as well as their impact.

To accomplish this, many companies use a “vulnerability map” or risk-matrix to visualize unforeseen and unwanted events as shown in  Figure 11.1. [ Sheffield and Rice, Jr.; 2005]

Figure 11.1. Vulnerability Map

This type of analysis has two dimensions: disruption probability and consequences. Obviously, risks with a high disruption probability and severe consequences should be given a great deal of attention.

One problem with this method is that it relies heavily on risk perception, which can vary depending on recent events, a person’s experience and knowledge, their appetite for risk and their position in the organization among other things.

Sources of Risk

Before determining a risk management strategy for your organization, it is important to consider the possible sources of risk. There are five sources of risk in a supply chain, some of which are internal, others external to your organization [ Figure 11.2; Christopher and Peck; 2005]:

Figure 11.2. Sources of Risk in the Supply Chain

Internal Risks

Process risk refers to the value-adding and managerial activities undertaken by the firm and to disruptions to these processes. These processes are usually dependent on internally owned or managed assets and on the existing infrastructure, so the reliability of supporting transportation, communication and infrastructure should be carefully considered.

Control risks are the rules, systems and procedures that determine how organizations exert control over the processes and are therefore the risks arising from the use (or mis-use) of these rules. For the supply chain, they include order quantities, batch sizes, safety stock policies etc. and any policies and procedures that cover asset and transportation management.

External Risks

Demand and supply risk are external to the organization, but are internal to the networks through which materials, products and information flow between companies. The organization should consider potential disruptions to the flow of product and information from within and between every all parties in the extended supply chain network and at least understand and monitor the potential risks that may affect other supply chain partners.

Supply risk is the upstream equivalent of demand risk and relates to potential or actual disturbances to the flow of product or information from within the network, upstream of your organization.

Environmental risks are disruptions that are external to the network of organizations through which the products flow. This type of event can impact your organization directly, on those upstream or downstream, or on the marketplace itself.

Environmental related events may affect a particular product (ex: contamination) or place through which the supply chain passes (ex: an accident, direct action, extreme weather or natural disasters). They may also be the result of sociopolitical, economic or technological events far removed from your firm’s own supply chains, with the effects often reaching other industry networks. In some cases, the type or timing of these events may be predictable (ex: regulatory changes), and many will not be, but their potential impact can still be evaluated. [Christopher and Peck; 2005]

Supply Chain Disruptions

Supply chain disruptions are the actual occurrence of risks including the categories mentioned above and are unplanned and unanticipated events that disrupt the normal flow of goods and materials within a supply chain.

There is usually some triggering event followed by the situation (with its consequences) that occurs afterwards.

Disruptions that a company has to deal with come primarily, although not always as previously mentioned, from customers, suppliers and/or the supply chain. The consequences can be immense to your company and can include higher costs, poor performance, lost sales, lower profits, bankruptcy and damage to your organization.

The actual characteristics of the supply chain structure you have may determine the drivers of your supply chain’s vulnerability.

These characteristics may include:

 Complexity of the supply chain (ex: global versus domestic sourcing).

 Density of the supply chain (i.e. using these high density regions leads to higher vulnerability of supply chains).

 Single or sole sourcing versus multiple vendors for the same item.

 Lean and JIT production philosophies require precise timing.

 Centralization of warehouse/manufacturing locations results in lengthy lead times due to distance issues.

 Dependency on major suppliers / customers (i.e. the “all your eggs in one basket” syndrome).

 Dependency on IT-infrastructure, electricity etc.

Flexible, secure supply chains with a diversified supplier base are less vulnerable to disruptions than those that are not.

Therefore, to a great degree, potential disruptions are the result of ‘conscious’ decisions regarding how you design the supply chain. Risk management is about using innovative planning to reduce potential disruptions by preparing responses for negative events.

Risk Mitigation

Depending on the type of supply chain risk, what follows are some common supply chain risks and tactics for risk mitigation [ Heizer and Render; 2013]:

Supplier failure to deliver - Use multiple suppliers with contracts with containing penalties. When possible, keep subcontractors on retainer.

Example: McDonald’s planned its supply chain many years before opening stores in Russia. All plants are monitored closely to ensure strong links.

Supplier quality failure - Ensure that you have adequate supplier selection, training, certification, and monitoring processes.

Example: Darden Restaurants (i.e. Olive Garden restaurants) has uses third-party audits and other controls on supplier processes and logistics for reduction of risk.

Logistics delays or damage – Have multiple or backup transportation modes and warehouses. Make sure that you have secure packaging and execute contracts with penalties for non-conformance.

Example: Walmart, always plans for alternative origins and delivery routes bypassing problem areas when delivering from its distribution centers to its stores with its private fleet.

Distribution – Have a detailed selection and management process when using public warehouses. Make sure that your contracts have penalties for non-conformance.

Example: Toyota trains its dealers on improving customer service, logistics and repair facilities.

Information loss or distortion - Always backup databases within secure information systems. Use established industry standards and train of supply chain partners on the understanding and use of information.

Example: Boeing utilizes a state-of-the-art international communication system that transmits engineering, scheduling, and logistics data to Boeing facilities and suppliers worldwide.

Political – Companies can purchase political risk insurance. This is also the situation where you may decide to go the route of franchising and licensing with your business.

Example: Hard Rock Café restaurants try to reduce political risk by franchising and licensing, in countries where they deem that the political and cultural barriers are great.

Economic - Hedging, the act of entering into a financial contract in order to protect against unexpected, expected or anticipated changes in currency exchange rates, can be used to address exchange rate risk.

Example: Honda and Nissan have moved some of its manufacturing processes out of Japan since the exchange rate for the yen has made Japanese-made automobiles more expensive.

Natural catastrophes – In many cases, natural disasters can be planned for by taking out various forms of insurance (ex: flood insurance). Companies may also consider alternate sourcing for example.

Example: Toyota, after the 2011 earthquake and tsunami, has established at least two suppliers, in different geographical regions, for each component.

Theft, vandalism, and terrorism – Again, in some cases, there is insurance available for these types of risk. Companies also enforce patent protection and use security measures such as RFID and GPS.

Example: Domestic Port Radiation Initiative: The U.S. government has established radiation monitors at all major U.S. ports that scan imported containers for radiation.

One reason that risk exists in a supply chain, globally or domestic, is that, due to its complexity, many companies chose to outsource many services. Risk of this type can be minimized if managed properly, which will be the topic of our next chapter.