Global Supply Chain

Management

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 after-market support for sustainment (Mabert and
Venkataraman 1998).

Supply Chain Utilities

TIME

PLACE

POSSESSION

Network of Relationships

Finland
Sweden

Germany
Denmark

Norway

Netherlands
Iceland

Ford Example
Belfast
Carburetors and
distributors

Enfield
Instruments, fuel
and water gauges,
plugs

Treforest

Basildon
Radiators, water
pump assembly,
engine components

Genk

Spark plug
insulators

Body panels,
road wheels

Leamington

Wlfrath

Foundry production
of engine
components

Transmission
parts, engine
components

Cologne

Dagenham

Die-cast transaxle
casings, gear and
engine components

Final assembly

Bordeaux
Transmissions

Valencia

Saarlouis

Final assembly

Final assembly

Types of International
Sourcing Strategy
S o u rc in g
In tr a -F ir m S o u r c in g

O u ts o u r c in g

D o m e s tic

In te r n a tio n a l

D o m e s tic

In te r n a tio n a l

D o m e s tic In -H o u s e S o u r c in g

O ffs h o r e S u b s id ia r y S o u r c in g

D o m e s tic P u r c h a s in g A r r a n g e m e n t

O ffs h o r e O u ts o u rc in g

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

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

The conditions in the

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

Demand
Conditions

Related and
Supporting
Industries

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

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

Human Resource Management

gi
ar
M

Technology Development

PROCUREMENT

M
ar
gi

Service

Marketing & Sales

OUTBOUND LOGISTICS

Operations

INBOUND LOGISTICS

Information Technology

Primary Activities
Source: Porter 1985

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.

2.

In the context of those links, determine the global location of the

companys competitive advantages, considering both economies of
scale and scope.

3.

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

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.

5.

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.

Source: Kotabe and Helsen 2001

Competencies Needed for

Efficient Global SCM
Positioning

The selection of strategic and

structural approaches to guide
global operations

Integration

The establishment of what to do

and how to do it creatively

Agility

The achievement and retention of

global competitiveness and global
customer success

Measurement

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

Automobile makers

Dealers

Independent
parts makers

Repair parts
makers

Wholesalers

Special agents

Cooperative
sales companies

Sub-dealers

2nd-level
wholesalers

Retailers
Gasoline
stations

Large users
Automobiles
repair shops
End users

Source: McKinsey Industry Studies

Auto Parts Example

in the U.S.
Manufacturer

51% Warehouse
distributor

Jobber buying groups

Jobber

Installer

Customer

10%

18%

Mass
merchandiser

21%

Repair
specialist

Primary channel
Secondary channel

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).