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
 It’s 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
Enfield Basildon
Belfast Instruments, fuel Radiators, water
Carburetors and and water gauges, pump assembly,
distributors plugs engine components

Treforest Genk
Spark plug Body panels,
insulators road wheels

Leamington Wülfrath
Foundry production Transmission
of engine parts, engine
components components

Dagenham Cologne
Final assembly Die-cast transaxle
casings, gear and
engine components
Bordeaux
Transmissions
Valencia Saarlouis
Final assembly Final assembly
 Types of International
Sourcing Strategy
S o u r c i n g

I n t r a - F i r m S o u r c i n g O u t s o u r c i n g

D o m e s t i c I n t e r n a t i o n a l D o m e s t i c I n t e r n a t i o n a l

D o m e s t i c I n - H o u s O e f fS s oh uo r r ce i nS g u b s i d iD a or ym S e os tu i cr c Pi n u g r c h a s i n gO Af f sr r h a o n r g e e Om u e t ns ot

A company procures A company procures A company buys major A company buys major
major components in- major components from components from components from
house by procuring them its foreign subsidiary independent suppliers at independent suppliers
domestically home 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

Activity Links
Resource Ties
 National
Competitive
Advantage
Firm Strategy,
Structure, and
Factor
Endowments
A nation’s 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.
Rivalry
The nature of
Demand home demand for
Conditions the industry’s
product or service.
Related and The presence or absence in a
Supporting nation of supplier industries
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.
Porter’s Value Chain
Firm Infrastructure
Support Activities

Human Resource Management

M
Technology Development

ar
gi
n
PROCUREMENT

Information Technology
OUTBOUND LOGISTICS
INBOUND LOGISTICS

Marketing & Sales

Operations

Service

n
gi
ar
Primary Activities M
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 company’s global value chain.

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

company’s 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
company’s 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 Independent Repair parts
affiliated parts makers parts makers makers

Automobile makers Wholesalers Special agents

Dealers Cooperative 2nd-level

sales companies wholesalers

Sub-dealers Retailers

Gasoline
Large users stations
Automobiles
repair shops

End users

Source: McKinsey Industry Studies

 Auto Parts Example
in the U.S.
Manufac- 51% Warehouse Jobber buy-
Jobber Installer Customer
turer distributor ing groups

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 University’s 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).