10.

1 Introduction
z About one-fifth of the output of U.S. firms
Chapter 10 is produced overseas.
z One-quarter of U.S. imports are between
foreign affiliates and U.S. parent
companies.
z Since the late 1980s, over half of U.S.
Global Logistics
companies increased the number of
and Risk
countries in which they operate.
Management

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. 10-2

International Supply Chain International Supply Chains

Management z International distribution systems
z Manufacturing still occurs domestically, but distribution and
z Dispersed over a larger geographical area typically some marketing take place overseas.
z International suppliers
z Offers many more opportunities than just
z Raw materials and components are furnished by foreign
the domestic supply chain suppliers
z Final assembly is performed domestically.
z Risk factors are also present z In some cases, the final product is then shipped to foreign
markets.
z Offshore manufacturing
z Product is typically sourced and manufactured in a single foreign
location
z Shipped back to domestic warehouses for sale and distribution
z Fully integrated global supply chain
z Products are supplied, manufactured, and distributed from
various facilities located throughout the world.

10-3 10-4

Forces toward Globalization Global Market Forces

z Global market forces. z Pressures created by foreign competitors, as
z Technological forces. well as the opportunities created by foreign
customers.
z Global cost forces.
z Presence of foreign competitors in home
z Political and economic forces. markets can affect their business significantly.
z Much of the demand growth available to
companies is in foreign and emerging markets.
z Increasing demand for products throughout the
world through the global proliferation of
information.

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1
 Global Market Forces
z Particular markets often serve to drive
technological advances in some areas.
z Companies forced to develop and
enhance leading-edge technologies and
products.
z Such products can be used to increase or
maintain market position in other areas or
regions where the markets are not as
competitive
10-7
Technological Forces
z Related to the products
z Various subcomponents and technologies
available in different regions and locations
z Successful firms need to use these resources
quickly and effectively.
z Locate research, design, and production
facilities close to these regions.
z Frequently collaborate, resulting in the location
of joint facilities close to one of the partners.
z Global location of research-and-development
facilities driven by two main reasons:
z As product cycles shrink, locate research facilities
close to manufacturing facilities.
z Specific technical expertise may be available in
certain areas or regions
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Global Cost Forces Political and Economic Forces

z Often dictate global location decisions z Exchange rate fluctuation
z Costs of cheaper unskilled labor more than z Regional trade agreements
offset by the increase in other costs associated
z Tariff system
with operating facilities in remote locations.
z In some cases cheaper labor is sufficient z Trade protection mechanisms
justification for overseas manufacturing. z More subtle regulations
z Other global cost forces have become more z Local content requirements
significant z Voluntary export restrictions
z Cheaper skilled labor is drawing an increasing
number of companies overseas. z Government procurement policies

10-9 10-10

10.2 Risk Management

Sources of Risks
z Outsourcing and offshoring imply that the supply
chain is geographically more diverse and hence
more exposed to various risks.
z Recent trends toward cost reduction, lean
manufacturing and just-in-time imply that in a
progressive supply chain, low inventory levels
are maintained.
z In the event of an unforeseen disaster, adherence to
this type of strategy could result in a shutdown of
production lines because of lack of raw material or
parts inventory. FIGURE 10-1: Risk sources and their characteristics

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2
Factors Impacting Exposure to Risks Managing the Unknown-
z Customer reactions Unknown
z Competitor reactions z Invest in redundancy
z Supplier reactions z Increase velocity in sensing and
z Government reactions responding
z Create an adaptive supply chain
community

10-13 10-14

Redundancy Decision Was Risky

z Respond to unforeseen events
z Careful analysis of supply chain trade-offs
z Example:
z CPG company with 40 facilities over the world
z Initial analysis for reduction of cost by $40M a
year
z shut down 17 of its existing manufacturing facilities
z leave 23 plants operating
z satisfy market demand all over the world.
z New design left no plant in North America or
Europe
z Long and variable supply lead times
z Higher inventory levels.
z Remaining manufacturing facilities in Asia and
Latin America fully utilized
z Any disruption of supply from these countries, due to
epidemics or geopolitical problems, would make it
impossible to satisfy many market areas.
z How can one design the supply chain taking into
account epidemics or geopolitical problems that
are difficult to quantify?
z Analyze the cost trade-offs

10-15 10-16

Trade-Offs Analysis of the Trade-Offs

z Closing 17 plants and leaving 23 open will
minimize supply chain costs.
z Total cost function is quite flat around the
optimal strategy.
z Increasing the number of open plants from
23 to 30 facilities
z increases total cost by less than $2.5M
z increases redundancy significantly.
FIGURE 10-2: Cost trade-offs in supply chain design

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3
 Sensing and Responding Sensing and Responding
Example
z Speed in sensing and responding can help
z Different responses of Nokia and Ericsson on a
the firm overcome unexpected supply fire at one of the supplier’s facility
problems z Supplier was Philips Semiconductors in Albuquerque,
z Failure to sense could lead to: NM
z Failure to respond to changes in the supply z Nokia:
chain z Changed product design to source components from
alternate suppliers
z Can force a company to exit a specific market
z For parts that could not be sourced from elsewhere,
worked with Philips to source it from their plants in
China and Netherlands
z All done in about five days

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Sensing and Responding Adaptability

Example
z The most difficult risk management
z Ericsson’s experience was quite different
method to implement effectively.
z Took 4 weeks for the news to reach upper
management z Requires all supply chain elements to
z Realized five weeks after the fire regarding the share the same culture, work towards the
severity of the situation.
z By that time, the alternative supply of chips was same objectives and benefit from financial
already taken by Nokia. gains.
z Devastating impact on Ericsson
z $400M in potential sales was lost z Need a community of supply chain
z Part of the loss was covered by insurance. partners that morph and reorganize to
z Led to component shortages
z Wrong product mix and marketing problems caused: better react to sudden crisis
z $1.68B loss to Ericsson Cell Phone Division in 2000
z Forced the company to exit the cell phone market

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Adaptability Recovery Effort by Toyota

Example
z In 1997, Aisin Seiki the sole supplier of 98% of
brake fluid proportioning valves (P-valves) used
by Toyota
z Inexpensive part (about $7 each) but important
in the assembly of any car.
z Saturday, February 1, 1997:Fire stopped Aisin’s
main factory in the industrial area of Kariya,
z Two weeks to restart the production
z Six months for complete recovery
z Toyota producing close to 15,500 vehicles per
day.
z JIT meant only 2-3 days of inventory supply
10-23
z Blueprints of valves were distributed among all Toyota’s
suppliers
z Engineers from Aisin and Toyota relocated to supplier’s
facilities
z Other manufacturers like Brother were also brought in
z Existing machinery adapted to build the valves according
to original specifications
z New machinery acquired in the spot market
z Within days, firms with little experience with P-valves
were manufacturing and delivering parts to Aisin
z Aisin assembled and inspected valves before shipment to
Toyota
z About 200 of Toyota’s suppliers were involved
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4
 Vehicle Production & P-Valves Outcome
Inventory z Accident initially cost:
z 7.8B Yen ($65M) to Aisin
z 160B Yen (or $1.3B) to Toyota
z Damage reduced to 30B Yen ($250M) with
extra shifts and overtime
z Toyota issued a $100M token of
appreciation to their providers as a gift for
their collaboration

FIGURE 10-3: Vehicle production and P-valve inventory levels

10-25 10-26

Single Sourcing and Adaptability Managing Global Risks

z Single sourcing is risky
Speculative Strategy
z Achieves economies of scale z A company bets on a single scenario
z High quality parts at a low cost
z Spectacular results if the scenario is realized
z Dismal ones, otherwise.
z JIT mode of operation builds a culture of:
z Example
z Working with low inventories
z Late 1970s and early 1980s
z Ability to identify and fix problem quickly
z Japanese automakers bet that exchange rate
z Entire supply chain was stopped once the fire benefits, rising productivity would offset higher
occurred labor costs
z Prompted every company in the chain to react z Had to build plants overseas later when this
to the challenge equation changed

10-27 10-28

Managing Global Risks Managing Global Risks

Hedge Strategy Flexible Strategy
z Losses in part of the supply chain will be z Allows a company to take advantage of different
scenarios
offset by gains in another part z Designed with multiple suppliers and excess
z Example: manufacturing capacity in different countries
z Multiple Volkswagen plants in different z Factories designed to be flexible
z Products can be moved at minimal cost from location
countries. to location
z Certain plants more profitable at times than z Factors to consider:
others z Is there enough variability in the system to justify the
use of flexible strategies?
z Move production between plants to be z Do the benefits of spreading production over various
successful overall. facilities justify the costs?
z Does the company have the appropriate coordination
and management mechanisms in place?
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5
 Approaches to Flexible Strategy Global Integration Implementation
z Production shifting
z Product development
z Flexible factories and excess capacity/suppliers
z Design products that can be modified easily for major
z Shift production from region to region markets
z Information sharing z Products can be easily manufactured in various facilities
z Larger presence in many regions and markets z May be possible to design a base product or products
increases availability of information that can be more easily adapted to several different
markets
z Can be used to anticipate market changes/find new
opportunities z An international design team may be helpful
z Global coordination z Purchasing
z Management teams should purchase important materials
z Multiple worldwide facilities allows greater market from many vendors around the world
leverage z Quality and delivery options from suppliers have to be
z Increased leverage limited by international compatible
laws/political pressures z Qualified team should compare pricing of various
z Political leverage suppliers
z Higher political leverage in overseas operations with z Sufficient suppliers required in different regions to ensure
global operations flexibility
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Global Integration Implementation 10.3 Issues in International Supply

z Production
z Excess capacity and plants in several regions are essential Chain Management
z Effective communications systems must be in place
z Centralized management is essential z International vs Regional Products
z Inter-factory communication needs to be established
z Centralized management should make each factory aware of z Local Autonomy vs Central Control
the system status.
z Demand management z Miscellaneous Dangers
z Setting marketing and sales plans based on projected demand
and available product
z Has to have at least some centralized component.
z Sensitive, market-based information best supplied by analysts
in each region.
z Communication is critical
z Order fulfillment
z Centralized system
z Regional customers must be able to receive deliveries from the
global supply chain with the same efficiency as they do from
local or regionally based supply chains
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International vs Regional Products International vs Regional Products

z Region-specific products z Global Products
z Some products have to be designed and
manufactured specifically for certain regions.
z Example: Automobile designs
z Honda Accord has two basic body styles
z a smaller body style tailored to European and Japanese
tastes
z a larger body style catering to American tastes
z Nissan designates lead-country status to every model
z Pathfinder and Maxima had U.S. as the lead-country
z Truly global, i.e. no modification necessary for global
sales.
z Coca-Cola
z Levi’s jeans
z Luxury brands such as Coach and Gucci
z Some depend on very specific regional manufacturing
and bottling facilities and distribution networks,
z Others are essentially distributed and sold in the
same way throughout the world

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6
Local Autonomy vs. Central Control
z Centralized control can be important
z However, in many cases it makes sense to
allow local autonomy in the supply chain
z Important to temper expectations for
regional business depending on the
characteristics of the region involved
z However, temptation to follow local
conventional wisdom may cause some
opportunities of a global supply chain to be
missed
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Miscellaneous Dangers
z Many potential dangers that firms must face as
they expand their supply chains globally
z Exchange rate fluctuations
z Administer offshore facilities, especially in less-
developed countries.
z Promise of cheap labor masking threat of reduced
productivity
z Expensive training may be required but it may not be
enough
z Local collaboration in the global supply chain.
Collaborators can ultimately become
competitors.
z Hitachi, which used to manufacture under license
from Motorola, now makes its own microprocessors.
z Toshiba, which manufactured copiers for 3M, is now a
major supplier of copiers under the Toshiba brand
name.
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Miscellaneous Dangers 10.4 Regional Differences in

z Dangers with foreign governments. Logistics
z Access to China’s huge markets causing First World Emerging Third World

many companies are handing over critical Infrastructure Highly developed Under development Insufficient to support
manufacturing and engineering expertise to advanced logistics

the Chinese government or to Chinese

partners.
Supplier operating High Variable Typically not
z When these companies become competitors standards considered

z Would overseas firms be able to compete

successfully in the Chinese market? Information Generally available Support system not Not available
system availability available
z Would they lose this opportunity even as Chinese
companies begin to compete on the world stage?
Human resources Available Available with some Often difficult to find
searching

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Cultural Differences Performance Expectation and

Evaluation
z Language
z Operating standards in First World nations
z Expressions, gestures, and context uniformly high
z Beliefs, or specific values about something z Operating standards vary greatly in emerging
z Can differ widely from culture to culture nations
z Customs z Research and negotiations required
z Vary greatly from country to country z Governments usually play a large role
z Important for the businessperson to adhere to z In the Third World traditional performance
local customs to avoid offending anyone. measures have no meaning
z Example: the practice of gift giving varies greatly z Shortages are common
z Customer service measures used in the West are
irrelevant A firm has little control of the timing and
availability of inventory
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7
 SUMMARY
z Types of international supply chains
z Various forces compelling companies to develop
international supply chains
z Both advantages and risks are inherent in global
supply chains
z Unknown-unknown risks to known-unknown risks
z Variety of strategies to deal with the risks
z Issues in global supply chain management.
z Concepts of:
z international and regional products
z centralized versus decentralized control
z regional logistics differences

10-43