Supply Chain Globalization

Unit 10
What is Global Supply Chain?

• A global supply chain is made up of the interrelated organizations, resources,

and processes that create and deliver products and services to end customers.
In the instance of global supply chains, it is extended around the world

• Any company that uses parts and services from another factory overseas faces
issues with global supply chain management
Rational and Key Strategies

• Manufacturing Strategy:
• How many plants & where should each be located?
• Products made & process to be used at each plant?
• What part of the world should each plant serve?

• Supply Base Design / Vendor Consolidation:

• How to select supplier for parts in same product group?
• How many suppliers is best?
• Which suppliers should send which parts to which plants?
• Can I source more than one part at a time from a supplier?
• Impact of Duty / Drawback, Taxes, Local Content :
• If the duty rates come down according to GATT/WTO, how should I change
my supply chain design?
• What is the best use of the tax havens?
• How much of local & global sourcing is possible?

• Outsourcing:
• What parts to produce "in-house" and what parts to outsource?
• 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?

• 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?
 Types of International
Sourcing Strategy

S ourcing

Intra-Firm S ourcing Outsourcing

D om estic Interna tional Dom e stic Interna tiona l

D om estic In-House S ourcing Offshore S ubsidiary S ourcing D om estic Purchasing Arra ngem ent Offshore Outsourc ing

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

Source: Kotabe (2000)

Why supply chain globalization ??

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
GLOBAL COST FACTORS
• Availability of skilled/unskilled labor at lower cost
• Integrated supplier infrastructure (as suppliers become more involved in design)
• Capital intensive facilities like tax breaks, price breaks etc.

POLITICAL AND ECONOMIC FACTORS

• Trade protection mechanisms:
• Tariffs, Quotas, Voluntary export restrictions, Local content requirements, Environmental
regulations, Government procurement policies (discount for local)
• Exchange rate fluctuations and operating flexibility
Challenges for supply chain globalization

• General Challenges:
• Cultural challenges
• Economic challenges
• Political challenges
• Organizational challenges

• Specific Challenges
• Supply challenges
• Manufacturing challenges
• Distribution challenges
 Advantages

• The main reason for any business to exist is to increase sales and profits.
• When you go global, then the likelihood of increasing sales goes up as you open up
your market to consumers all over the world.
• This allows businesses to reduce dependence on their local and national
economies.
• With the number of Internet users on the rise, global businesses are able to do
business at all hours of the day with consumers from every point on the globe.
• The potential for expansion for businesses increase as they enter into more
markets.
• Lower supply chain costs , reduced cycle time & Enhance speed and efficiency
• Competitive advantage
• Untapped markets
 Disadvantages
• Heavy investment of time, money, and resources needed to implement and overlook the
supply chain.

• Inefficient and undersized transportation and distribution systems

• Market instability

• Integrating the supply chain and choosing the correct suppliers is much more difficult
than one can imagine.
• Not only do companies have to strongly consider price and quality, but they also have to
make sure that all the organizations are willing to cooperate to benefit the group.
• Managerial styles, objectives, and goals must have a strategic fit between all companies
involved and power must be evenly distributed throughout the supply chain. 
• When entering the global market, businesses need to be aware that the gains
may not be seen in the short term.

• It may be many years before they start reaping the rewards of their efforts.

• Hire additional staff to help launch their companies in the global markets they
expand into.

• Companies usually have to modify their products and packaging to suit the local
culture, preferences and language of the new market.

• Travel expenses are sure to increase for the administrative staff, as (travel all
over the world to oversee their business outlets)
Global Supply Chain

Suppliers Corporation Customers

Order Order
processin placement
g

transportatio
transp Physical n
ortatio Materials distribution
n management Physical
distribution
storag Inventory
e managemen Storage Inventory
t management

Forward and reverse flows of information, products and funds

 Global Supply Chain System Components

 International distribution systems :

• Manufacturing(domestically), Distribution (overseas)
  International suppliers :
• Raw materials and Components(foreign suppliers), Final assembly/
Manufacturing(domestically)
 Offshore manufacturing :
• Product is sourced & manufactured in a single foreign location,
• Shipped back to domestic warehouses for sale and distribution.
 Fully integrated global supply chain :
• Products are supplied, manufactured and distributed from factories located throughout
the world
• In a truly global supply chain, it may appear that the supply chain was designed
without regard to national boundaries.
• The true value of a global supply chain is realized by taking advantage of these
national boundaries
 Potential Hidden Costs

1. Cost of an outdated outsourcing strategy: For example, if 100 percent of the

design and manufacturing for a product is located in China, it would be difficult to
serve an emerging or fast-growing market in Brazil or Los Angeles.
2. Cost of management and coordination of contractors: This includes the cost of
employees' time and travel expenses incurred when they visit suppliers, plus any
other identifiable lost opportunities, such as lost sales, missed market opportunities,
warranty and returns, and loss of customer confidence. The cost of these activities
can quickly add up to millions of dollars.
3. Cost of subpar inventory performance: Outsourcing manufacturing reduces
flexibility in design as well as the ability to respond to schedule changes. This usually
translates into more inventory in the global pipeline, more mismatches between
supply and demand, more shrinkage from variances (count errors, theft, weak
disciplines, and so forth), and more excess and obsolete inventory
4. Cost of unplanned logistics activities and premium freight: Outsourcing increases the
distance and the number of touch points between order entry and order fulfillment. Poor
planning and oversight in such a highly complex demand and supply chain leads to
unnecessary expenses.
5. Cost of inappropriate sales and operations planning (S&OP): There are significant costs
associated with sales and operations planning in an outsourced environment, where
additional complexity increases both risks and costs. In addition, having to manage
multiple demand streams among a network of contractors has added complexity.
6. Cost of poor or substandard quality
7. Cost of warranty, returns, and allowances: Warranties require product repairs or
replacements at no cost to the customer, customer returns equate to lost sales, and
allowances are discounts for blemished but fully functional products.
8. Cost of supplier management: There are numerous costs associated with selecting,
developing, and maintaining a supplier and ensuring that it meets expected
performance levels in areas such as process capability, quality and reliability,
capacity, flexibility in regard to changes, turnover and retraining, and so forth.
9. Cost of cash flow: Because outsourcing lengthens and adds complexity and risk to the
supply chain, in many cases it also lengthens the cash-to-cash cycles, which are
proportional to the number of trading partners in the supply chain. The need to pay
outside contractors can also make revenues and cash flow disappear.
10.Cost of unplanned and unforeseen risks: Organizations that outsource production
tend to overvalue the labor savings they expect to gain from outsourcing and
undervalue all the other potential costs and risks. These include such underhanded
practices as intellectual property theft, and product and component piracy and theft
that may be acceptable or are rarely (if ever) prosecuted in some countries.
Total Cost Strategy

• Integrating global sourcing into the overall business strategy to

obtain a low-cost advantage.
• Contributed by: Offshore Outsourcing
Various facilities under total cost strategy
1. Off-Shore facility
1. Primary focus is on supplying products to foreign markets. More focus on
supply and production is minor focus
2. Minor exports focused

2. Source facility
1. Source of production in the host country. More focused on global
production.
2. Motive is to reduce import export and instead produce the products itself
in the host country with a proper location
3. Server facility
1. Partenered with a local producer to serve the local market in the best
possible way and
4. Contributor facility
5. Outpost facility
6. Lead facility