M:4.

0 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

Dagenham

Cologne
Die-cast transaxle
casings, gear and
engine components

Final assembly

Bordeaux
Transmissions

Valencia

Saarlouis

Final assembly

Final assembly

Types of International
Sourcing Strategy
Sourcing

Intra-Firm Sourcing

Outsourcing

Domestic

International

Domestic

International

Domestic In-House Sourcing

Offshore Subsidiary Sourcing

Domestic Purchasing Arrangement

Offshore Outsourcing

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

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

The conditions in the nation

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

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-todelivery system, value is added to the product or service.

Porters Value Chain

Firm Infrastructure

Support Activities

Human Resource Management

Technology Development

PROCUREMENT
Information Technology

Service

Marketing & Sales

OUTBOUND LOGISTICS

Operations

INBOUND LOGISTICS

Primary Activities

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.

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.

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

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?

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?

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

Auto Parts Example

in the U.S.
Manufacturer

51% Warehouse
distributor

Jobber buying groups

Jobber

Installer

10%

18%

Mass
merchandiser

21%

Repair
specialist

Primary channel
Secondary channel

Customer

Global SCM Example 1:

Large Computer Company
Goals

Reduce cost

Improve ROA
Simplify the worldwide

supply chain

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

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

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).