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. Global Logistics z Since the late 1980s, over half of U.S. and Risk companies increased the number of 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.

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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 Technological Forces z Particular markets often serve to drive z Related to the products z Various subcomponents and technologies technological advances in some areas. available in different regions and locations z Companies forced to develop and z Successful firms need to use these resources enhance leading-edge technologies and quickly and effectively. z Locate research, design, and production products. facilities close to these regions. z Such products can be used to increase or z Frequently collaborate, resulting in the location maintain market position in other areas or of joint facilities close to one of the partners. z Global location of research-and-development regions where the markets are not as facilities driven by two main reasons: competitive z As product cycles shrink, locate research facilities close to manufacturing facilities. z Specific technical expertise may be available in certain areas or regions 10-7 10-8

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 with operating facilities in remote locations. z Tariff system 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

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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

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

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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 z $400M in potential sales was lost 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 Blueprints of valves were distributed among all Toyota’s suppliers z In 1997, Aisin Seiki the sole supplier of 98% of brake fluid proportioning valves (P-valves) used z Engineers from Aisin and Toyota relocated to supplier’s facilities by Toyota z Other manufacturers like Brother were also brought in z Inexpensive part (about $7 each) but important z Existing machinery adapted to build the valves according in the assembly of any car. to original specifications z Saturday, February 1, 1997:Fire stopped Aisin’s z New machinery acquired in the spot market main factory in the industrial area of Kariya, z Within days, firms with little experience with P-valves z Two weeks to restart the production were manufacturing and delivering parts to Aisin z Aisin assembled and inspected valves before shipment to z Six months for complete recovery Toyota z Toyota producing close to 15,500 vehicles per z About 200 of Toyota’s suppliers were involved day. z JIT meant only 2-3 days of inventory supply

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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 Speculative Strategy z Single sourcing is risky z Achieves economies of scale z A company bets on a single scenario z z High quality parts at a low cost 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

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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 Factories designed to be flexible z Multiple Volkswagen plants in different 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 Purchasing z Global coordination 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 10-31 10-32

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

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6 Local Autonomy vs. Central Control Miscellaneous Dangers z Many potential dangers that firms must face as z Centralized control can be important they expand their supply chains globally z Exchange rate fluctuations z However, in many cases it makes sense to z Administer offshore facilities, especially in less- allow local autonomy in the supply chain developed countries. z Important to temper expectations for z Promise of cheap labor masking threat of reduced regional business depending on the productivity z Expensive training may be required but it may not be characteristics of the region involved enough z However, temptation to follow local z Local collaboration in the global supply chain. conventional wisdom may cause some Collaborators can ultimately become opportunities of a global supply chain to be competitors. z Hitachi, which used to manufacture under license missed 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. 10-37 10-38

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 10-41 10-42

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

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