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. 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. 10-5 10-6 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 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 10-11 10-12 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 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 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 10-17 10-18 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 10-19 10-20 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 10-21 10-22 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 10-23 10-24 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 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 Factories designed to be flexible z Multiple Volkswagen plants in different z Products can be moved at minimal cost from location countries.