Lecture 19: Global Networks
What are the two reasons offshoring fails?
(1) Focusing exclusively on unit cost rather than total cost (2) Ignoring critical risk factors
Conclusion of Global Supply Chain Network Design
(1) Identify factors that need to be included in total cost when making global sourcing decisions (2) Define uncertainties that are particularly relevant when designing global supply chains (3) Explain different strategies that may be used to mitigate risk in global supply chains
What are three important questions in designing global supply chain networks?
(1) What are the factors that need to be included in total cost when making global decisions? (2) What are the uncertainties that are particularly relevant when designing global supply chains? (3) What are some of the strategies that may be used to mitigate risk in global supply chains?
Percentage of Supply Chains Affected by Volatility of Fuel Prices
37%
Percentage of Supply Chains Affected by Performance of Supply Chain Partners
38%
Advantage of Chained Network with One Long Chain
a chained network with one long chain is very effective when dealing with demand fluctuations
Which type of network is ALMOST as effective as a fully flexible network?
chained networks
How can we tailor risk mitigation strategies during network design?
consider flexibility vs. cost-efficiency (a little bit of flexibility goes a long way)
Taxes and Tariffs in Offshoring
could go either way
Raw Material Costs in Offshoring
could go either way depending on raw material sourcing
How can we mitigate risk in our network design?
extreme option is to incorporate full flexibility
Risk Drivers of Delays
high capacity utilization at supply source; inflexibility of supply source; poor quality or yield at supply source
Minimum Order Quantity in Offshoring
higher (economies of scale)
Freight Costs in Offshoring
higher (longer distance)
Globalization Example
in 2012, overseas revenue represented 86% of sales for Samsung
Risk Drivers of Forecast Risk
inaccurate forecasts due to long lead times, seasonality, product variety, short life cycles, small customer base, information distortion
Inventories in Offshoring
increase
Stockouts in Offshoring
increase
Working Capital in Offshoring
increase
Product Returns in Offshoring
increased returns likely
Major Benefits from Offshoring
low labor and fixed costs along with possible tax benefits
In what cases would offshoring be most attractive?
most attractive for products with high labor content, large production volume, low variety, and low transportation costs
Risk Drivers of Receivables Risk
number of customers; financial strength of customers
What are the opportunities of globalization accompanied by?
opportunities are accompanied by significant additional risk — in a survey, 50% of executives believed their supply chain risk had increased as a result of globalization
What is the difference between offshoring and outsourcing?
outsourcing is the use of a third party to perform a specific service/function (i.e. assembly, transportation, retailing)
Supply Chain Visibility in Offshoring
poorer
On-Time Delivery/Lead Time Uncertainty in Offshoring
poorer on-time delivery and increased uncertainty resulting in higher inventory and lower product availability
What is the difference between success and failure in supply chains?
the ability to incorporate suitable risk mitigation into supply chain design
What is the goal of global network design?
the goal is to locate the facilities and allocate capacities to minimize cost, while meeting global demand
What is offshoring?
the practice of basing some of a company's processes or services overseas, so as to take advantage of lower costs
Risk Drivers of Intellectual Property Risk
vertical integration of supply chain; global outsourcing and markets
Advantage of Dedicated Networks
very cost-effective
Disadvantage of Chained Network with Multiple Short Chains
can be costly
Dedicated Network
dedicating a plant to each product (each plant fulfills one market) — this is risk because if anything happens to any of the plants, the supply of the dedicated product will be disrupted
What are the added costs of global supply chain networks?
duties
Do duties apply to domestic sourcing?
duties do NOT apply to domestic sourcing
Fully Flexible Networks
each plant can produce ALL products
Chained Network with One Long Chain
each product is produced by two plants, but has longer chain between plants
Chained Network with Multiple (Two) Short Chains
each product is produced by two plants, closer together (small chains) — i.e. hog farms
Advantage of Chained Network with Multiple Short Chains
effective when dealing with disruption risks because small chains can contain the impact of disruption
Risk Drivers of Procurement Risk
exchange-rate risk; price of inputs; industry-wide capacity utilization
What strategy should be used if there is low risk?
focus on cost-efficiency (low variability)
What strategy should be used if there is high risk
focus on flexibility (pooling)
In which cases would offshoring NOT be an attractive option?
for products with low labor content, low production volume, high variety, and high transportation costs
What plays a significant role in mitigating supply chain risk?
good network design
Order Communication in Offshoring
harder
Advantage of Fully Flexible Networks
if one plant is not operational, other plants can fulfill the demand of that product (most safe)
Risk Drivers of Systems Risk
information infrastructure breakdown
Unit Cost in Offshoring
labor/fixed costs decrease; quality may suffer
Supply Lead Time in Offshoring
lead time increase results in poorer forecasts and higher inventories
Disadvantages of Chained Network with One Long Chain
less effective when dealing with supply disruption and it may be costly to build a long chain
Major Disadvantages from Offshoring
most of the other factors discussed (risk, lead times, returns, high inventory, weak visibility and communication, etc.)
Risk Drivers of Disruptions
natural disaster, war, terrorism; labor disputes; supplier bankruptcy
What does globalization offer?
offers opportunities to increase revenues and decrease costs
What does offshoring increase?
offshoring increases the length and duration of information, product, and cash flows; thus, the cost of managing the supply chain when offshoring can be significantly higher than anticipated
Risk Factor with the Highest Percentage of Supply Chains Affected
performance of supply chain partners (38%)
How should we evaluate whether we should offshore?
quantify the benefits of offshoring production along with the reasons
Intellectual Property Risk Example
selling of information/designs to competitors — keep designs in-house
What are the major risks in supply chains?
supply disruptions, supply delays, demand fluctuations, price fluctuations, exchange rate fluctuations, systems risk, forecast risk, intellectual property risk, procurement risk, and receivables risk
What are duties?
taxes on imported goods
Increase Inventory Strategies
- Decentralize inventory of predictable, lower value products - Centralize inventory of less predictable, higher value products
What can a firm do in terms of network design when selling multiple products?
- Dedicated network - Fully flexible network - Chained network
Increase Flexibility Strategies
- Favor cost over flexibility for predictable, high-volume products - Favor flexibility for unpredictable, low-volume products - Centralize flexibility in a few locations if it is expensive
Increase Responsiveness Strategies
- Favor cost over responsiveness for commodity products - Favor responsiveness over cost for short life cycle products
Increase Capacity Strategies
- Focus on low-cost, decentralized capacity for predictable demand - Build centralized capacity for unpredictable demand - Increase decentralization as cost of capacity drops
Types of Risk Mitigation Strategies
- Increase Capacity - Increase Responsiveness - Increase Inventory - Increase Flexibility - Pool or Aggregate Demand
Why does globalization offer significant cost reductions in apparel and consumer electronics?
- Labor intensive (apparel) - Close to suppliers - Transportation (light-weight and durable) - Tax incentives in 1990s - Market (large global demand) - Economies of scale (electronics)
Examples of Risks in Supply Chains
- Natural disasters - Shortage of skilled resources - Geopolitical uncertainty - Terrorist infiltration of cargo - Volatility of fuel prices - Currency fluctuation - Post operations/customs delays - Customer/consumer preference shifts - Performance of supply chain partners - Logistics capacity/complexity - Forecasting/planning accuracy - Supplier planning/ communication issues - Inflexible supply chain technology
What dimensions should be considered when evaluating the total cost from offshoring?
- Order Communication - Supply Chain Visibility - Raw Material Costs - Unit Cost - Freight Costs - Taxes and Tariffs - Supply Lead Time - On-Time Delivery/Lead Time Uncertainty - Minimum Order Quantity - Product Returns - Inventories - Working Capital - Stockouts
Example of Good Network Design: One Disaster, Two Different Journeys
- Royal Phillips Electronics was one of the suppliers of both Nokia and Ericsson for semiconductor chips - In March 2000, a plant owned by Royal Philips in New Mexico caught on fire - Nokia adjusted by using other supply plants - Ericsson had no backup source: estimated lost revenues of $400 million
Percentage of Supply Chains Affected by Terrorist Infiltration of Cargo
13%
Percentage of Supply Chains Affected by Geopolitical Uncertainty
20%
Percentage of Supply Chains Affected by Inflexible Supply Chain Technology
21%
Percentage of Supply Chains Affected by Customer/Consumer Preference Shifts
23%
Percentage of Supply Chains Affected by Post Operations/Custom Delays
23%
Percentage of Supply Chains Affected by Shortage of Skilled Resources
24%
Percentage of Supply Chains Affected by Supplier Planning/Communication Issues
27%
Percentage of Supply Chains Affected by Currency Fluctuation
29%
Percentage of Supply Chains Affected by Forecasting/Planning Accuracy
30%
Percentage of Supply Chains Affected by Logistics Capacity/Complexity
33%
Percentage of Supply Chains Affected by Natural Disasters
35%
Pool or Aggregate Demand Strategies
Increase aggregation as unpredictability grows
Can one strategy fit all?
NO! consider supply disruption and demand risk (TAILOR)
Disadvantage of Dedicated Networks
SUPER RISKY (one plant disrupted, entire supply of product is disrupted)
Examples of Risk Influencing Supply Chains
Two suppliers for flu vaccine: Chiron and Aventis Pasteur - In 2004, severe shortage due to contamination - FDA commissioner: "today we are announcing that none of the flu vaccine made by Chiron for the US market is safe" - CDC recommended healthy people forego flu shots! Dole sources bananas from Latin America: - As a result of a hurricane, Dole's banana production decreased by 25%
What is the only constant in supply chains?
UNCERTAINTY
Disadvantage of Fully Flexible Networks
VERY costly to operate
What is outsourcing?
a supply chain function being performed by a third party (NOT the same as offshoring)
In which industries does globalization offer significant cost reduction?
apparel and electronics
Duties Equation
applied on each unit based on: Fixed cost per unit of capacity + Variable production cost + Transportation cost
Chained Networks
- Chained network with one long chain - Chained network with multiple short chains