Lecture 19: Global Networks

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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


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