Developing a global supply chain

Baldiwala, Quraish

Introduction

“Supply chain management is the last unexplored frontier of management”-Peter Drucker.

The end of the last millennium and the beginning of the new millennium has seen supply chain management emerge as a new management paradigm and a source of competitive advantage. This is especially true in a global marketplace where “getting the right goods at the right place at the right time and at the right cost” is imperative. It is essential for firms to develop an understanding of supply chain management issues, opportunities and problems in a global context. It is important to keep in mind the various cultural and distribution nuances existing around the world, together with the macro economic and countryspecific factors while designing a global supply chain and when developing global solutions. This article begins by defining global supply chain management and the drivers of globalization. These two concepts form the basis of understanding the reason behind envisaging the need for an efficient global supply chain. By illustrating the need for a global supply chain, this article then highlights how the concept of a global supply chain can be linked to the value chain concept through the three basic functions of supply chain management (i.e. managing the flow of information, material and finance). The article then dwells into the four steps in the creation of a global supply chain: the strategy for a global supply chain, designing a global supply chain, enabling a global supply chain, and maintaining and monitoring a global supply chain. The article concludes by discussing some of the potential risks resulting from an inefficient or badly designed global supply chain. The purpose of this article is to provide a simple roadmap for companies desiring to create a global supply chain by providing guidelines, methodologies and templates for design, implementation and maintenance.

What is global supply chain management?

According to the Council of Logistics Management, global supply chain management is the process of planning, implementing and controlling the efficient, effective flow and storage of goods, services and related information from the point of origin to the point of consumption in order to meet customers’ requirements on a worldwide scale. In other words, global supply chain management is the process of understanding and integrating the existing business activities along the value chain, with a view to improving them, while extracting efficiencies from different functional and geographic areas in order to create value for the end customer.

Drivers of globalization

In order to understand the importance of global supply chains, we need to take a step back and evaluate some of the drivers of globalization and their effect on the enabling of global supply chains. Some of the drivers of globalization are:

* Decreasing tariffs: The emergence of trade blocs, liberalization of economies and organizations such as the WTO (World Trade Organization) and GATT (General Agreement on Tariffs and Trade) have all contributed to decreasing tariffs worldwide. An example is India, which until 1991 had a closed economy and high tariff barriers. But with the liberalization of the economy, the hitherto closed Indian market was opened to foreign companies, and the existing tariffs were either drastically cut or eliminated.

* Transportation efficiencies: In the 194 century it took two months to cross the Atlantic. Today goods from Taiwan can reach Chicago via the Pacific and overland within 30 days. The modernization of transportation methods, the emergence of air travel as a feasible method of transportation and the plethora of options available to transport goods has greatly decreased costs and reduced lead-times.

* Communication and information technology: The proliferation of the Internet and the modernization of worldwide communication through the use of telephones, faxes and telexes has reduced the time required to communicate information across the globe. The conveying of real time information, the use of EDI (Electronic Data Interchange) and other information technology has increased the visibility across the supply chain and facilitates the management of information.

* Globalization of products and services: According to Levitt,’ there are global market segments that are receptive to similar and branded goods and services like Nike and Levi’s. In order to grow, companies will have to globalize in order to achieve economies of scale, efficiencies of operation and reduce the risk incurred by dependence on certain geographic markets.

The importance of a global supply chain

The importance of an efficient global supply chain is highlighted by the following reasons:

* Growth in outsourcing: As mentioned earlier, companies are taking advantage of location-specific advantages such as skilled labor, low wages, lower cost of raw materials, and lower overheads to move production and sourcing overseas. A case in point is the fact that the majority of apparel in the US. is manufactured in the Far East, and this has decimated the textile industry in the United States. Companies look to lower their fixed assets by outsourcing functions to competent vendors either domestically or overseas. Cisco is an example of a company that boasted of having low inventory in the system and outsourcing all aspects of manufacturing. An efficient supply chain is required to ensure the timely and cost-effective movement of goods and services, together with the management of the flow of information that would help control a dispersed supplier and customer base.

* Global competition: Competition is no longer confined to local domestic companies. Low-cost imports, the advent of foreign companies and the modernization of existing companies have served to blur the competitive landscape. Companies need to operate globally in order to reap the benefits of location and cost advantages, enter untapped markets, reduce the dependence on saturated markets in developed countries and offset global competitors. According to Michael Porter,2 competitive advantage can be achieved either through cost advantages or differentiation strategies. An efficient global supply chain can offer companies cost advantages through efficient operations and can serve as a source of differentiation by assuring timely delivery and customer service.

* Effects of corporate strategy: The modern day corporate strategy is focused on strategic alliances, partnerships, coordination among channel members, co-adaptation among multi business units and an integration of systems through information technology, where many of these business entities could be global. In such an environment, the presence of an efficient global supply chain can augment the benefits of a good corporate strategy while leveraging the core competencies of a global corporation.

1. Strategy for a global supply chain

In order to begin creating a global supply chain, a company needs to first have a clear and coherent strategy for the same. This strategy should encompass the following factors:

* Developing structure: In developing the structure, the various functional activities performed need to be highlighted. These activities are significant in scale and scope for the firm to be identified with and are separated on the basis of characteristics such as delivery time, service characteristics, labor intensity and percentage of outsourcing. The location of plants and selling outlets in proximity to suppliers and customers respectively form a vital part of strategy, depending on whether a pull or push strategy, just-in-time service, quick response manufacturing or other characteristics form the cornerstone of the company’s policy.

* Developing a process: Managing the process alludes to managing the sequence of operations through the supply chain. These include production planning, scheduling, inventory control and transportation, all of which have a bearing on the chain or preceding/subsequent processes. Optimizing the entire process is far more important than optimizing each link. That may lead to a sub-optimal process.

* Development of organizational networks: In order to determine the organizational network, companies need to identify their core competencies and look to outsource the nonvalue added tasks. This outsourcing leads to the search for outside parties that are capable of meeting these functional needs at favorable terms. Another important facet of the organizational network is the prevalence of information technology. Companies would be well advised to invest heavily in information technology that helps manage the business activities along the supply chain and with its external partners.

* Partnerships and alliances: Global companies invariably have an umbrella of partnerships and alliances that stretch across the globe and encompass various business activities. It is important for these associations to be mutually beneficial and compatible in terms of work ethos and objectives.

2. Design of a global supply chain

The factors relating to the design of the global supply chain relate to both upstream and downstream activities and are as follows:

* Strategic procurement: It is essential for any corporation to have strategic procurement, which could in turn be translated into competent suppliers. This is true in an age when corporations are looking to outsource production and assembly, and procure material globally by taking advantage of cost and locationspecific advantages. While designing a global supply chain, it is essential to have suppliers that are capable of delivering quality products and services, at favorable terms, and are capable of responding to market trends and technological changes. Compatibility of information systems, cooperation and collaboration, a mutually beneficial partnership founded on trust, and correlation of goals and objectives are paramount because supplier inadequacies in terms of service or products could be costly.

* Location of manufacturing plants and distribution centers: Facility location is important to minimize transportation costs and increase responsiveness. The basic rule of supply chain management is to be close to either the suppliers or the market. This is important when a company has a global supplier and customer base. Facility location can be achieved through a variety of methods, such as Center of Gravity, which is the easiest method and lends itself well to a variety of parameters. Software tools such as simulations based on Operations Research or commercial software packages from vendors such as Logic Tools can help a company determine the optimal location for facilities based on various parameters such as volume, demand patterns, location of suppliers and customers, and transportation methods.

* Logistics: Efficient logistics can prove to be very beneficial to the company in terms of reduced costs and better service, which translates into a competitive advantage. Companies tend to outsource the logistics function to competent forwarders or 3PLs (3rd Party Logistics) that have a global network or regional specialization. Carriers or even 3PLs are selected on the basis of expertise, market and geographic presence, reputation, networks, a multitude of services offered, excellent information systems, ability to provide customization, warehouse and inventory management capability, miscellaneous services such as customs clearance, well-developed infrastructure, a variety of transportation methods, well-qualified personnel and financial clout. Formal contracts that stipulate performance metrics and other service functionalities help avoid confusion and ambiguity regarding goals, expectations and objectives of both partners. The industry has seen a variety of successful alliances and even some high profile failures in 3PL and customer partnerships. Examples of successful and failed alliances include Daimler-Chrysler and Caterpillar Logistics Services, and Laura Ashley and Federal Express respectively.

* Customer service: The company’s corporate strategy stipulates the service level, delivery periods and other customer service features that serve to differentiate the company’s products and services from their competitors. For example, Grainger offers next-day delivery to customers for a premium price. Too often unrealistic goals strain the supply chain when appropriate measures such as adjusting the operating capacity, improving the distribution efforts or stocking inventory are not carried out. Any supply chain evaluation should begin from the customer and then be worked backward to determine whether or not the measures in place are capable of meeting the customer service goals set by top management.

3. Enabling a global supply chain

It is important to have certain enabling measures in place to facilitate the creation of a global supply chain and satisfy the three main criteria of managing flows of capital, information and material. Some of these are as follows:

* Financial and accounting measures: To facilitate the management of capital, appropriate and uniform accounting methods and financial measures should be incorporated throughout the company. Different countries follow different accounting methods; and it has been found that subsidiaries of the same company, be it in the same country or different countries, sometimes follow different accounting measures. A uniform accounting measurement and financial documentation helps increase both visibility and control, while enhancing accountability and responsibility.

* Internet as an enabler: The proliferation of the Internet has made communication and managing the information flow very easy. The low cost of information transmission, easy accessibility, and the prevalence of both open system and closed architecture systems enables companies to communicate easily with “real time” information across the supply chain. The Internet is a way for companies to reduce the risk of incompatible systems. The Internet is a “disruptive technology” that is also a new medium for promotion, procurement, advertising, distribution, order taking and information exchange. The recent e-procurement initiative by automobile companies such as Ford and Nissan is apparent in their electronic venture called COVISINT that seeks to bring together buyers and sellers with a view to lower transaction costs. Web-enabled solutions and software packages from vendors like Ariba and i2 are revolutionizing the way business is conducted across borders and organizations. Dell and Cisco are prime examples of companies that have used the Internet to generate sales, create demand and maintain a distribution channel, which in turn augments their “direct distribution” and “zero inventory and complete outsourcing” business models.

* Enterprise planning applications: To manage the flow of goods across the value and supply chains, companies can use a variety of application software provided by companies such as SAP, Baan, i2 and Manugistics that help in enterprise resource planning and allocation of resources, while increasing control and visibility across the supply chain. These measures serve to iron out inefficiencies in the system and optimize operations. This is particularly relevant when companies source goods from a multitude of vendors worldwide, have a global customer base, use a variety of transportation methods, have a large product portfolio, incorporate a variety of promotional measures and use differential pricing. These measures are costly and time consuming, but have a high probability of success in integrating the company’s operations and business functions on a uniform level. However, failure to integrate these measures can be costly as is evident by the recent fallout between Nike and i2 over erroneous implementation and execution of i2 software.

4. Maintaining and monitoring a global supply chain

It is imperative to maintain and monitor a global supply chain from the stage of its inception in order to make adjustments and improvements, and correct any errors.

* Establish goals and performance metrics: Establishing goals and performance metrics aids in determining the effectiveness of the supply chain, together with abetting the improvement measures and accountability of the various stakeholders. Timely reports that depict these performance measures such as customer service levels, order fill rates and number of back orders can help give the top management a birds-eye view of the system and its inherent dynamics.

* Financial controls: The bottom line results, in terms of costs reduction, revenue increase and increase in profitability, lend credence to an effective supply chain and can determine the extent of value creation. The du Pont model3 is a useful tool for today’s supply chain executives.

Potential risks from creating an inefficient global supply chain

The ramifications for a company are far reaching because of the creation and implementation of an inefficient global supply chain. Some of the risks are as mentioned below:

* Monetary expenditure: It takes a significant amount of capital to design and implement a global supply chain, both in terms of dollars spent and the opportunity cost of capital. An equal if not greater amount is required to monitor and operate the supply chain. An inefficient or erroneously designed supply chain will result in increased costs because of inappropriate resource allocation, wrong decision making based on incorrect data and sunk costs because of bad asset allocations or investments. A case in point is the heavy expenditure incurred by both Nike and Laura Ashley in creating a global supply chain that was inefficient and that resulted in bad investments in assets or products produced.

* Resources utilized: Resources such as man-hours spent, personnel reassigned and corporate funds that could be used more beneficially elsewhere, but are expended on a faulty endeavor, are all intangible costs that detract from the basic purpose of the corporation.

* Disruption of business activities: Implementing ERP (Enterprise Resource Planning) as a part of developing a supply chain can be disruptive in the daily activities of the firm. In order to create a global supply chain, cooperation is required across the enterprise and active involvement of all stakeholders both inside and outside the firm is essential. People could tend to view this as a hindrance to their work and they could feel threatened. For example, Hershey’s faced a production shortfall during their peak holiday season when their newly implemented ERP system crashed.

* Disruption of channel activities and partnerships: Channel members such as dealers, distributors, existing transporters, and forwarders and suppliers could feel threatened by any endeavor on the part of the company to alter channel structure, channel membership and incentives. Long standing relations could be affected, and reestablishing relations is costly and time consuming. Any disruptive move could affect the reputation of the company in the marketplace or within the trade. For example, the endeavor of Levi’s to sell directly via the Internet was greeted with open hostility by retailers such as JC Penny who threatened to boycott the company’s products. Levi’s withdrew the move to sell direct.

* Loss of market share: An inefficient supply chain could hamper the company’s corporate strategy and strategic intent. Inability to meet stated goals to customers or even channel members could cause the company lost orders, ill will and back orders. All of these factors could cause a loss of market share, which in a highly competitive or fragmented industry is difficult to regain. An inefficient supply chain will also hamper any moves on the part of a firm to procure a firstmover advantage by entering new markets, developing new products and enhancing the market share for existing products. As a result of this, competitors will benefit and succeed in increasing their market share, revenues and profitability.

Conclusion

In conclusion, in an evolving global marketplace, blurring competitive landscapes dominated by global competition, the emergence of disruptive technologies like the Internet, globalization and liberalization of markets, lower tariff barriers and economic regionalism, all interspersed with widespread consolidation, increased outsourcing and global procurement, and an international supplier and customer base all allude to the importance of an efficient and responsive global supply chain that successfully lowers cost, increases responsiveness and leverages the core competencies of the company. The creation of a global supply chain is based on a sound corporate strategy that accurately states goals, objectives and performance metrics followed by accurate design and enabling features that abet the operation and monitoring of this supply chain. Financial models such as the du Pont model can serve the purpose of evaluating the bottom line results and contributions of the global supply chain by acting as simple templates for the supply chain executives. However, detailed research and analysis of the company’s operations and business activities, channel members and partnerships, core competencies and an understanding of worldwide trends can help avoid tangible losses such as loss of market share, revenues and profitability, together with intangible losses accruing through loss of reputation among customers and trade members. As Sun Tzu stated in his epic book The Art of War4, “the secret to any successful campaign or endeavor is exceptional planning and implementation, while accurately gauging one’s own resources and that of the enemy (competitor).”

End Notes

1. Levitt, T., “The Globalization of Marketing,” Harvard Business Review, 1983.

2. Porter, M.E., Competitive Strategy, New York, Free Press, 1985.

3. Mentzer, John T. et al, Supply Chain Management, Sage Publications, 2001.

4. Tzu, Sun, The Art of War, translated version, edited by James Clavell, Dell Publishing, 1983.

References

1. Schary, Philip B., Managing the Global Supply Chain, Handelshojskolens Forlag Press, 1995.

2. Ballou, Ronald H., Business Logistics Management, Fourth Edition, Prentice Hall, 1992.

3. Hopp, Wallace J., Spearman, Mark L., Factory Physics, Second Edition, McGraw Hill, 2001.

4. Edwards, Peter, Sharman, Graham, “The Effectiveness of Information Systems in Supporting the Extended Supply Chain,” presented at the Council of Logistics Management educators conference, New Orleans, 2000.

Author’s Biography

Quraish Baldiwala, an MBA student from the University of WisconsinMadison, is a 2000 SOLE LEF (Logistics Education Foundation) Scholarship Recipient.

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