Globalisation Trends

Worldwide cross-border trade is estimated to increase from US$5.9 trillion in 1999 to US$8.4 trillion in 2005. 51 of the 100 largest economies in the world are corporations, not countries. Wal-mart is bigger than Indonesia, NTT is bigger than Ireland. Global brands now dominate most markets: Coca- cola, IBM, Toyota, etc.

These companies seek to extend its markets worldwide whilst seeking cost-reductions through scale economies by sourcing globally


Drivers of Globalisation
   

Global trade liberalisation; Trade barriers diminishing Multi-national companies evolving into real global organisations Production out-sourcing to lower cost regions Improved logistics infrastructure and operations 1

Why Companies Go Global?

Global Market Forces Local market saturation Foreign demand growth Competition at home Global Cost Forces Labor cost Raw materials cost

Political and Economical Forces Regional trade agreements Tariff & tax incentives overseas Local content requirements

Globalizatio n

Technological Forces Access to specific technologies Speed to market (integrate R&D and manufacturing)

Zhi-long Chen Zhi-

ButGlobal Operations are Not Simple

Issues & risks in global supply chains:
-- Infrastructure in developing countries -- Cultural, language, labor skill differences -- Government stability, legal systems, regulations -- Currency exchange rate fluctuation -- Duties & tariffs -- Different corporate tax rates -- Import/export quotas -- Local content rules -- Product design issues (local customer needs) -- Longer transportation lead times -- Quality/reliability of local suppliers
Zhi-long Chen Zhi-

Nike: the logistics challenge of global business

 

Nike: re-created the sport shoe as high-tech, high-performance products that is an icon of youth subculture, with a price to match! Core business:
 

state-of-the-art R&D capabilities ruthless low-cost manufacturing



Air Max Penny basketball shoe: designed in Oregon and Tennessee, manufactured in South Korea and Indonesia from 52 components sourced from Japan, South Korea, Taiwan, Indonesia and USA.

 

Nike markets over 300 new shoe design each year, leading to costly overstocks if sales forecasts not achieved. Distribution in USA is outsourced to third-party logistics providers with IT linkage to Nikes global sales and customer support systems, enabling sales/inventory information to be accesible to all decision makers concerned. When the supply chain is global and the products are fashion-oriented, the management of logistics becomes a key determinant of business success or failure.

Domestic vs. Global Business



What is a global business?

   

More than just a company that exports source materials and components from more than one country geographically dispersed manufacturing/assembly locations market products worldwide

Challenges facing global businesses



local variations in markets (consumer preferences)

  

e.g. left-hand drive and right-hand drive cars e.g. voltage and socket variations by country production process complications co-ordination of production and transportation cross-docking, merge-in-transit economies of scale --> global cost competition 6

complex logistics of global supply chains

  

Key Issues in Global Logistics Strategy



Appropriate degree of centralisation?

  

Management Manufacturing Distribution

How can the needs of local markets be met while gaining economies of scale through standardisation?

Focussed Factories
Limit the range and mix of products manufactured at a single location to achieve economies of scale  Instead of local-for-local production, each location produces a few items for the world market  e.g. Heinz makes all the ketchup for Europe in only 3 plants and switches production depending on local costs, demand, and currency fluctuations Is using the global lowest-cost producer always the best strategy?


Focussed Factories: Concerns

    

Effect on transportation costs?



Especially on low-value, low-margin products More local safety-stock needed For high-tech products, usually < 10% is direct labour e.g. packaging styles, language labels

Effect on delivery lead times?



Effect on overall savings



Local variations in product requirements



Customers order a variety of products from the same producer on a single order; but product now produced in focussed factories in diverse locations Product flexibility? Variety? Responsiveness?
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Centralisation of Inventories
   

Pooling of inventories reduces cycle stock (EOQ square-root rule!) Pooling of inventories also reduces safety stock Philips reduced consumer electronics products warehouses in Europe from 22 to 4 Drawbacks:
 

higher transport costs longer delivery lead times

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Virtual Inventory Consolidation



Locating inventory near the customer, but managing and controlling it centrally
 

Virtual inventory reduces double-handling and physical transportation costs Requires an information system that can provide complete visibility of demand from one end of the supply chain to the other in as close to realtime as possible To be response, transport costs may also increase (e.g use of couriers for speedy delivery)
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Postponement and Localisation



Significant local difference in customer and consumer requirements



e.g. refrigerators, cars design products to use common platforms, components and modules delay final assembly/customisation as much as possible until final market destination and customer requirements known
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Postponement:
 

Advantages and concerns of Postponement

Generic inventory -> fewer stock-keeping variants  flexibility and variety in products  forecasting is easier at the aggregate generic level than at individual SKU level MassMass-customisation  design for localisation

 

maximise variety using fewest basic components final customisation out-sourced to local distribution centres 13

E-commerce: Business and Logistics Concerns

Domestic --> International --> Multi-national Global

(Table abridged from e-Global Logistics by Robin Roberts, Stephens Inc., 2000.)

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Issues
Physical location Foreign trading partners
Aware and business priority for global logistics

National Brick-&Mortar companies doing business internationally

National e-commerce companies doing business internationally

Multinational companies Independent operations in multiple countries Finite in number

Global companies
Close-knit operations in multiple countries regardless of national borders

No foreign office Finite in number Usually Low (not strategic)

No foreign office

Intermediaries Few in supply chain (freight forwarders)

Suppliers: finite Customers: infinite Usually Low Usually High (not strategic) (competitive advantage) More Few
(logistics integrators) (several FFs, brokers, carriers)

Suppliers: finite Customers: infinite Very High (core strategic) Many

(many FFs, brokers, carriers)

Global SCM challenge

Low

Low

Medium

High

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Issues
SCM System sophistication

National Brick-&Mortar

National e-commerce companies

Multinational companies
SCM system for planning and execution
Relatively predictable. (Many contractual trading partners).

Global companies
SCM system for planning and execution
Relatively predictable. (Many contractual trading partners; projected demand).

Some system installed

Not likely to have SCM system Supply predictable. Demand variable. Low Real-time. Small lot pick&-ship.
Small package

Demand/supply Predictable. (Few predictability contractual trade partners) Order Variability Low Batch processing (Bulk) Full container or LTL Mostly ocean

Medium Batch processing (Bulk) Full container or LTL Mostly ocean

High Batch processing (Bulk) Full container or LTL Mostly ocean

International fulfillment patterns

Load Size Shipping Method

Mostly air

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Issues
Import Quota requirements Local Taxation considerations Payment mechanisms Yes

National Brick-&Mortar

National e-commerce companies Not likely Relative simple (for small packages) Mostly credit cards

Multinational companies
Yes Relatively complex due to large shipment size
documents against acceptance,

Global companies
Yes Very complex, use of free trade zones and duty regulations Mostly wire transfers, ACH

Relatively complex due to large shipment size Credit cards, letter of credit (LC)

Mostly LCs,

Medium Trade complex documents requirement Major Challenge in International Logistics Lack of knowledge of international logistics; Customers do not know landed costs for sourcing comparisions

Relatively simple

Lack resource and expertise to handle international logistics; Customers do not know landed costs for sourcing comparisions

wire transfers Relatively complex, due to volume and payment methods Lack of easy interface with trading partners systems. Manual process for trade compliance and cost estimates slow.

(automatic clearing house) transactions

Very complex, due to large shipments, countries involved and taxation issues Lack of seamless integration of business processes and info systems with trading partners. Manual process for trade compliance and cost estimates slow.

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Key Challenges of Global Logistics

    

Extended lead times of supply Extended and unreliable transit times Multiple consolidation and break-bulk options Multiple freight mode and cost options International trade and finance issues
  

Duty, tariffs, taxes, customs Trade compliance: import ceilings and quotas, joint-venture requirements Cash flow, currency fluctuations, financial exposure concerns

Total landed costs can be much higher than traditional domestic logistics (transportation + warehousing) costs 18

Extended supply lead times and transit times

 

Long manufacturing lead-times are sometimes artificial



Mind-set change from make-to-stock to make-to-order

Intermediate inventory needed to buffer against unreliable transit times

 

sea freight from Rotterdam to Japan takes 5 weeks (a lot of inventory tied up at sea!) air-freight options may be attractive if total costs considered

 

International shipping, consolidation and customs delays are significant As variability increases, local managers tend to compensate by over-ordering, double-buffering and requesting more allocation


Instead, should explore transportation options and examine supply chain to reduce variability, increase shipment visibility and tracking

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Complex Consolidation/BreakBulk Supply Network



Multiple Shipment options:

  

direct ship from each source to final market in full containers consolidate in the supply region for final market in full containers Consolidate from each source for each consumer region with break-bulk/intermediate inventory in region Consolidate in the supply region and also break-bulk in the consumer region
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Multiple freight mode and costs options

 

Variety of shipping services available Air vs sea freight:



air freight transport cost expensive, but may be worthwhile when inventory holding costs, potential lost revenue and market flexibility taken into account

Integrators provide door-to-door service

   

DHL, FedEx, UPS, TNT shorter and more reliable transit times swifter and less complicated procedures, e.g. customs clearance worldwide tracking and tracing capability co-ordinate export dept, shipping dept, freight forwarder

Need for end-to-end pipeline management



Compartmentalised decision-making (e.g. shipping dept, decisionexport dept) may focus on wrong or partial objectives and lead to sub-optimal decisions. sub21

Organising for global logistics

 

Centralisation vs. Decentralisation? Efficiency vs. responsiveness? Global vs local decision making


Local decision making preferable in sales, promotion and marketing

Key principles:  Strategic structure and control of logistics flows centralised for worldwide cost optimisation  Customer service localised for competitive advantage  Global co-ordination is key, especially if many functions out-sourced  Global logistics information system is the pre-requisite for achieving local service needs and global cost optimisation 22

Logistics Structure and Control

If the potential trade-offs in rationalising sourcing, tradeproduction and distribution across national boundaries are to be achieved, then it is essential that a central decisiondecision-making structure for logistics is established. Martin Christopher


Location decisions
   

fundamentally affects the supply chain operations long-range impact; investments in fixed assets and equipment exchange rate and different regional costs must consider total cost (Activity-Based Costing) 23

Customer service management

   

Local markets have their own specific characteristics and needs opportunities for tailoring service against local customer requirements Monitoring of service needs and performance management of entire order-fulfillment process
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Out-sourcing and partnerships



 

Trend towards out-sourcing, not only for materials and components, but also for services Focus on core competencies Logistics: provision of warehousing, inventory control (VMI) and transportation is increasingly out-sourced Co-ordination and liaison with strategic partners is crucial

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Logistics Information Systems



 

Only with updated and accessible information can the complex flows of goods be co-ordinated to achieve costeffective service Substitute Information for inventory Look down the pipeline into end-user markets to better see true demand
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Global co-ordination vs. Local Management

Global functions:  Network structure for production and transportation optimisation  Information systems development and control  Inventory positioning  Sourcing decisions  International transport mode and sourcing decisions  Trade-off analysis and supply chain cost control Local functions:
     

Customer service management Gathering market intelligence Warehouse management and local delivery Customer profitability analyses Liaison with local sales and marketing management Human resource management

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Characteristics of Companies at the Leading Edge of Logistics

Survey by Council of Logistics Management in North America:  Exhibit an over-riding commitment to customers  Emphasise planning  Encompass a significant span of functional control  Commit to external alliances with service providers  Have a highly-formalised logistical process  Place a premium on operational flexibility  Employ comprehensive performance measurement  Invest in state-of-the-art information technology 28

Concerning organisational structure, leading edge firms:

      

Have had formal logistics organisations longer Tend to have logistics headed by an officer-level executive Adopt more fluid approach to logistics organisation; encourage frequent re-organisation to take advantage of opportunities Favour centralised control Becoming more centralised as they adapt organisational structure to corporate mission More apt to execute boundary-spanning or externally-oriented logistics functions Tend to manage more beyond or extended functional responsibilities not traditionally considered part of logistics

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Concerning strategic posture, leading edge firms:

       

Have a greater tendency to manage logistics as a value-added process Reflect a stronger commitment to achieving and maintaining customer satisfaction Place a premium on flexibility, particularly in accommodating special or non-routine requests Are better positioned to handle unexpected events Are more willing to use outside service providers Place a premium on how well the service company performs in managing itself and its service to clients Are more apt to view service-provider relationships as strategic alliances Anticipate greater use of outside services in the future

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Concerning managerial behaviour, leading edge firms:

       

Expend more effort on formal logistics planning Are more apt to publicise their performance commitments and standards by issuing specific mission statements Are more apt to have chief logistics officers involved in business unit strategic planning Respond effectively to non-planned events Regularly use a wider range of performance measures, including asset management, costs, customer service, productivity and quality Are more significant users of information processing technology and enjoy a higher quality of information systems (IS) support Typically have more state-of-the-art computer applications and are planning more updates and expansions Are more involved in new technology such as electronic data interchange (EDI), artificial intelligence (AI), etc.

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The new organisational paradigm



Traditionally, organisations are hierarchical, vertical and functionally defined Current and future business environment:
  

focus on speed, just-in-time, short product life-cycles volatile demand flexibility in customer requirements
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Challenge: how to be a responsive organisation?

Distinguishing features of the responsive organisation

Focus will shift:  From functions to processes  From profit to performance  From products to customers  From inventory to information  From transactions to relationships
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From functions to processes



Conventional organisations
 

organised around functional silos inwardly focussed, concentrates on use of resources product development, order fulfilment, etc. through these processes are the customers satisfied capabilities reflect processes which require coordination and co-operation horizontally across t he organisation 34

Organisations actually compete on capabilities

  

From profit to performance

   

Profit is the end, but the means important too What gets measured gets managed Performance drives profitability New performance indicators
  

customer satisfaction: customer retention, brand preference, dealer satisfaction, service performance flexibility: commonality of components, reduction of process complexity, set-up times people commitment: employer turnover, suggestions submitted and implemented, internal service climate and culture, training and development

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From products to customers

    

Move away from focus on products e.g. brand managers, product group managers Re-focus on customer satisfaction and demand management Emphasis on customer value Need to be supported by accounting systems that better identify the cost of servicing the customers Logistics and marketing need to be managed conjointly
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From inventory to information

   

uncertainty is the mother of inventory forecasts are never right Feedback information on actual usage!


Substitute information for inventory capture information at point-of-sale early in the season flexibility in production process reduce reliance on (highly inaccurate) fashion forecasts 37

Benetton:
  

From transactions to relationships

 

Tradition: focus on market share and winning customers Keeping customers important
 

the longer customers stay, the more profitable customers who drift from one supplier to another more difficult to satisfy than loyal and committed customers improved quality innovation sharing reduced costs integrated scheduling of production and deliveries barriers to entry of competitors

Benefits of single sourcing:

    

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Managing the supply chain of the future

Since it is through people that change is created, attention must be paid to how the organisation develops a set of skills and competencies that are appropriate to the constantly changing external environment. - Martin Christopher

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Managing the supply chain of the future

Paradigm shift
From function to processes From products to customers

Leading to
Integral management of materials and goods flow

Skills required

From revenue to performance

From inventory to information From transactions to relationships

Cross-functional management and planning skills Focus on markets and the Ability to define, measure creation of customer value and manage service requirements by market segments Focus on the key Understanding of the performance drivers of cost-to-serve and timeprofit based performance indicators Demand-based Information systems and replenishment and quick information technologies response systems Supply chain partnerships Relationship management and win-win orientation

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Role of information in the virtual supply chain



Internet and other IT technologies can now link the customer directly to the supplier, and allow the supplier to react, sometimes in realtime. Geographically dispersed network of specialists can be joined together to create innovative and cost-effective solutions for complex designs e.g. Boeing, Airbus, Infosys Tescos  sets up information exchange extranets to implement efficient consumer response (ECR) to reduce waste and improve product availability  on average, 5 to 10 % of products on promotion  suppliers can access Tesco sales data and track their products  enables the firm to estimate stock levels to fulfil promotions  specifications for new products can be available on-line

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The extended enterprise and the virtual supply chain



Boundary-less
  

horizontal process management across vendors, distributors, customers value-added exchange of information between partners

Supply chain becomes a synergistic confederation of organisations with agreed common goals, each bringing specific strengths to the overall value creation Example: Smart Car
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Making Change happen

    

Clear vision of the role of logistics in the organisation significant organisational change new ways of working with upstream and downstream partners in the supply chain underpinning information systems established Effective leadership crucial
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Summary
   

Continuing trend towards globalisation global brands, global sourcing, focussed factories serving the world market Increased complexities: longer supply chains, more out-sourcing Need to balance the varying needs of local markets against the economic advantages of standardised procedures/products

Challenge: a flexible and agile supply chain yet achieves economies of scale/scope
 

Requires organisational change within firm and with supply change partners Integrated logistics planning; information technologies

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