Global Supply Chain Management

Matt Drake

• Publisher: Business Expert Press
• Year: 2012
• Print ISBN: 9781606492765
• eBook ISBN: 9781606492772
• Topic: Business
• Subtopic: Business General
• Index: Business

The business environment in the twenty-first century is truly global in scope. Companies must navigate and manage networks of international suppliers and customers to compete in a global marketplace. While this may seem like a daunting task for executives and managers, this book will help in more ways than one.

An efficient and effective supply chain can provide a sustainable competitive advantage that will secure a firm's position in the global market. Global supply chains are often fraught with complexity and uncertainty that makes them difficult to manage in a way that enables the firm to realize the maximum potential advantage. You must understand the importance of supply chain management to your firm's overall performance and competitiveness.

Inside this outstanding contribution to supply chain management, you'll learn about the challenges of managing a global supply chain and how cutting-edge strategies will help your company cope with these challenges and improve their supply chain performance. Details include supply chain risk management, the total cost of ownership approach to procurement, global supplier selection, network orchestration, transportation and distribution strategies around the world, and transportation security measures.

Chapter 1

What Is Supply Chain Management?

As I sit and listen to the seemingly interminable honks of the cars and auto-rickshaws outside of my hotel room in Kottayam, India, I cannot help but reflect on how small the world has become in the past few decades. You cannot go anywhere in India without seeing signs of the Western world in the form of cars, electronics, billboard advertisements, and the like. Even in the small town of Thekkady, nestled high in the Western Ghats mountain range, I could purchase Lay’s potato chips or Aquafina water if I desired.

A major mechanism behind this shrinking of the world is the development of global supply chain networks designed to manufacture and move products to every corner of the world. With the proliferation of international air travel and the improvement of logistics infrastructure around the world, it is now possible to catch a fish in the Mediterranean Sea or in the waters off the coast of Prince Edward Island and feast on that same fish in a Tokyo sushi bar several days later.¹ A product manufactured deep in the interior of China could be delivered direct to a customer in the American heartland within the week. This is the state of world-class supply chain management in the twenty-first century.

Of course, few products are able to navigate the complex web of international trade regulations and domestic distribution operations so quickly and seamlessly. Much of the logistics infrastructure around the world is underdeveloped. The two-lane road that my hotel sits on in Kottayam has to handle traffic in the form of cars, pedestrians, bicycles, auto-rickshaws, motorcycles, buses, trucks, and even elephants! The road system in India is very poor; in most places, two-lane roads are the largest that you will see. A road can go from pavement to dirt in an instant, causing havoc for cars, let alone trucks carrying goods. I cannot even imagine taking a 53-foot trailer that is at home on the U.S. Interstate Highway System on these roads with traffic weaving in and out. If the goods actually arrived at their destination safely, chances are there would be no adequate dock to unload the freight. India is not alone with its infrastructure issues; many other countries have roads and ports that are not conducive to hauling large quantities of freight on a consistent basis.

Thus even if we can say that the world is smaller, this does not mean that it is completely homogeneous. There are plenty of differences in culture, economic and political policies, regulations, and physical and climatic characteristics that complicate efforts to manage a global supply chain. When a company operates (i.e., with respect to procurement, manufacturing, and distribution) entirely within the boundaries of one country, its supply chain managers only have to worry about the domestic regulations and culture they live with everyday. Very few companies outside of those that tout themselves as selling or producing “locally sourced” products can say with any certainty that they have a truly domestic supply chain.² Most companies today are explicitly tied to the global marketplace and, as a consequence, have a global supply chain.

The complexities related to managing global supply chains can cause firms great difficulties and can even make decisions that look sound on paper (such as offshoring work to another country or entering a foreign market) turn out to be unprofitable. They can also, however, provide an opportunity for organizations to establish a strong competitive advantage by learning how to manage the issues that trip up other firms. This book is designed to highlight the importance of managing global supply chains effectively, as well as to provide insight and recommendations for handling the most important obstacles to making your supply chain successful in the global marketplace.

Supply Chain Management Defined

Before we delve too far into the challenges of global supply chain management, it is important in this first chapter that we take some time to examine supply chain management itself, for this is a term that has been used in many different contexts in the business vernacular and can cause confusion as a result.

Supply chain management as a field is approximately 25 years old, but the traditional business functions that compose it (i.e., procurement, forecasting, production, transportation, warehousing, customer service, order management) have been around since business began. The Council of Supply Chain Management Professionals (CSCMP) defines supply chain management as

encompass[ing] the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies.³

The most important part of this definition is its emphasis on the interorganizational element of supply chain management. This is what sets supply chain management apart from its traditional business functions and its predecessors of materials management, physical distribution, and business logistics. True supply chain management focuses on interactions and collaboration with suppliers and customers to ensure that the end customer’s requirements are satisfied adequately. All activities in the supply chain should be undertaken with the customer’s requirements in mind; all supply chains ultimately exist to ensure that the customers are satisfied.

Both academic and practitioner discussions of supply chain management inevitably include some specialized terminology to describe a firm’s position in the supply chain relative to its partners. In the “chain” part of the supply chain metaphor, suppliers are referred to as upstream entities, and customers are called downstream entities. The firm’s immediate suppliers are tier 1 suppliers, their suppliers are tier 2 suppliers, and so on. The same vernacular is used to describe the different echelons of customers all the way down to the end customer. In this way it has often been said that supply chain management seeks to coordinate operations from the “supplier’s supplier to the customer’s customer.”

Example 1.1. Co-Creating Value With Customers

As firms adopt a supply chain perspective and consider their interactions with suppliers and customers, they can often differentiate themselves in the market by engaging customers in the value creation process. This is a concept known as co-creation. In many traditional supply chains, the customers themselves play little role in creating value; they only consume the value that the manufacturers create. Many firms, from gas stations and grocery stores to Ikea, have designed ways for customers to create their own value through gas pumps, self-checkout machines, and furniture that is assembled at home.

A more significant way to have customers create value is to involve them in the manufacturer’s product design process. In the industrial context customers’ representatives from procurement and engineering can work with the manufacturer to collaborate on a design that meets their needs. Many consumer product manufacturers such as Lego and Nike have established online design studios where customers can customize their own offerings to meet their needs. Many college textbook publishers offer customized textbooks where faculty members can select chapters from several textbooks along with additional readings to design their own textbook that fits their courses better than the general textbook offerings can. Even retailers such as Amazon and Walmart invite their customers to rate and comment on the products they purchase online to provide additional guidance for future customers.

Source: Prahalad and Ramaswamy (2004).

The Supply Chain Council, an international nonprofit dedicated to helping organizations improve their supply chain performance, has developed its widely applied Supply Chain Operations Reference (SCOR^®) process reference model to align a firm’s supply chain performance metrics with its overall strategic goals.⁴ It is helpful to consider the SCOR^® model’s highest level processes when describing supply chain management:

1. Plan. All supply chains must undertake a significant amount of planning because so many of their operations are performed in different locations and most of the time in different companies’ facilities. It takes a great deal of planning to synchronize these actions, and this synchronization is important because the activities are cross-functional and interrelated.
2. Source. After the initial plans have been established, the firm starts to acquire resources from its suppliers, often in the form of parts or partially manufactured subassemblies, but this can also include resources such as machinery, technology, capacity, and other services.
3. Make. Once the resources have been acquired, the firm performs its primary transformation activity to turn resource inputs into outputs that can ultimately satisfy downstream demands from other members of the supply chain or the end customer.
4. Deliver. After the resources are transformed from inputs to outputs, they must be moved physically to the next phase of distribution. If the output item is a part, it must be delivered to another manufacturer who will use it as an input. If the output item is a finished item that can be sold to the end customer, the item is delivered to the next layer of distribution (e.g., central warehouse or retail store). The delivery of services requires that the firm manage its customer requirements and ensure that the customer is satisfied with the service received.
5. Return. The original SCOR^® model stopped at the deliver process, but the Supply Chain Council appended the model in the early 2000s to acknowledge that products often flow in the reverse direction from the traditional flow for a variety of reasons (e.g., defects, shipment errors, buyback arrangements, customer service policies, or end-of-life disposal). These return flows can be very costly for companies that have not developed appropriate processes to handle them, and they can turn into a revenue source and competitive advantage for companies that proactively plan for them.

Implicit in the SCOR^® model’s description of a firm’s supply chain processes are the linkages of these processes with those of the firm’s supply chain partners. For example, a manufacturer’s sourcing process is invariably dependent on its suppliers’ delivery processes. The SCOR^® model explicitly shows how companies in the same supply chain are linked and gives managers a map of them so that none of the linkages are overlooked, which could lead to a breakdown in the entire chain.

The Evolution of Supply Chain Management

This section describes some important factors and milestones in the development of the supply chain management field over the past century. This is not meant to be an exhaustive history, however, because that would fill an entire book on its own.

The field of supply chain management has its origins in the giant manufacturing firms of the late nineteenth century. It was common for large firms in that era to own many or all of the stages of production from raw materials to finished goods and even part of the distribution channel as well. Ford Motor Company is the classic example of such an approach, which is called vertical integration. In the 1920s Ford owned its main manufacturing facility in River Rouge, Michigan, but it also owned rubber plantations, glassworks, railroads, forests and timber operations, coal and iron ore mines, and ocean carriers.⁵

The main benefit to complete vertical integration is the degree of control that a firm has over its supply chain operations. The more stages of a supply chain that a firm owns, the easier it is for the firm to coordinate the operations to minimize waste in the form of excess inventory buffers. The downside, though, is that the firm must be able to perform all of these functions well and synchronize them so that they occur in a timely manner. As the twentieth century progressed, most vertically integrated firms divested themselves of their ancillary functions and processes to focus on their core competencies, the functions that positively distinguish a firm from its competitors.

In the 1960s the major business functions related to supply chain management, such as procurement, forecasting, production, transportation, and warehousing, all operated independently in what have become known as functional silos.⁶ Employees in each of these departments made decisions with only their department’s interests in mind and without concern for how their decisions affected other departments’ ability to satisfy the end customer’s demand.⁷

In the 1970s many firms began to recognize that these business functions are inherently linked and dependent upon each other and started to manage them together, as a group. All of a firm’s inbound activities to the point of production were grouped under the header “materials management,” while the outbound activities after production of a good were called “physical distribution.” It should not be difficult to see where the trend went from this point.

In the 1980s firms established the link between the inbound materials management processes and the outbound physical distribution processes under the heading “integrated business logistics.” Firms that truly integrated their logistics processes managed all the processes involved with sourcing, making, and delivering products together, but it was not until the late 1980s and early 1990s that the focus shifted outside of the company’s internal operations and functions and to the firm’s interactions with suppliers and customers. Supply chain management as we know it today began when firms recognized that, regardless of where they stood in the supply chain hierarchy, they should be focused on satisfying the end users of their products and services, and their ability to fulfill customers’ demands was necessarily dependent on the performance of their suppliers (and their suppliers’ suppliers).

It is no coincidence that this timeline of business process coordination and channel collaboration mirrors the development of business enterprise and communications information technology. Supply chain management is inherently dependent on technology to facilitate the sharing of information between partners and coordination of actions between parties that are likely located many miles from each other. The gains from such coordination and joint planning would be severely limited without the ability to share information and communicate quickly and easily. Any supply chain that does not perform tasks entirely inside one physical building (which is all supply chains) must have some minimum level of proximity in relation to geographic, organizational, cultural, or electronic characteristics to be effective; this proximity is often easiest to accomplish through the deployment of information and communications systems.⁸

The development of the supply chain management field was influenced by the discovery by Procter & Gamble (P&G) of the phenomenon known as the bullwhip effect.⁹ Managers at P&G could not understand the data that they had investigated with respect to their Pampers brand of diapers. If any product should have relatively constant demand at the retail store level over the course of a year, it should be diapers. There are no predictable seasonal fluctuations as there are for, say, snow blowers, and the market demand does not grow or decline very quickly over time (unless P&G were able to successfully capture market share from its competitors). As a result, it should be no surprise that the managers were puzzled to see a graph of the orders they received from their wholesalers and large retailers exhibited a great deal of variability. Some weeks the orders from a customer would be very high, and the next week they would drop off precipitously. There had to be a reason that they were experiencing such a counterintuitive result.

After investigating order data from every level of the distribution channel for the diapers, the researchers identified a pattern that they found also held true for other products. As orders moved further upstream in the supply chain (toward the manufacturer), the variability of the orders increased. End-user demand at the retail-store level was indeed relatively flat, but the orders that the stores placed to the retailer’s distribution center were more variable. The pattern of increasing variability continued until the orders reached P&G, the manufacturer.

In the work that followed, the researchers were able to identify the following four major causes of the bullwhip effect:

1. Demand forecast updating. This is the major cause of the bullwhip e...

Table of contents

• Cover
• Title Page
• Copyright Page
• Contents
• Chapter 1: What Is Supply Chain Management?
• Chapter 2: Global Supply Chain Management
• Chapter 3: Global Sourcing
• Chapter 4: Global Transportation and Distribution
• Notes
• References
• Announcing the Business Expert Press Digital Library