Global Value Chains and Supply Chains

Introduction to Global Value Chains

• A Global Value Chain (GVC) includes all activities involved in designing, producing, distributing, and supporting a product or service
• These activities occur across multiple countries
• Companies optimize operations through outsourcing or offshoring to specialized firms, leveraging cost efficiencies, technological expertise, and resource availability

The Value Chain

• It includes primary and secondary activities
• Primary activities include inbound logistics, operations, outbound logistics, marketing & sales, and after-sales service
• Secondary activities encompass infrastructure, human resources management, technological development, and procurement

Global Supply Chains

• It is defined as the sequence of events in a goods flow, adding value to a specific good
• These events encompass conversion, assembling, disassembling, movements, and placements
• The global supply chain crosses international boundaries
• Supply chain links producers, manufacturers, and suppliers with distributors and consumers

GVC vs. Supply Chain

• GVC refers to value-adding activities like R&D, design, manufacturing, and after-sales services across multiple countries
• The supply chain describes the flow of raw materials, components, and finished goods from suppliers to consumers
• GVC focuses on the entire lifecycle of a product or service, from design to after-sales
• Supply-chains focus on the logistics and movement of goods for efficient production and delivery
• GVC covers intangible aspects like innovation and knowledge transfer and emphasizes cross-border collaboration
• Supply Chains primarily involve physical processes like procurement, manufacturing, transport, and warehousing
• GVC aims to maximize value creation, and supply chains ensure efficient material flow and cost-effective logistics

History of Global Value Chains

• Involves technical development, political development, quality/cost improvements, networks/alliances, and customer value

Technical Development (1783-1929)

• Hot air balloons and kites were used in China, an invention attributed to Zhuge Liang (AD 180–234)
• In 852 AD, parachutes and gliders were flown in Spain and England
• Leonardo da Vinci designed a hang glider with fixed wings and control surfaces
• Emanuel Swedenborg published the first paper on aviation
• The first human flight was in Paris in 1783, and was conducted by Jean-Francois Pilatre de Rozier and Francois Laurent d'Arlandes, using a Montgolfier brothers hot air balloon
• Sir George Cayley started rigorous study about physics of flight, and exhibited plan for a glider
• Otto Lilienthal made flights of 25 m or more routinely with his gliders, completing 2,500 flights, before dying due to a glider accident
• Between 1900 and 1902, the Wright brothers built and tested a series of kite and glider designs before attempting to build a powered design. They successfully achieved sustained flight with a powered, controlled aircraft in 1903

Political Development (1929-1944)

• Aircraft evolved from wood and canvas to aluminum
• Engines developed from in-line water-cooled to rotary and radial air-cooled, increasing propulsive power
• In the 1930s, Germany and England began jet engine development
• WWII increased aircraft development and production for weapon delivery systems
• The Chicago Convention in 1944 led to international air law standardization
• This created ICAO, The International Civil Aviation Organization

Development of Quality and Cost (1945–1973)

• Companies and flight routes increased across North America, Europe, and other regions, with conversions of heavy bomber airframes into commercial aircraft
• In September 1949, the Avro C102 Jetliner, the first North American commercial jet airliner, shortly after the British Comet flew.
• By 1952, the British state airline BOAC launched the De Havilland Comet into scheduled service
• In 1956, USSR's Aeroflot was the first airline in the world to operate sustained jet services using the Tupolev Tu-104
• In 1947, Chuck Yeager piloted the Bell X-1 past the speed of sound
• In 1961, Yuri Gagarin orbited the planet, heating up the space race between the Soviet Union and the US
• In 1963, Canada became to send a satellite into space with Alouette I
• In 1969 Neil Armstrong landed on the moon
• In 1967, the X-15 set the air speed record for an aircraft at Mach 6.1 at 4,534 mph

Characteristics of Global Value Chains

• Geographic Fragmentation: Production stages occur in multiple countries
• Companies outsource tasks to leverage lower costs, expertise, and resources
• Example: Parts for a Boeing 787 come from USA, France, Japan, and UK before final assembly in the USA
• Specialization and Comparative Advantage occurs where firms focus on China in manufacturing, Germany in Engineering, and India in IT Leads to higher efficiency and cost reduction
• Apple designs iPhones in the USA, manufactures components in Japan, and assembles them in China
• Multi-tier Supplier Networks have direct and indirect suppliers, plus raw material providers such as engine manufacturers
• Coordination and Integration necessitates strong coordination among manufacturers through real time monitoring
• Airbus uses digital twins and blockchain for supply chain transparency
• Lead Firms (OEMs) that control the value chain set industry standards, negotiate prices, and manage risks, examples include Apple and Samsung
• Regulation and Compliance requires adhering to international laws, trade policies, safety regulations, labor laws, and environmental policies; Airbus must comply with European safety standards

Characteristics of Global Value Chain risks

• Vulnerable to global shocks from pandemics, geopolitical conflicts, natural disasters
• Firms mitigate risks by diversifying suppliers and using digital tracking systems
• Sustainability and ESG Compliance involves tracking emissions, using circular economy practices, better improve labor conditions
• High Interdependence - No single country can produce everything independently
• Semiconductor industry relies on Taiwan (TSMC), USA (Nvidia, Intel), and the Netherlands (ASML)

Logistics for GVC

• Factors influencing logistics are twenty first century companies striving to:
• Become more competitive
• Provide customers with value in the supply chain
• Becoming more complex and demanding in a global market environment

Global Logistics Challenges

• Supply chain disruptions
• Complex supplier networks
• Cybersecurity threats
• Long lead times
• Regulatory and trade restrictions
• Shortage of skilled labor
• Fluctuating raw material prices
• Environmental regulations

Aerospace Value Chain and Aviation Systems

• The aviation value chain includes manufacturers of aircraft, along with lessors who buy aircraft and lease them to the airlines
• Includes airport ground services, airlines, Computer Reservation System companies within the industry and travel agents
• Freight forwarders send the customers in the airfreight sector
• Countries like Singapore or Dubai strategically develop an entire aviation ecosystem from an integrated viewpoint

Key Aviation Sectors

• Aircraft Manufacturers such as Boeing, Airbus, Embraer and Bombardier, and their suppliers
• Airlines (cargo and passenger)
• Airports and Terminal Services
• Air Navigation Service Providers
• Ground Handling and MRO which is Maintenance Repair and Overhaul
• Aviation Fuel Supply & Jet Fuel Distribution
• Travel & Distribution via distributors
• Regulatory Authorities & Aviation Associations such as the FAA, EASA, ICAO, IATA and ACI
• Aerospace & Defense such as Lockheed, Northrop and Raytheon
• Aircraft Leasing Companies such as AerCap, Air Lease and Avolon

Airline Strategy Approaches and Business Models

These involve Network (structure, partnerships, alliances), Market (pricing distribution) and Resources (CRM, brand, hubs, service levels)

Network Structures

• Hub-and-spoke systems try to offer a high connectivity and many different O&D (Origin & Destination) connections
• Point-to-point traffic relies on strong and stable individual markets

Partnerships & Alliances

• These are impacted by global mergers and acquisitions, fundamentally a results of the airline’s efforts to manage network, but governments also add significant regulation
• The three big alliances – Star Alliance, Oneworld, and SkyTeam command three-quarters of the worldwide scheduled air traffic

Markets

• Pricing has an important task of governing demand
• Distribution channel choice is a key instrument to increase market share, it can also be used as a market entry barrier

Resources

• A brand must serve for the identification and positioning that helps to reduce the risk perceived by customers
• Service level allows for skimming a price premium and for a differentiation from competition to generate a barriers
• Customer relationship management can lead to more frequent purchases
• Hub dominance must have a minimal size to increase passenger market shares