Supply Chain Management: Strategy, Planning, and Operation PDF

Supply Chain Management: Strategy, Planning, and Operation Seventh Edition Chapter 6 Designing Global Supply Chain Networks Cop...

Supply Chain Management: Strategy, Planning, and Operation Seventh Edition Chapter 6 Designing Global Supply Chain Networks Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Impact of Globalization on Supply Chain Networks (1 of 2) Opportunities to simultaneously increase revenues and decrease costs Accompanied by significant additional risk and uncertainty Difference between success and failure often the ability to incorporate suitable risk mitigation into supply chain design Uncertainty of demand and price drives the value of building flexible production capacity Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Impact of Globalization on Supply Chain Networks (2 of 2) Table 6-1 Results of Accenture Survey on Sources of Risk That Affect Global Supply Chain Performance Risk Factors Percentage of Supply Chains Affected Natural disasters 35 Shortage of skilled resources 24 Geopolitical uncertainty 20 Terrorist infiltration of cargo 13 Volatility of fuel prices 37 Currency fluctuation 29 Port operations/custom delays 23 Customer/consumer preference shifts 23 Performance of supply chain partners 38 Logistics capacity/complexity 33 Forecasting/planning accuracy 30 Supplier planning/communication issues 27 Inflexible supply chain technology 21 Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Importance of Total Cost (1 of 4) Comparative advantage in global supply chains Quantify the benefits of offshore production along with the reasons Two reasons offshoring fails 1. Focusing exclusively on unit cost rather than total cost 2. Ignoring critical risk factors Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved The Offshoring Decision: Total Cost A global supply chain with offshoring increases the length and duration of information, product, and cash flows The complexity and cost of managing the supply chain can be significantly higher than anticipated Quantify factors and track them over time Big challenges with offshoring is increased risk and its potential impact on cost Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Importance of Total Cost (2 of 4) Table 6-2 Dimensions to Consider When Evaluating Total Cost from Offshoring Performance Dimension Activity Affecting Performance Impact of Offshoring Order communication Order placement More difficult communication Supply chain visibility Scheduling and expediting Poorer visibility Raw material costs Sourcing of raw material Could go either way depending on raw material sourcing Unit cost Production, quality (production Labor/fixed costs decrease; and transportation) quality may suffer Freight costs Transportation modes and Higher freight costs quantity Taxes and tariffs Border crossing Could go either way Supply lead time Order communication, supplier Lead time increase results in production scheduling, production poorer forecasts and higher time, customs, transportation, inventories receiving Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Importance of Total Cost (3 of 4) Table 6-2 [Continued] Performance Dimension Activity Affecting Performance Impact of Offshoring On-time delivery/lead time Production, quality, customs, Poorer on-time delivery and uncertainty transportation, receiving increased uncertainty resulting in higher inventory and lower product availability Minimum order quantity Production, transportation Larger minimum quantities increase inventory Product returns Quality Increased returns likely Inventories Lead times, inventory in transit Increase and production Working capital Inventories and financial Increase reconciliation Hidden costs Order communication, invoicing Higher hidden costs errors, managing exchange rate risk Stockouts Ordering, production, Increase transportation with poorer visibility Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Importance of Total Cost (4 of 4) Key elements of total cost 1. Supplier price 2. Terms 3. Delivery costs 4. Inventory and warehousing 5. Cost of quality 6. Customer duties, value added-taxes, local tax incentives 7. Cost of risk, procurement staff, broker fees, infrastructure, and tooling and mold costs 8. Exchange rate trends and their impact on cost Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Risk Management in Global Supply Chains (1 of 6) Risks include supply disruption, supply delays, demand fluctuations, price fluctuations, and exchange-rate fluctuations Critical for global supply chains to be aware of the relevant risk factors and build in suitable mitigation strategies Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Risk Management in Global Supply Chains (2 of 6) Table 6-3 Supply Chain Risks to Be Considered During Network Design Category Risk Drivers Disruptions Natural disaster, war, terrorism Labor disputes Supplier bankruptcy Delays High capacity utilization at supply source Inflexibility of supply source Poor quality or yield at supply source Systems risk Information infrastructure breakdown System integration or extent of systems being networked Forecast risk Inaccurate forecasts due to long lead times, seasonality, product variety, short life cycles, small customer base Information distortion Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Risk Management in Global Supply Chains (3 of 6) Table 6-3 [Continued] Category Risk Drivers Intellectual property risk Vertical integration of supply chain Global outsourcing and markets Procurement risk Exchange-rate risk Price of inputs Fraction purchased from a single source Industry-wide capacity utilization Receivables risk Number of customers Financial strength of customers Inventory risk Rate of product obsolescence Inventory holding cost Product value Demand and supply uncertainty Capacity risk Cost of capacity Capacity flexibility Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Risk Management in Global Supply Chains (4 of 6) Good network design can play a significant role in mitigating supply chain risk Every mitigation strategy comes at a price and may increase other risks Global supply chains should generally use a combination of rigorously evaluated mitigation strategies along with financial strategies to hedge uncovered risks Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Risk Management in Global Supply Chains (5 of 6) Table 6-4 Tailored Risk Mitigation Strategies During Network Design Risk Mitigation Strategy Tailored Strategies Increase capacity Focus on low-cost, decentralized capacity for predictable demand. Build centralized capacity for unpredictable demand. Increase decentralization as cost of capacity drops. Get redundant suppliers More redundant supply for high-volume products, less redundancy for low-volume products. Centralize redundancy for low-volume products in a few flexible suppliers. Increase responsiveness Favor cost over responsiveness for commodity products. Favor responsiveness over cost for short– life cycle products. Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Risk Management in Global Supply Chains (6 of 6) Table 6-4 [Continued] Risk Mitigation Strategy Tailored Strategies Increase inventory Decentralize inventory of predictable, lower value products. Centralize inventory of less predictable, higher value products. Increase flexibility 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. Pool or aggregate demand Increase aggregation as unpredictability grows. Increase source capability Prefer capability over cost for high-value, high-risk products. Favor cost over capability for low-value commodity products. Centralize high capability in flexible source if possible. Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Flexibility, Chaining, and Containment (1 of 3) Three broad categories of flexibility – New product flexibility  Ability to introduce new products into the market at a rapid rate – Mix flexibility  Ability to produce a variety of products within a short period of time – Volume flexibility  Ability to operate profitably at different levels of output Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Flexibility, Chaining, and Containment (2 of 3) Figure 6-1 Different Flexibility Configurations in Network Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Flexibility, Chaining, and Containment (3 of 3) As flexibility is increased, the marginal benefit derived from the increased flexibility decreases – With demand uncertainty, longer chains pool available capacity – Long chains may have higher fixed cost than multiple smaller chains – Coordination more difficult across with a single long chain Flexibility and chaining are effective when dealing with demand fluctuation but less effective when dealing with supply disruption Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Using Decision Trees (1 of 2) Several different decisions – Should the firm sign a long-term contract for warehousing space or get space from the spot market as needed? – What should the firm’s mix of long-term and spot market be in the portfolio of transportation capacity? – How much capacity should various facilities have? What fraction of this capacity should be flexible? Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Using Decision Trees (2 of 2) Executives need a methodology that allows them to estimate global currency instability, unpredictable commodities costs, uncertainty about customer demand, political or social unrest in key markets, and potential changes in government regulations the uncertainty in demand and price forecast Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Discounted Cash Flows Supply chain decisions should be evaluated as a sequence of cash flows over time Discounted cash flow (DCF) analysis evaluates the present value of any stream of future cash flows and allows managers to compare different cash flow streams in terms of their financial value Based on the time value of money – a dollar today is worth more than a dollar tomorrow Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Basics of Decision Tree Analysis A decision tree is a graphic device used to evaluate decisions under uncertainty – Identify the number and duration of time periods that will be considered (T) – Identify factors that will affect the value of the decision and are likely to fluctuate over the next T periods – Evaluate decision using a decision tree Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved Decision Tree Methodology 1. Identify the duration of each period (month, quarter, etc.) and the number of periods T over which the decision is to be evaluated 2. Identify factors whose fluctuation will be considered 3. Identify representations of uncertainty for each factor 4. Identify the periodic discount rate k for each period 5. Represent the decision tree with defined states in each period as well as the transition probabilities between states in successive periods 6. Starting at period T, work back to Period 0, identifying the optimal decision and the expected cash flows at each step Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved