Detailed Summary of Chapter 6_ Designing Global Supply Chain Networks.pdf

Detailed Summary of Chapter 6: Designing Global Supply Chain Networks 6.1 The Impact of Globalization on Supply Chain Networks Globalization offers companies the opportunity to increase revenues and decrease costs. However, it also introduces significant risks and uncertainties, such as fluctuatio...

Detailed Summary of Chapter 6: Designing Global Supply Chain Networks 6.1 The Impact of Globalization on Supply Chain Networks Globalization offers companies the opportunity to increase revenues and decrease costs. However, it also introduces significant risks and uncertainties, such as fluctuations in exchange rates, volatile fuel prices, and geopolitical uncertainties. Example: - Procter & Gamble (P&G): Reported substantial sales growth from developing markets with comparable profit margins to developed markets. By 2010, developing markets represented almost 34% of P&G’s global sales. - Samsung: In 2012, 86% of Samsung’s sales were outside Korea, highlighting its effective penetration into emerging markets like China and India. Global supply chains benefit from cost reductions through economies of scale and the consolidation of production in low-cost countries. However, these advantages come with risks, such as supply chain disruptions and demand fluctuations. 6.2 The Offshoring Decision: Total Cost Offshoring involves moving production to low-cost countries to reduce costs. The key is to evaluate total landed cost, which includes not only production costs but also transportation, inventory, and risk-related costs. Factors to Consider: - Supplier Price: Direct and indirect labor, materials, overhead, local taxes, and regulatory compliance costs. - Transportation Costs: Include freight costs and the impact of distance on logistics. - Inventory Costs: Higher due to longer lead times and increased safety stock requirements. - Risk Factors: Natural disasters, geopolitical risks, and economic volatility can impact cost-effectiveness. Example: The 2008 crude oil price fluctuations from $90 to over $140 per barrel and exchange rate fluctuations highlighted the volatility that global supply chains must manage. 6.3 Risk Management in Global Supply Chains Global supply chains face more risks compared to localized supply chains, including supply disruptions, demand fluctuations, price volatility, and exchange rate fluctuations. Effective risk management involves identifying these risks and implementing mitigation strategies. Risk Mitigation Strategies: - Multiple Suppliers: Reduces the risk of supply disruption. - Flexible Capacity: Adjusts production levels to match demand fluctuations. - Inventory Buffers: Mitigates delays but increases the risk of obsolescence. - Hedging: Financial strategies to manage currency and fuel price fluctuations. Example: Nokia mitigated the risk of a plant fire by using multiple suppliers, while Ericsson, which had no backup, suffered significant losses. 6.4 Discounted Cash Flows Evaluating global supply chain design decisions requires considering future cash flows and their present value. Discounted cash flow (DCF) analysis helps compare the financial viability of different supply chain options. Key Concepts: - Net Present Value (NPV): The present value of future cash flows minus the initial investment. It helps determine the profitability of an investment over time. - Discount Rate: The rate of return used to discount future cash flows to their present value. DCF analysis is essential for making informed investment decisions in global supply chain networks. 6.5 Evaluating Network Design Decisions Using Decision Trees Decision trees are used to evaluate supply chain design decisions under uncertainty by mapping out possible scenarios and their associated probabilities. Example: - D-Solar: A German solar panel manufacturer uses decision trees to evaluate plant location decisions in Europe or China, considering fluctuating exchange rates and demand uncertainties. Decision Tree Components: - Nodes: Represent decision points or uncertain events. - Branches: Represent possible outcomes and their probabilities. - Payoffs: The expected value of each decision path. Decision trees help managers make optimal decisions by considering all possible outcomes and their associated risks. 6.6 To Onshore or Offshore: Evaluation of Global Supply Chain Design Decisions Under Uncertainty Evaluating the decision to onshore or offshore involves considering both costs and risks. While offshoring can reduce labor and production costs, it increases risks related to transportation, lead times, and geopolitical factors. Considerations: - Total Landed Cost: Includes all costs from production to delivery. - Risk Mitigation: Strategies like flexible capacity and inventory buffers can offset some risks. - Economic Volatility: Exchange rates and commodity prices can significantly impact the cost-effectiveness of offshoring. Example: Honda’s flexible manufacturing plants allowed it to adjust production in response to demand shifts, unlike competitors with dedicated plants that faced idle capacity during demand drops. 6.7 Making Global Supply Chain Design Decisions Under Uncertainty in Practice Practical considerations for global supply chain design include combining strategic and financial planning, using multiple evaluation metrics, and conducting sensitivity analysis. Best Practices: - Integrated Planning: Combine strategic and financial planning to evaluate supply chain options under uncertainty. - Multiple Metrics: Use various metrics such as profits, customer service levels, and response times to evaluate decisions. - Sensitivity Analysis: Assess how changes in input assumptions affect outcomes to identify key variables. Using these practices helps managers make informed and robust supply chain design decisions. 6.8 Summary of Learning Objectives 1. Total Cost Considerations: Include all cost factors when making global sourcing decisions. 2. Uncertainties in Global Supply Chains: Account for demand, price, and economic uncertainties. 3. Risk Mitigation Strategies: Implement operational and financial strategies to manage risks. 4. Decision Tree Methodologies: Use decision trees to evaluate supply chain design decisions under uncertainty. Case Studies 1. BioPharma, Inc.: Explores the complexities of global supply chain decisions in the pharmaceutical industry. 2. The Sourcing Decision at Forever Young: Examines the challenges and considerations of sourcing decisions for a fashion retailer. This detailed summary encapsulates the essential concepts and examples from Chapter 6, providing a comprehensive understanding of designing global supply chain networks.