JIAOTONG UNIVERSITY 196 Supply Chain Management Lecture 6 Designing Global Supply Chain and Supply Chain Decision Under Uncertainty Instructor(s) Prof.Jianjun Gao Department of Automation School of Electronic Information and Electrical Engineering SEIEE AU406
Supply Chain Management Instructor(s) SEIEE AU406 + - Designing Global Supply Chain and Supply Chain Decision Under Uncertainty Prof. Jianjun Gao Department of Automation School of Electronic Information and Electrical Engineering Lecture 6
Outline The Impact of Globalization On SCM Risk Management in Global Supply Chain Discounted Cash Flow Analysis Representations of Uncertainty Evaluating Network Design Decisions Supply Chain Networks Using Decision Trees Designing under Making Supply Chain Decisions Under uncertainty Uncertainty in Practice SEIEE AU406 6-2
+ - SEIEE AU406 Outline The Impact of Globalization On SCM Risk Management in Global Supply Chain Discounted Cash Flow Analysis Representations of Uncertainty Evaluating Network Design Decisions Using Decision Trees Making Supply Chain Decisions Under Uncertainty in Practice 6-2 Supply Chain Networks Designing under uncertainty
The Impact of Globalization On SCM Globalization offers companies opportunities to simultaneously grow revenues and decrease costs P&G >1/3 profit from developing market Apparel and consumer electronics are two areas in which globalization has offered significant cost reduction opportunities. Globalization are often accompanied by significant additional risk. Dole's global banana production Crude oil spot price and exchange rate fluctuations in 2008 ■ Uncertainty of demand and price drives the value of building flexible production capacity at a plant SEIEE AU406 6-3
+ - SEIEE AU406 The Impact of Globalization On SCM Globalization offers companies opportunities to simultaneously grow revenues and decrease costs P&G >1/3 profit from developing market Apparel and consumer electronics are two areas in which globalization has offered significant cost reduction opportunities. Globalization are often accompanied by significant additional risk. Dole’s global banana production Crude oil spot price and exchange rate fluctuations in 2008 Uncertainty of demand and price drives the value of building flexible production capacity at a plant 6-3
The Impact of Globalization On SCM Results of Accenture Survey on Sources of Risk That Impact Global Supply Chain Performance Risk Factors Percentage of Supply Chains Impacted 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 Source:Adapted from"Integration:The Key to Global Success."Jaume Ferre,Johann Karlberg,and Jamie Hintlian,Supply Chain Management Review (March 2007):24-30. SEIEE AU406 6-4
+ - SEIEE AU406 The Impact of Globalization On SCM 6-4
The Offshoring Decision:Total Cost "If a foreign country can supply us with a commodity cheaper than we ourselves can make it,better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage." --Adam Smith,"The Wealth of Nations" ▣ Offshoring is the relocation,by a company,of a business process from one country to another-typically an operational process,such as manufacturing,or supporting processes,such as accounting. SEIEE AU406 6-5
+ - SEIEE AU406 The Offshoring Decision: Total Cost 6-5 “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” --Adam Smith ,“The Wealth of Nations” Offshoring is the relocation, by a company, of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting
The Offshoring Decision:Total Cost ■ Many companies have taken advantage of cost reduction through offshoring However,the benefits of offshoring to low-cost countries to be far less than anticipated. The reason: focusing exclusively on unit cost rather than total cost when making the offshoring decision ignoring critical risk factors SEIEE AU406 6-6
+ - SEIEE AU406 Many companies have taken advantage of cost reduction through offshoring However, the benefits of offshoring to low-cost countries to be far less than anticipated. The reason: focusing exclusively on unit cost rather than total cost when making the offshoring decision ignoring critical risk factors 6-6 The Offshoring Decision: Total Cost
The Offshoring Decision:Total Cost Dimensions to Consider When Evaluating Total Cost from Offshoring Performance Dimension Activity Impacting Performance Impact of Offshoring Order communication Order placement More difficult communication Supply chain visibility Scheduling and expediting Poorer visibility It is important to Raw material costs Sourcing of raw material Could go either way quantify these factors depending on raw material sourcing carefully when making Unit cost Production,quality (production and Labor/fixed costs decrease; transportation) quality may suffer the offshoring decision Freight costs Transportation modes and quantity Higher freight costs The benefits:unit cost Taxes and tariffs Border crossing Could go either way Supply lead time Order communication,supplier Lead time increase results reduction from low production scheduling,production time, in poorer forecasts and customs,transportation,receiving higher inventories labor and fixed costs; On-time delivery/lead Production,quality,customs, Poorer on-time delivery time uncertainty transportation,receiving and increased uncertainty tax advantages resulting in higher inventory and lower ▣almost every other product availability Minimum order quantity factor getting worse Production,transportation Larger minimum quantities increase inventory Product returns Quality Increased returns likely Inventories Lead times,inventory in transit and Increase production Working capital Inventories and financial reconciliation Increase Hidden costs Order communication,invoicing Higher hidden costs errors,managing exchange rate risk Stock-outs Ordering,production,transportation Increase with poorer visibility 6-7
+ - SEIEE AU406 6-7 The Offshoring Decision: Total Cost It is important to quantify these factors carefully when making the offshoring decision The benefits: unit cost reduction from low labor and fixed costs; tax advantages almost every other factor getting worse
Risk Management in Global SCM Global supply chains today are subject to more risk factors than localized supply chains of the past. These risks include supply disruption,supply delays, demand fluctuations,price fluctuations,and exchange-rate fluctuations. Financial Crisis in 2008 SEIEE AU406 6-8
+ - SEIEE AU406 Global supply chains today are subject to more risk factors than localized supply chains of the past. These risks include supply disruption, supply delays, demand fluctuations, price fluctuations, and exchange-rate fluctuations. Financial Crisis in 2008 6-8 Risk Management in Global SCM
Risk Management in Global SCM Supply Chain Risks to Be Considered During Network Design Category Risk Drivers Case:An automotive Disruptions Natural disaster,war,terrorism Labor disputes component manufacturer had Supplier bankruptcy hoped to save $4 to $5 Delays High capacity utilization at supply source Inflexibility of supply source million a year by sourcing Poor quality or yield at supply source from Asia instead of Mexico Systems risk Information infrastructure breakdown System integration or extent of systems being networked As a result of port congestion Forecast risk Inaccurate forecasts due to long lead times,seasonality, in Los Angeles-Long Beach, product variety,short life cycles,small customer base Information distortion the company had to charter Intellectual property risk Vertical integration of supply chain aircraft to fly the parts in Global outsourcing and markets Procurement risk Exchange-rate risk from Asia Price of inputs A charter that would have Fraction purchased from a single source Industry-wide capacity utilization cost $20,000 per aircraft from Receivables risk Number of customers Mexico ended up costing the Financial strength of customers company $750,000. Inventory risk Rate of product obsolescence Inventory holding cost The anticipated savings Product value Demand and supply uncertainty turned into a $20 million loss. Capacity risk Cost of capacity Capacity flexibility Source:Adapted from "Managing Risk to Avoid Supply Chain Breakdown."Sunil Chopra and Manmohan S.Sodhi,Sloan Management Review (Fall 2004):53-61. 6-9 飞
+ - SEIEE AU406 Risk Management in Global SCM 6-9 Case: An automotive component manufacturer had hoped to save $4 to $5 million a year by sourcing from Asia instead of Mexico As a result of port congestion in Los Angeles–Long Beach, the company had to charter aircraft to fly the parts in from Asia A charter that would have cost $20,000 per aircraft from Mexico ended up costing the company $750,000. The anticipated savings turned into a $20 million loss
Risk Management in Global SCM 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 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. Source:Adapted from "Managing Risk to Avoid Supply Chain Breakdown."Sunil Chopra and Manmohan S.Sodhi, Sloan Management Review (Fall 2004):53-61. SEIEE AU406 6-10
+ - SEIEE AU406 6-10 Risk Management in Global SCM
