Nowadays with globalization, global supply chain management is becoming a very important issue for most of businesses. The main reasons of this trend are procurement cost reduction, purchasing risks control, revenues increasing and etc. For instance, companies may set up overseas factories to benefit from tariff and trade concessions, lower labor cost, capital subsidies, and reduced logistics costs in foreign markets. Moreover, easy access to abroad markets and close proximity to customers result better organizational learning. On the other hand, improved reliability can be obtained as a consequence of closer relationship with suppliers.
There are some issues that should be considered in managing a global supply chain. First of all, the company should decide about its general outsourcing plan. For whatever reason, businesses may prefer to keep some aspects of supply chain nearer to home. The second issue that must be incorporated into a global supply chain management strategy is supplier selection. It can be very difficult to comparing bids from a range of global suppliers. Companies usually jump on the lowest price instead of taking time to consider all of the other elements. On the other hand, selecting the right suppliers is influenced by a variety of factors and thus there will be additional complexity in supplier selection due to the multi-criteria nature of this decision. Additionally, companies must make decisions about the number of suppliers to use. Fewer supplies may result reduced inventory costs, volume consolidation and quantity discounts, reduced logistical costs, coordinated replenishment, improved buyer-supplier product design relationship and thus better customer service and market penetration. However, small number of suppliers could lead to potential problems if one vendor is unable to deliver as expected, especially in global sourcing strategy. Finally, companies who prefer to ship their manufacturing overseas may face some additional concerns. Questions about the number of plants, as well as their locations can pose complex logistical problems.
Global Supply Chain Drivers
Driven by the promise of low material, manufacturing and labor costs, and advanced by the desire to penetrate emerging markets, companies have been testing the waters of offshore supply since the 1980’s. There are two dimensions of globalization: The geographic and the qualitative dimension. The former is used to describe the increased geographic scope of activities of worldwide companies, as well as increased location and dispersion of manufacturing facilities. Supply chains are becoming more and more international and at the same time increasingly integrated, thus increasingly interdependent than in earlier years. This is referred to as the qualitative dimension of globalization. Moreover, new possibilities of optimizing the supply chains belong to the qualitative dimension.
While both dimensions are of major importance for logistics, the qualitative dimension is becoming the driving force of global supply chain management. There are four clusters of globalization drivers: market, cost, government and competition. These drivers can be considered as descriptive variables for the ongoing globalization process. Effective global supply chain management calls first for an understanding of each driver and the way it operates. Each driver has the ability to directly affect the supply chain and enable certain capabilities for globalization.
1. Market Drivers
When considering the globalization process, the homogenization of customer needs can be considered on the market side. This frequently means long production runs and centralized manufacturing and distribution centers in order to generate and benefit from economies of scale. On the other hand, building dispersed production facilities that have a lot of excess capacity and take into account a multitude of local securities are no longer required and instead replaced by fewer, larger and central production plants.
Another part of market driver can be referred to as channel globalization. A typical characteristic of the global customers is the coordinated or centralized ordering of materials or services. Companies as a customer now prefer to deal with few outsourced service providers, and distribution channel partners which are able to perform transportation, warehousing and other related services more effectively and at a better price than producers, distributors, retailers, or consumers could do on their own. Thus, global logistics service providers are preferred partners of globally operating companies.
2. Cost Drivers
Besides the drivers on the market side there are also variables on the cost side. The global scale economies are the most apparent of these drivers. Production processes geographically concentrated for worldwide delivery require sophisticated logistics operations.
Global sourcing, sourcing efficiencies, favorable logistics, differences in country costs (including exchange rates), high product development costs and fast changing technology are essential for the supply chain focus. Global sourcing involves identifying, evaluating, negotiating and configuring supply across several geographies to reduce costs, maximize performance and lessen risks. Global sourcing focuses on the upstream side of the supply chain and denotes the globally dispersed supplier locations of a company. Companies are no longer restrained to local suppliers but are free to select their suppliers on a global scale. Companies are being challenged to increase the level of global sourcing to tap into opportunities and to fend off competition. Most of them are ill equipped for the challenge, though global sourcing employs the same set of activities as domestic sourcing; there is also greater complexity. They need to improve the skills of their purchasing organizations to pursue global sourcing effectively.
Favorable logistics denote transportation, procurement, distribution, maintenance, warehousing, inventory management and etc. The increasing productivity due to technological progress of logistics industry has considerable impact on the capability to globalize operations.
Another driving force of globalization is differences in country costs. For example, low-priced work forces and easy access to inexpensive raw materials in several countries are some of supply opportunities that can be employed in global supply chain management in order to enhance the overall competitiveness of the supply chain. Moreover, expensive markets with high profit margins in other countries are demand chances which can be used to increase supply chain’s income.
3. Government Drivers
One of important globalization drivers is government regulations. Favorable trade policies, compatible technical standards, common marketing regulations, government-owned competitors and customers and host government concerns are a number of governmental drivers.
The first one, favorable trade policy, has undoubtedly promoted international trade. For example, the WTO agreement has considerably pushed world trade. Agreements like this facilitate the worldwide cooperation and motivate companies to develop their domestic supply chain to new countries. Without the emergence of these policies, the globalization of business activities would not have occurred.
The compatibility of technical standards is of major importance as well. This applies to the transparency and compatibility of information systems which are essential components of every flow of goods. For instance, Global Trade Item Number (GTIN) is a part of a global item numbering scheme used in Radio Frequency Identification (RFID) technology to track products moving through supply chains that stretch all the way around the globe. This is a single international standard for information about the product and tracking so that people all over the world in different companies and countries be able to read the data easily and not have to translate it from one standard to another.
4. Competitive Drivers
The last group of drivers is called competitive drivers. High exports and imports, competitors from different continents, interdependency of countries and competitors globalized can be considered in this category.
High exports and imports represent flows of goods across national borders and thus are of critical importance for global supply chain management. The interdependencies of country activities reflect the increasing functional integration of economic activities across national boundaries. In globally configured supply chains, product components have to cross a multitude of national boundaries before a finished product can be handed over to the final customer.
Global versus Domestic Supply Chains
There are many differences between global and local supply chains, where the global supply chains are generally more advanced and complex. However, this does not necessarily mean that the global supply chains are always the best solution. We, at first, will review these differences and then talk about the best solution, global or domestic.
Nowadays you can find few sole domestic companies. Global sourcing is becoming a critical strategy for most of businesses or at least for their suppliers. Fewer and fewer companies are still selling their merchandises merely in domestic markets. Even if a company wants to stay totally domestic, competitors will come from every area of the world to its market. If domestic suppliers and customers are the only partners of a company, it needs to be analyzed whether it would be better to develop a global supply chain or not.
Although extension of companies to global marketplaces is a strategy almost accepted by everyone, the way it should be translated when it comes to managing global SCs is not that much clear. On the other hand, can the domestic features of a locally managed supply chain be easily considered as a part of a larger global supply chain? Before answering this question, we need to know the differences between the global and domestic SCs.
Differences Between Global and Domestic Supply Chains
Obviously, one of the main dissimilarities between global and domestic supply chain management is that the former involves company’s worldwide suppliers and interests rather than just a local or national direction. Thus, global supply chains are more difficult to manage than domestic supply chains.
Large geographical distances in global context not only increase transportation costs, but also complicate other logistics decisions because of inventory cost tradeoffs due to increased lead-time in the supply chain. Dissimilar local cultures, languages, laws and currencies lessen the effectiveness of supply chain processes such as demand forecasting, material planning, supplier relationship management and etc. Moreover, shortages of infrastructural resources especially in developing countries may hinder supply chain’s operations. Lack of qualified personals, bureaucratic management, poor banking system, inadequate road network, system inflexibility, inability of suppliers to provide requested products in adequate quality and quantity, and deficiencies in logistics and telecommunications infrastructure are just some problems frequently encountered when operating on the global scale.
There are some elements that are required to manage any supply chain regardless of whether it is domestic or global. Visibility and flexibility are some of basic ingredients that need to be incorporated in order for a supply chain to function efficiently regardless of the length of the chain.
Visibility is a key element. Effective supply chain collaboration requires that the people be able to see accurate and timely data showing needed information at different stages in the supply chain. This is critical in order to allow companies to manage their supply chain strategically, identifying various points throughout the supply chain where goods can be held to reduce the risk of delays. The increased visibility makes it possible to operate supply chains more efficiently leading to lower costs.
Another element is flexibility, a critical factor to the success of the supply chain. Importance of flexibility in supply chains and logistics becomes so obvious when we understand that global supply chain works in a vague environment and markets and customers are dynamic. In the new millennium, time is becoming the strongest competitive tool for the supply chain managers. As the basis of competition expands to the supply chain and time becomes increasingly significant, an important issue will be the flexibility of the supply chain. Thus, a supply chain should have enough flexibility in order to be able to compete efficiently.
Global supply chains seem to be less agile and flexible compared to domestic ones. In a sense, the very process of globalization has retarded agility. For instance, many companies in their search for lower production costs have outsourced much of their functions offshore. The main driver for such moves is lower related costs. However, in so doing they run the risk of extending their lead-times considerably and thus generating the need for more safety stock. As a result their agility is reduced.
As mentioned above, a great number of firms no longer deal with only their local customers; in contrast, they would ship their products to many different countries around the world. In addition, it is very common that a firm source their raw material from different countries with distance of thousands of miles from it. Thus, lead time in both inbound and outbound logistics has dramatically increased and would result in a more uncertainty through the logistics. Since then, if companies want to be successful in the global competition, it is necessary for them to achieve supply chain flexibility.
These two elements are tied with information and thus information management will be an important area in supply chain management. In fact, many would argue that today, managing the supply chain is more about managing information than moving goods. Companies operating today are collecting tremendous amounts of data and the trend to move towards point of sale information is resulting in mountains of information being fed into a company’s system. While this information ultimately will help businesses streamline their operations and reduce inventory, the trick right now is to take the raw data and translate it into a form that is useful for the customer.
Information visibility is absolutely critical for businesses that want to improve management of their global supply chain. Metrics relative to shipments and order and payment status will spotlight inefficiencies in the global supply chain and help companies drive these out through cost elimination.
Companies are looking at how to achieve efficiencies in a broad range of supply chain operations such as product design, demand forecasting, inventory management, and customer service. The key to realizing these efficiencies is information sharing between companies in a supply chain. Many current e-business developments are working on methods and standards to share information across multiple companies. Information sharing is the foundation and then cross-company coordination is what will deliver the desired efficiencies.
Although these elements are critical to both global and domestic supply chain success, operational differences come into play when the supply chain extends beyond borders. They play out differently where international trade is just more complicated. First, the goods are traveling a far greater geographical distance. This usually requires different modes of transportation. Since, visibility is very complicated to achieve in an international supply chain compared to a local. Consequently, the skills and expertise needed to manage a global supply chain differ from the domestic requirements.
For global traders, the information flow in developing countries is not as well established or disciplined as it is in developed countries. Missing and unreliable information adds risk and decreases flexibility in the international supply chain. Often supply chain managers and the ultimate customer can’t be sure what they will be receiving until the shipment actually arrives.
Achieving visibility is easier domestically than globally. In the domestic supply chain, you can contract a single carrier and will achieve high visibility. If you’re going end-to-end, it is more complex and there will be gaps in visibility. Langley is a big proponent of outsourcing the supply chain function to partners that have the ability to handle the complexities of global supply chain management. You need to have partners if you really want to play in the global supply chain. One of the reasons these partnerships are so important is because many of these logistics partners have developed operations and partnerships in countries overseas. For companies shipping globally, there are three main issues: getting the goods from origin to port in-country, shipping from port to port over the ocean, and then shipping from port to destination.
Extending a supply chain beyond countries borders clearly lengthens the chain and thus results in exposure to greater variables. These variables can include border crossings, multiple modes of transportation and multiple hands-offs, different government systems, technology issues and security concerns. Every one of these variables presents opportunities for errors that can stall the entire supply chain. There is more risk in global trade and you have to plan for and be aware of that. Thus, it can be concluded that managing the global supply chain is mostly about risk management. Domestic supply chains face less inherent risk; incidents are less likely to occur and the consequences will be less severe. Global supply chains are entirely different where the margin for accident and error is huge.
Companies that operate globally are under greater pressure than their domestic counterparts to actively manage their supply chain. It is such a dynamically charged situation with constant trade-offs. The risks inherent in managing a global supply chain mean that companies need to constantly be conducting cost-benefit analyses. Sourcing overseas may be less costly, but the risks could outweigh the benefits in the long run.
Selecting Global or Domestic Supply Chain?
A company’s supply chain is an integral part of its approach to the markets it serves, regardless of whether the supply chain is domestic or international. There is no perfect supply chain formula that can be applied to every company. The supply chain should respond to the market necessities and do so in a way that supports the company’s business strategy. Supply chains vary across industries and even within industries, according to the corporate goals. The business strategy a company employs starts with the needs of the customers that the company serves or will serve. Depending on the needs of its customers, a company’s supply chain must deliver the appropriate mix of responsiveness and efficiency.
This means that there is no right answer about which one is the best. Companies need to understand how the supply chains result in the profitability of their business. Depending on the size and operational structure of a company, the domestic supply chain may be managed as part of a global whole. In many companies, their global supply chain is yet made up of a lot of smaller sections that operate separately and individually. In such cases, the domestic supply chain comprises one part, and the skills and knowledge necessary to manage it are different from those required to manage the global supply chain.
Based on the above discussion, it can be concluded that although supply chain is very important and crucial in nowadays business, it is at most a function of companies that helps them achieve their objectives. No matter which one you select, domestic and global supply chains should all be aligned with your business strategy.
Characteristics of Global Supply Chains
There are a number of characteristics, which add more difficulties to handling a global supply chain compared to a domestic. More important ones are: farness, forecasting complexities, economical and political worries and, infrastructural insufficiency.
- Farness: No need to say, worldwide business are associated with larger geographic distances and more unpredictable disturbances, implying longer lead times. Longer lead times in a supply chain cause “the bullwhip effect”. The bullwhip effect is a dynamic in supply chains. This phenomenon happens when small changes in product demand by the consumer is translated into wider swings in demand experienced by companies, going back in the supply chain. As a result, companies at different stages in the supply chain will have different pictures of final-customer’s demand and a breakdown in supply chain coordination will occur.
- Forecasting complexities: Another feature of global supply chains that increases the bullwhip effect is forecasting inaccuracy. Increased geographical distances and communication difficulties result in forecasting complexities. Moreover, in a global supply chain, different cultures with different languages and mentalities should be included into the demand forecasting models. As the exactitude of demand forecast has considerable impact on the safety stock level, operating in the global context tends to raise inventories. On the other hand, demand forecasting based on orders received instead of end user demand data will become more and more inexact as it moves up the supply chain. In global supply chains, companies are usually removed from contact with the end user and thus they lose touch with actual market demand. Thus, each company just sees the orders that come to it and when it uses this order data to do demand forecasts, it adds more distortion to the demand picture and pass this distortion along in the form of orders that it places with its suppliers.
- Economical and political worries: Global supply chains carry unique risks, including variability and doubt in currency exchange rates, economic and political instability, tariffs and duties changeability, non-tariff trade barriers, individual income tax and etc. Although macroeconomic uncertainties arise in the national setting, in the international context, the problem is magnified as the company deals with a number of national macroeconomic settings. Since then, risk management has to be seen as an essential part of global supply chain management, where practitioners should factor these risks into their decisions when dealing with global supply chains. For example, currency exchange rate affects the price of goods purchased in the supplier’s currency and so influences the financial performance of the supply chain. Thus, its changes should be traced in order to continuously make decisions about the time and quantity of purchasing.
- Infrastructural insufficiency: Infrastructural shortages in developing countries in transportation and telecommunications, as well as inadequate worker skills, supplier availability, supplier quality, equipment and technology provide challenges normally not experienced in developed countries. These difficulties reduce the degree to which a global supply chain provides a competitive advantage. For example, intra-country links are usually sparse in the third world countries, making access to new inland markets more difficult and costly.
One of the most important activities of global supply chain management is global sourcing. Global sourcing occurs when buyers purchase goods and services from sellers located anywhere in the world. Global sourcing is used as a proactive strategy to reap economic advantage. As developing countries continue to implement free market reforms, educate workforces and develop expertise and knowledge, these emerging economies can be considered as a cost-effective alternative compared to more expensive, domestic resources.
Global sourcing is a sourcing strategy which involves identifying, assessment and negotiating supply across multiple countries in order to minimize costs, make the most of performance and lessen related risks. Global sourcing related costs that must be controlled can be summarized as follows:
- Material costs: price, tooling, transaction and other costs related to the actual product or service delivered.
- Transportation costs: transportation, freight charge, consolidation, transfer fee, pickup and delivery.
- Inventory holding costs: warehousing, taxes, insurance, depreciation, shrinkage, obsolescence, and other costs associated with maintaining inventories, including the cost of money or opportunity costs.
- Handling and packaging: material handling, disposal charge, packaging/supplies materials storage.
- Cross-border taxes, tariffs, and duty costs: the sum of duties, shipping, insurance and other fees and taxes for door-to-door delivery.
- Administration: order processing, communication, overhead.
- Risk and damage: damage/loss/delay, insurance.
Such variables give global sourcing attributes that are similar to financial and risk management, requiring companies to determine performance targets and to develop a balanced supply portfolio that includes the appropriate mix of cost, risk and performance.
Global Sourcing Challenges
Although the use of foreign suppliers has an increasing trend, the transition to global sourcing seems not to be easy for most companies. Few companies have the required infrastructure to effectively make this transition. On the other hand, although sourcing from low cost markets may offer significant cost advantages, it also means larger geographical distances, extended lead times and increased risk. Left unaddressed, these challenges result in critical supply chain performance issues that can severely undermine any sourcing initiative. Some of global sourcing challenges are as follows:
- Low visibility: As mentioned before, global sourcing processes introduce distance, time zone, cultural and language barriers that combine to reduce visibility into offshore operations. With no visibility into international shipments, companies are forced to maintain safety stock that handle the risk of obsolescence each time a decision is made to launch new products, extensions or discontinuations. Furthermore, with no access to complete and up-to-date information, supply chain executives struggle to assess the cost of making these decisions. In this environment, making the right sourcing decisions quickly turns into a guessing game. One of the greatest problems for executives in global supply chain management is lack of visibility. If people have visibility into where an item is within the global supply chain they are able to make optimal supply and demand decisions based on the information. Without context it is impossible for individuals responsible for managing products across complex global supply chains to make decisions that are optimal for the organization. To get context the organization requires cross-functional execution, information and financial visibility. Therefore, more emphasis and investment are needed by organizations to insure that they have the required visibility and are enable to operate efficiently. Critical global supply chain visibility is not just about the location of an item in the supply chain but it includes the ability to see virtually all aspects that affect the item. Critical supply chain visibility includes views into where an item is anywhere in the cash-to-cash cycle and the views into all of financial and compliance issues that accompany the item.
- Difficult communication: Diverse cross border business practices and customs often create a challenging communication environment. Suppliers, logistics providers, manufacturers and other members of the chain may have different expectations on how, where and when to communicate information, and at what level of detail. Manual methods of communication such as phone, fax and email combined with language, cultural, and time-zone differences result in higher order-taking and order fulfillment error rates, high Days Sales Outstanding (DSO) rates and etc. since then, these problems may even outweigh the benefits of employing an international low-prices supplier.
- Security issues: On top of sourcing and logistics complexities, companies are now increasingly concerned with security issues in the global sourcing process. To avoid these pitfalls, brand owners must develop greater visibility into order and logistics related processes across their extended supply chain.
Global Sourcing Dimensions
Different dimensions of global sourcing that should be considered selecting the sourcing strategy are as follows:
- Costs: One of the main reasons of global sourcing is to benefit from lower costs abroad such has labor; raw material and etc. Although, there are other costs such as multi-modal freight charges, broker fees, taxes, and insurance in global sourcing that are not part of domestic transactions. Since then, one should employ a cost/benefit analysis in order to make decision between global or domestic sourcing strategy. Today’s supply chains exist in an extremely dynamic global environment. Product customization, rising energy, commodity, and labor costs, and new markets located in emerging economies have driven many manufacturers to source and produce goods in globally dispersed regions of the world. The uncertainties and risks associated with increasingly extended supply chains are resulting in bloated inventories to hedge against the unanticipated disruptions in delivery times and supply.
- Laws: Laws applied in global contracts between buyers and suppliers can be chosen from the law of the buyer’s country, the law of the supplier’s country, or one applicable under an agreement accepted by both countries. Therefore, it should be clearly defined which one of these three category of laws are going to be used through buyer-vendor transactions.
- Currency: Supply chain members should agree on a currency to use. If the buyer’s currency strengthens relative to the supplier’s currency, careful decisions consider use of the supplier’s currency.
- Lead time: As mentioned before, large geographical distances in global context make lead-time to be longer than for domestic ones. This is also due to slower transportations modes such as shipment which is not usually involved in domestic sourcing. Whether ultimate customers expect all products to be available for immediate delivery or they will accept longer lead times, will have a significant effect on company sourcing strategy. Also, longer lead times require a longer time horizon over which forecasts must be made.
- Language and culture: Being unfamiliar with the supplier’s language and culture, you increase the risk of communication challenges, misunderstandings, and uncomfortable encounters. On the other hand, sourcing processes such as supplier selection, supplier assessment, supplier involvement and so on in global supply chains needs to consider more sophisticated factors such as culture and civilization which may be insignificant in domestic sourcing.
- Transportation: While domestic sourcing usually involves one shipping mode, global sourcing involves multi-modal transportation, combined air, water, and ground transportation to get goods from initial suppliers to the ultimate consumers. Deciding about optimal shipment modes combination is another global sourcing attribute which can be worked out using operations research techniques.
- Payment methods: Global sourcing often involves payment using international letter of credits which requires the involvement of both the buyer’s and supplier’s banks. Managing credit risk can be accomplished by creating some credit programs that are tailored to suppliers in foreign countries. Credit risks can be lowered by the use of credit insurance and government loan guarantees for exports.
One of the other main activities in global supply chain management is known as demand management. Demand management in a global SC includes three activities: demand management, demand planning, and sales forecasting management. Although any purchasing order from a buyer to a supplier in a global supply chain can be considered as a demand, all of them are dependent to each other except the first one- the amount of product demanded by the end-use customer of the supply chain. On the other hand, the ultimate customers create the demand that will flow through the supply chain. These ultimate customers may be final consumers shopping from a retailer or online, or a business buying products for consumption in their business operations.
Only the frontline company in the supply chain that directly serves these ultimate customers can experience the actual independent demand. All companies in the other levels of traditional supply chains just experience an inexact demand that is tempered by the order fulfillment policies of their immediate customers which they procure products for them. The second type of demand is not the independent demand of the ultimate customer.
It is important to note that only one company in front of a supply chain is directly affected by independent demand. The rest are affected by dependent demand. It should be mentioned that the techniques, systems, and processes needed to deal with dependent demand are somewhat different from those of independent demand. In order to improve the global supply chains performance targets such as logistics and supply chain costs or customer service levels, we need to know the differences between these independent and dependent demand and identify which type of demand affects companies in different levels of a chain. Moreover, developing techniques, systems, and processes to deal with each company’s type of demand can have a deep impact on global supply chain performance targets.
Demand management includes the marketing functions, along with the coordination of marketing activities with other functions in the company and the supply chain. However, the traditional demand creation role of marketing is tempered in demand management by a desire to coordinate the flow of demand across the supply chain and to create incentives for supply chain partners to help manage these flows. Demand planning is concerned with the coordination across the global supply chain of derived and dependent demand. Sales forecasting management is concerned with the independent demand that occurs in any global supply chain.