Global supply chain management can deliver four main benefits: cost reduction, quality improvements, increased customer satisfaction and competitive leverage.3 These four benefits can be achieved in each of the four functions of the global supply chain, namely logistics, purchasing, operations and marketing channels.
Take cost reductions as an example: they can be achieved in logistics through distribution centres and inventory management systems that serve multiple country markets, in purchasing through sourcing at the lowest total costs worldwide, in operations through locating production or back-office activities in low cost countries and in marketing channels through coordinated multi-market strategies.
Ultimately, the benefits obtained from global supply chain management need to be translated into customer value and satisfaction in form of increased delivery speed, more product diversity, higher quality and consistency in goods and services as well as lower purchasing prices.
The globalisation of supply chains is also associated with formidable challenges.
It depends on appropriate infrastructure, such as transportation, communication, utilities and technology. In a global environment, it cannot be assumed that the required transportation infrastructure, such as motorways, railways or waterways, exists in each location. Moreover, communication issues may arise in terms of international data transfer or data security. Basic utilities, such as 24-h electricity supply or access to clean water cannot be taken for granted in every country.
Finally, the technological infrastructure has to be scrutinized. This could involve questions on electronic data interchange (EDI) capabilities of offshore production sites; the use of an enterprise resource planning (ERP) tool across corporate boundaries; the ability of logistic partners to trace products with radio frequency identification tags (RFID); or the implementation of a vendor-managed inventory (VMI) system.
In addition to such infrastructure requirements, global supply chain management also has to deal with a plethora of legal issues, security concerns, custom formalities, commercial documents, payment streams, insurance aspects and so on. While industry globalization drivers, i.e. markets, costs, government and
3Hult et al. (2014).
competitors,4inevitably lead to the globalization of supply chains, the challenges involved in managing them effectively and efficiently are not to be underestimated.
Next, we take a closer look at inbound and outbound logistics.
7.2.1 Inbound Logistics, Purchasing and Operations
Inbound logistics encompasses receiving goods from suppliers. Traditionally, such goods were primarily raw materials or components that were used as input into manufacturing located in the home country of a company. However, these days the pressure toward achieving better results with fewer resources and at a faster speed has fundamentally changed this pattern. Companies locate their own value chain activities in different countries around the globe, outsourcing a wide variety of activities. Frequently, inbound logistics and operations are embedded in a web of international joint ventures and strategic alliances. In fact, many companies even outsource activities that were previously regarded as their core competencies.
Examples are car manufacturers that outsource the assembly of their products,5 banks that outsource their information systems,6and companies that outsource their entire customer relationship management.7 Sourcing from abroad via contract manufacturing or licensing agreements not only permits companies to concentrate on sales and marketing activities, but also reduces the level of investment into manufacturing and increases the flexibility to switch between different suppliers and manufacturing countries.
International sourcing decisions tend to be rather complex due to the multitude of factors that managers need to take into account. Among the most important factors to be considered are (1) cost differences between countries, (2) transport costs (e.g. delivery time, security, and costs), (3) country infrastructure, (4) political risk, (5) market access barriers, and (6) exchange rate issues.8
Cost differences between countries influence the location of value chain activities. Many US and EU based companies, for instance, have shifted labor-intensive production to South East Asia and other low cost regions of the world.
Interesting in this context has been the development in China and India. China’s comparatively cheap and huge labor pool earned the county a reputation as the
‘workbench of the world.’ Similarly, many western companies took advantage of the Indian labor market and outsourced many call centers and IT functions to cities like Bangalore and Hyderabad. Today, the situation has changed in that both China and India are moving away from merely serving as low labor cost destinations for products sold in Europe or the United States. The emergence of a broader middle
4Yip and Hult (2012).
5Takeishi (2001).
6Insinga and Werle (2000).
7Graf et al. (2013).
8Keegan and Schlegelmilch (2001).
class has made the markets attractive in their own right. Indigenous competitors also emerged in both countries (e.g. Haier, Lenovo or Midea in China or Tata, Infosys or Wipro in India) that have the capabilities to challenge the traditional dominance of companies headquartered in the EU or the USA. Consequently, labor intensive low skill activities like sport shoe or textile production are now more likely to be located in Bangladesh, Cambodia or Vietnam than in the coastal region of China or in India. Figure7.1illustrates the large difference existing in hourly compensation for production workers in selected countries.
While differences in wages are important, it should not be forgotten that they are only one element of the costs of production and, depending on the product, may be responsible for only a relatively small part of the total costs of a product. Moreover, other factor costs like land, material and capital will sometimes offset the labor cost differentials.
Transport costs are largely driven by distance. However, transportation technologies such as increasing sizes of container ships, advances in intermodal services and EDI—electronic data interchange—have been reducing both transport time and costs. Containers can be transferred between air, ship, rail, and trucks; EDI facilitates the smooth exchange of information on production schedules, forecasts and orders. Some industries have also launched their own extranets, for example the
Fig. 7.1 Hourly compensation costs in manufacturing, US dollars 2012. Source: U.S. Bureau of Labor Statistics (2013, August). International Labor Comparisons. www.bls.gov/fls/
ichccaesuppall.xls. Accessed 14 August 2015
Automobile Network Exchange (ANX),9to place and process orders and facilitate just-in-time manufacturing.
International transport is nearly always performed by third parties. However, the mode of transport (e.g. airfreight versus ocean shipping) is mainly driven by the type of products transported, and the time requirements of the receiving entity.
Environmental sustainability is an increasing concern in the transport industry.
The transport “sector consumes over 50 per cent of global liquid fossil fuels and is projected to grow over 45 % overall from 2008 to 2035.”10 Over 80 % of this growth in transport emissions is predicted to occur in developing countries such as China and India,11and most of the emissions will be caused by land transport.12 Consequently, the transport sector is tasked to move toward greener, low-carbon and more environmentally friendly patterns. In future, corporations clearly need to put more weight on environmental costs when making sourcing decisions.
Country infrastructure provides the necessary framework for manufacturing operations. The infrastructure includes power, roads, communications networks, and the availability of a competent labor pool. In addition, a country needs to provide a secure setting, offer civil order and permit effective governance. When services, components and raw material from other countries are required, a country also has to offer a reliable access to foreign exchange to enable purchases from abroad. Thus, access to cheap labor alone is not enough to be an attractive location for manufacturing operations; a country also has to offer the necessary infrastruc-ture to support the manufacturing facility.
Political risk may deter companies from making investments into sourcing from abroad. Such risks could, for example, relate to terrorism, riots, coups, civil war and the resulting confiscation or destruction of property. In general, any political change that alters the value of an economic action may pose a political risk. Assessing the likelihood and severity of political risk is relatively difficult. This holds in particular for less developed countries.
From a corporate point of view, two types of political risks should be distin-guished13: Macro-level risk affects all companies in the jurisdiction of the country in a similar way. This may include adverse regulatory changes, currency restrictions instigated by the central bank of the country or endemic corruption.
In contrast, micro-level risks are industry, company or project specific. This may include discrimination against certain international companies operating in the country, such as the expropriation of oil companies in Venezuela.
Market access also influences sourcing considerations. When countries limit market access via exports because of local content requirements, balance of payments problems or to encourage knowledge transfer, companies often have no
9ANXeBusiness Corp (2015).
10UNCTAD Secretariat (2013).
11United Nations Environment Programme (2012).
12UNCTAD Secretariat (2013).
13Alon and Herbert (2009).
choice but to establish local manufacturing if they want access to the market in question. Sometimes companies may also be forced to enter into joint venture agreements with local partners to gain market access. Such requirements are usually politically motivated because governments try to restrict foreign ownership, either in general or in certain industries, or hope to increase the speed of knowledge transfer by making a local partner mandatory. Of course, establishing foreign manufacturing or service facilities in a country in order to serve this market may also have positive sides. A local presence may be viewed more favorably by customers, can reduce delivery time and costs, and improves the quality of market intelligence. In addition, a local joint venture may contribute valuable market knowledge and networks.
Foreign exchange exposure may also shape global sourcing strategies in that companies may opt to pursue global sourcing strategies as a way of limiting exchange-related risks. However, as exchange rates fluctuate, a previously attrac-tive manufacturing location may become less attracattrac-tive over time. To this end, flexible sourcing strategies that offer alternative country options for supplying markets, such as contract manufacturing or licensing, are called for. As far as possible, prudent companies will include exchange volatility into their planning of logistics and sourcing.
7.2.2 Outbound Logistics and Marketing Channels
Market channels comprise the part of the global supply chain that connects to customers. To this end, market channels include all activities related to sales, service and the development of customer relationships.14Of course, an important component of this final part of the supply chain is also the physical movement of products to the customer, i.e. the outbound logistics.
Focusing first on outbound logistics, the processes are initiated by an order from a customer. Apart from the physical movement of goods, transportation and warehousing, this also involves the management of the appropriate information flow, such as sending an acknowledgement of the order to the customer or inventory control. From a marketing perspective, a customer-focused view of the logistic function is called for. Customers are primarily interested in speed (e.g. how much time lies between order and delivery; is the supplier able to meet agreed time schedules), reliability (e.g. does the delivery match the order; zero defect delivery), and convenience (e.g. is it easy to place the order; is it possible to track the order status). In business-to-business relationships, issues like electronic data exchange and the willingness to participate in just-in-time delivery and inventory holding are also important.
While in principle, the requirements placed on outbound logistics are largely identical for domestic and international customers, in practice the complexity
14Hult et al. (2014).
increases considerably when goods cross-national boundaries. Increased distances may require other modes of transport and special packaging, international deliveries require different customs, shipping and tax documents, and language differences require translation and may make communication with the customers more difficult. All of this increases distribution costs.
In order to reduce international distribution costs, many companies have consolidated their national distribution networks and formed distribution centers that serve multiple countries. Others are outsourcing their logistics to specialist companies like UPS, FedEx or DHL (now owned by Deutsche Post). In addition to simply offering only physical distribution, specialist logistic companies are increas-ingly taking over warehousing functions and manage the associated information flows. Efforts to reduce logistic costs by, for example cutting inventories through build to order (BTO) approaches, lead to an integration of the outbound logistics in comprehensive supply chain management solutions that span procurement to final customer delivery. For both customers and corporations, ethical aspects, including working conditions in geographically dispersed factories or on cargo ships, as well as ecological challenges, such as the need to reduce the carbon footprint, are playing an increasingly important role in the design of international supply chains.15