Global Supply Chain Management: Strategies, Sourcing, and Risk

Posted on Aug 30, 2024 in Economy

Global Supply Chain Management

Introduction

Due to globalization, suppliers and customers are now globally dispersed. Companies have evolved their supply chains into complex global structures, contributing significantly to their cost structure and posing management challenges. These supply chains are best described as networks or webs of interconnected entities and activities involved in producing and delivering products to consumers.

Upstream and Downstream Activities

Activities within the supply chain are categorized as upstream or downstream relative to the focal firm (FF):

  • Upstream: Suppliers/raw materials (e.g., cotton, steel), component parts, assembly. This flows from Tier 3 Suppliers → Tier 2 Suppliers → Tier 1 Suppliers → Focal Firm.
  • Downstream: Distributors/Wholesalers → Retailers → End Consumers (consumers are an entity, not an activity).

Value Chain

A value chain encompasses the entire process from input acquisition to product delivery and support. It’s broken down into:

  • Primary Activities: Directly contribute value to the end product (e.g., R&D, Production, Marketing).
  • Support Activities: Support the primary activities (e.g., HR, Finance, Logistics).

Competitive Advantage Strategies

Companies primarily compete using one of three strategies:

  1. Differentiation: Creating superior value (high value, high price, high cost, low profit margin) – Examples: Tesla, Technogym.
  2. Low-Cost Structure: Lower value, low price, low cost (low profit margin) – Examples: Costco, Walmart.
  3. Differentiation and Low-Cost: High value, high price, low cost (maximizing profit margins) – Examples: Nike, Apple.

Example: Nike’s Primary Value Chain

Nike’s primary activities include R&D, Product Development, Manufacturing, Marketing, and Customer Support. Their support activities (HR, Accounting, Finance, MIS, Logistics) support the entire organization’s primary value chain.

Supply Chain Management and Outsourcing/Offshoring

Supply chains are embedded within the primary value chain. Companies make strategic decisions about which activities to perform internally versus contracting them out (outsourcing).

  • Outsourcing: Contracting with another company (often in a foreign country) to perform a specific value-chain activity.
  • Offshoring: Establishing facilities, hiring labor, and performing a value-chain activity (or the entire value chain) in a foreign country.

Key Considerations for Outsourcing

  1. Which activities to outsource and the number of suppliers for each activity.
  2. Geographic location of suppliers (logistics and proximity to markets).
  3. Cost associated with each supplier relationship and contract length.

Global Supply Chain Management (GSCM)

GSCM focuses on managing all upstream and downstream activities, including distribution, delivery, and product support. It has four primary areas of focus:

  1. Planning: Forecasting demand for all products and customers.
  2. Sourcing: Evaluating the make/buy decision for all tiers and products.
  3. Delivering: Managing logistics between upstream and downstream nodes.
  4. Returns: Handling excess inventory and defective products.

Key Characteristics of Effective Supply Chains

  1. Agility: Reacting quickly to unexpected events and shifts in demand or supply.
  2. Adaptability: Changing supply chain configurations in response to external environmental changes.
  3. Alignment: Coordinating the interests of all entities involved in the supply chain. This requires power (typically held by the focal firm) and trust built through a framework and consistent demonstration of trustworthiness.

Supply Chain Strategy

A company’s supply chain strategy must align with its overall business model and consider five key elements:

  1. Cost: Relevant to the entire supply chain.
  2. Innovation: Developing valued products/services.
  3. Quality: High quality leads to increased value and price.
  4. Time: Delivering products/services when customers expect them.
  5. Service: Understanding and meeting customer service expectations.

Example: Bob Marshall’s Biga Pizza

Bob Marshall prioritizes high value (fresh, local ingredients) and high prices. He sources ingredients locally and seasonally, changing his menu to reflect availability. His strategy emphasizes quality, cost, and innovation.

Sourcing Decisions

Sourcing decisions involve determining which activities to perform internally “mak”) versus contracting out “bu”).

Advantages of Buying (Outsourcing)

  • Focus on core value-creating activities.
  • Lower costs due to economies of scale.
  • Improved quality from specialized suppliers.
  • Greater flexibility and adaptability to changes.
  • Increased efficiency.

Disadvantages of Buying (Outsourcing)

  • Increased risk in managing supplier relationships.
  • Risk of IP infringement.
  • Risk associated with logistics and delivery.
  • Risk of product safety and quality issues.

Total Cost of Ownership (TCO)

TCO is used to evaluate the make-or-buy decision and select suppliers. It considers costs before, during, and after the transaction.

Splintering and Hedging

Splintering: Breaking down large supply chains into smaller, more agile ones to reduce complexity and improve efficiency.

Hedging: Building buffers against risk and creating diverse supply networks to mitigate uncertainty.

Conclusion

Effective global supply chain management requires careful consideration of strategy, sourcing decisions, and potential risks. By aligning their supply chain strategy with their business model and prioritizing key elements like cost, innovation, quality, time, and service, companies can achieve a competitive advantage in the global marketplace.