Lecture 6:

Global strategic complexities

International Supply
Chain Management
 Contents

I. Supply chain management as a

concept

II. Supply chain management and the

challenges in a global market
 I. Supply chain
management concept
1. Definition:
• A supply chain is the network of all the activities
involved in delivering a finished product/service to
the customer
• Supply chain management (SCM): the planning
and management of all activities involved in
sourcing and procurement, conversion and
logistics.
• SCM includes coordination and collaboration with
channel partners, which can be suppliers,
intermediaries, third-party service providers, and
customers; and integrates supply and demand
management within and across companies
Source: Council of Supply Chain Management Professionals, 2010
 I. Supply chain
management concept
2. Activities in the supply chain
• demand management (e.g., forecasting, pricing, and
customer segmentation),
• procurement (e.g., purchasing, supplier selection, and
supplier-base rationalization),
• inventory management (e.g., raw materials and finished
goods),
• warehousing and material handling,
• production planning and control (e.g., aggregate planning,
workforce scheduling, and factory operations),
• packaging (i.e., industrial and consumer),
• transportation management,
• order management,
• distribution network design (e.g., facility location and
distribution strategy), and
• product-return management.
 I. Supply chain
management concept

• Cross-organizational teams across the supply chain

can bring great perspective to the overall team process.
Representatives from design, business, purchasing,
manufacturing, equipment purchasing, planning,
customer, logistics, information technology, and finance
all bring their specialized knowledge to the benefit of
the supply chain as a whole
 II. SCM & the challenges
in a global market
1. Global sourcing and distribution

a. Global sourcing
• Global sourcing refers to buying the raw materials or
components that go into a company’s products from
around the world, not just from the headquarters’
country. The advantages of global sourcing include
access to higher quality or lower prices.
• Information technology and communications have
enabled the outsourcing of business processes, enabling
those processes to be performed in different countries
around the world.
 II. SCM & the challenges
in a global market
1. Global sourcing and distribution

Different sourcing decisions

• When making sourcing decisions, companies must
decide whether to sole-source (i.e., to use one supplier
exclusively) or to use two or more suppliers.
• Whichever sourcing strategy a company chooses, it can
reduce risk by visiting its suppliers regularly to ensure
the quality of products and processes, the financial
health of each supplier, and the supplier’s adherence to
laws, safety regulations, and ethics.
 II. SCM & the challenges
in a global market
1. Global sourcing and distribution
Different sourcing decisions
Advantages Disadvantages
Sole-sourcing • Price discounts based on higher • Higher risk of disruption
volume • Supplier has more negotiating
• Rewards for loyalty during tough power on price
times
• Exclusivity brings differentiation
• Greater influence with a supplier

Multi-sourcing • More flexibility in times of • Quality across suppliers may

disruption be less uniform
• Negotiating lower rates by pitting • Less influence with each
one supplier against another supplier
• Higher coordination and
management costs
 II. SCM & the challenges
in a global market
1. Global sourcing and distribution

Best sourcing practices

• Best practices in global sourcing include the following
components:
– Using ISO 9001:2008 certification to help ensure the quality of
products regardless of where they are produced
– Considering not just the quality of products but also the
environmental practices of the company providing the products,
through ISO 14000 certification
– Using service-level agreements to ensure the quality of services
• Entrepreneurs benefit from outsourcing because they
can acquire services as needed, without having to build
those capabilities internally.
 II. SCM & the challenges
in a global market
1. Global sourcing and distribution
b. Global distribution
There are typically three distribution strategies for entering a new
market.
• First, companies can do a joint-venture or partnership with a local
company. This is the strategy Wal-Mart used when entering Mexico.
• A second strategy is to acquire a local company to have immediate
access to large-scale distribution. The Home Depot pursued this
strategy in China when it acquired a partner with whom it had been
working for quite some time.
• Third, a company can to build its own distribution from scratch.
Retailer Carrefour chose this route in China years ago, because it
knew China would offer a big opportunity, and Carrefour wanted to
develop its own local capabilities.
Which strategy the company chooses depends on its timetable for
volume in the market, local foreign-ownership laws, and the availability
of suitable partners or acquisition targets.
 II. SCM & the challenges
in a global market
1. Global sourcing and distribution
b. Global distribution (cont.)
• Establishing a partnership or joint venture is the least costly
approach, followed by acquisition. Building a distribution
network from scratch is the most costly and time consuming,
but it may give the company the most local experience and
capabilities for the long term.
• Distribution channels in emerging markets are less
developed, which means that companies may need to seek
novel solutions to distributing their products, such as
Hindustan Unilever Limited creating its own distribution
network of 14,000 female independent distributors and
cooperatives or Nokia creating Nokia Academy to train
salespeople
 II. SCM & the challenges
in a global market
2. Global production

There are several strategic choices available to

companies when they decide how to produce their
products for international markets:
• Export
• Local assembly
• Local production
 II. SCM & the challenges
in a global market
2. Global production

a. Export
• Companies can manufacture their products in their home
countries and export them.
• This strategy involves the least amount of change but
has the downsides of higher supply-chain costs,
potential delays, exchange-rate risks, and isolation from
local knowledge.
• For instance, EMC supplies its Asia-Pacific customers
from plants in the United States and Ireland
 II. SCM & the challenges
in a global market
2. Global production
b. Local assembly
• A company can build components in one country and do local assembly in
another. This strategy offers advantages of tax or tariff incentives but
increases coordination costs and may bring unfavorable country-of-origin
effects.
– Example 1: Dell Latin America uses this approach. It buys high-tech
computer components globally but performs customized assembly in
Brazil. Being closer to the market improves Dell’s sales, service, and
customer knowledge.
– Example 2: Iams makes its proprietary pet food in the United States and
ships it to other countries for packaging. This strategy lets Iams do
some local customization and offer better customer response, while
gaining tax or tariff incentives from local assembly.
• But this increases coordination costs and may bring unfavorable country-of-
origin effects.
– For example: For example, some markets like Colombia don’t want to
buy Colombian-made goods. In those cases, local assembly can harm
product sales.
 II. SCM & the challenges
in a global market
2. Global production
c. Local production
• A company can opt for local production; i.e. a company can
go completely local, sourcing materials in the foreign country
and manufacturing the product there. Nokia used this strategy
in India.
– This decision requires a careful evaluation of the risks and
rewards of production operations in that country, including:
• political stability,
• statutory/legal environments,
• infrastructure quality,
• foreign-investment incentives,
• local telecommunications and utility infrastructure,
• workforce quality,
• security and privacy,
• compensation costs,
• tax and regulatory costs, and
• communication costs.
 II. SCM & the challenges
in a global market
2. Global production
c. Local production (cont.)
• Some companies also choose to outsource or offshore
their processes: off-shoring and outsourcing
– Off-shoring means setting up operations in a low-cost country
for the purpose of hiring local workers at lower labor rates. Off-
shoring differs from outsourcing in that the firm retains control of
the operations and directly hires the employees.
• Companies that choose to offshore face the same location-criteria
factors as companies that make production-operation decisions.
 II. SCM & the challenges
in a global market
2. Global production
c. Local production (cont.)
• In outsourcing, by contrast, the company delegates an entire
process (such as accounts payable) to the outsource vendor.
The vendor takes control of the operations and runs the
operations as they see fit. The company pays the outsource
vendor for the end result; how the vendor achieves those end
results is up to the vendor.
– The advantages of outsourcing include the following:
• Efficient processes (the outsourcer typically specializes in a
particular process or set of processes, giving them high levels of
expertise with that process)
• Access to specialized equipment that may be too expensive for
a company to invest in unless that process is their chief
business
 II. SCM & the challenges
in a global market
2. Global production
How company should manage risks in global
production?
Read short cases:
– Intel’s Approach to Managing Risk in Global
Production (pg. 756, course book)
– Standard Chartered Bank Mitigated Risk by
Duplicating Operations in Chennai and Kuala Lumpur
(pg. 758, course book)