Welcome to Module 1 Global Supply Chain By Department of Primary Industries and Mines Ministry of Industry
Objectives of this Module 1. Explain the meaning and purpose of global supply chain management. 2. Identify the impact of globalization on organizational reforms. 3. Explain the advantages of outsourcing. 4. Discuss the format of business expansion to foreign market. 5. Identify the benefits and disadvantages of global supply chain development. 6. Discuss the principles of trade facilitation. 7. Examine the fundamentals of end-to-end supply chain development. 8. Demonstrate the impact of global supply chain development. 9. Disclose the change of firms’ operation in order to response to customers’ need. 10. Explain the development of transportation management according to global supply chain. 11. Identify the transition of operation management in accordance with global supply chain. 12. Discuss the advancement of data integration and information management in agreement with global supply chain.
Course Structure 1. Introduction 2. Definition of Global Supply Chain 3. Business adaptation to Globalization 4. Development to Global Supply Chain 5. Advantages and Obstacles to the development of Global Supply Chain Implementation 6. Factors contributing to the Implementation of Global Supply Chain 7. Implementation of Global Supply Chain Management
1. Introduction In this chapter, we would learn about the context of Global supply chain, means of adaptation, advantages and shortcomings of its development, factors that support development and finally the things that we must consider in changing to Global supply chain
2. The meaning of Global Supply Chain A supply chain is the whole business processes or activities, weaving together into a chain or network. Supply chain is the systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole. It has also been defined as the design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure,
leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally. The global supply chain comprises networks expansion over national boundaries and into other continents. These networks are far more complicating and has more details than general supply chains 3. Business adaptation to Globalization Business adaptation to globalization results in • The expansion of outsourcing. It is based on the viewpoint that every firm has their specialization. The outsourcing of tasks to more specialized firms also has the intention of creating business alliances. Beside cutting costs, the efficiency and quality is also better with outsourcing, thus permitting the re assessment of limited resource to the main operation which creates value in the product. e.g., the automobile industry outsources the manufacturing of parts to other manufacturers, while the firm itself would focus on product innovation, R&D or marketing. • Furthermore, globalization also results in exports to foreign markets and overseas investment
Outsourcing The strategy of outsourcing is based on the viewpoint that every firm has their specialization. The outsourcing of tasks to more specialized firms also has the intention of creating business alliances. Beside cutting costs, the efficiency and quality is also generally better than manufacturing all the components ourselves.
Benefits of Outsourcing 1. Reduces cost 2. Increases efficiency 3. Better access to labor market 4. Access to other firm’s capitals 5. Decreases firm response time to global market 6. Size mobility 7. Organization specialization 8. Benefits from specific managerial skills 9. Benefits from joining business alliances Contributing factors to outsourcing strategy are described as follow: 1. One of the most frequently studied factors in outsourcing studies is the cost factor. Companies are only required to pay for the actual work done by the supplier and can thus turn their fixed costs into variable costs. In this way, firms can eliminate the fixed costs associated with employing internal staff members. 2. There is plenty of study finding that outsourcing is critical to improving productivity and efficiency. 3. Some countries do not have an expertise in some skills. This is the driver that forces firms to outsource to other countries that have skillful labor. 4. Some contractors have better infrastructure and expertise in the field than the companies. Therefore, outsourcing becomes a better option than incurring a large investment in firms’ employment. This also enhances companies capabilities. 5. In the rapidly changing market place, investment managers need to create new products in order to meet client demands and stay competitive. One solution is the potential for investment managers to consider an outsourced operations model to help reduce the
time to market and manage on-going operational responsibilities associated with the product. 6. In addition, a company may be able to free up resources for other purposes by outsourcing certain functions or departments to third parties which contribute to firm’s mobility. 7. Outsourcing helps companies to avoid the costs associated with adopting new technologies and training employees. In other words, outsourcing allows a company to redirect its resources. The human resources can be redirected to other activities, allowing people to play a more valuable role based on their specialization. 8. Another factor is to acquire the right people, with the right skills involved in all phases of outsourcing activities. Early in the evaluation, persons must be identified as to who will take leadership responsibility, perform the analysis, and make the decisions. Adequate supporting infrastructures, commitment by top management, and development of objective performance criteria were among the factors contributed to successful outsourcing. 9. The key strength of the vendors who take up the outsourcing projects is their ability to standardize their internal processes. In many a case, this has a positive rub off on the client organization as they can absorb some of the standardized best practices from their outsourcing vendors as business alliances.
Expansion to foreign market There are two major types of export format as follow: 1. Indirect Exporting and 2. Direct Exporting Indirect Exporting The Indirect exporting is the method of employing a middle man or distributer. This method would both decrease the capital needed and reduces the risk due to the lack of market understanding. This also includes customer behaviors, economies, regulations, political climate, competition and exchange rate. However, indirect export has its drawbacks in the inability to control distributer’s business policy, which in turn might affect the long term market strategy, such as brand positioning or pricing strategy, etc.
Direct Exporting Direct exporting employs the use of an Exporting Department, which would be responsible in finding clients or dealers in foreign market. This method expose the firm to an elevated risk, but would result in more direct control over the new market. Firms would usually make the use trade expos and internet as a means of entering and advertising in their early market entries. • Contract manufacturing • Licensing • Franchising • Foreign Direct Investment (FDI) • International Joint Venture • Wholly Own
For the business adaption to globalization in order to expansion to foreign market. It can be done in several business format for example: 1. In a contract manufacturing business model, the hiring firm approaches the contract manufacturer with a design or formula. The contract manufacturer will quote the parts based on processes, labour, tooling, and material costs. 2. Licensing is another way to enter a foreign market with a limited degree of risk. The international licensing firm gives the licensee patent rights, trademark rights, copyrights or know-how on products and processes. In return, the licensee will: produce the licensor’s products, market these products in his assigned territory and pay the licensor fees and royalties usually related to the sales volume of the products. This type of agreement is generally welcomed by foreign public authorities because it brings technology into the country. 3. Franchising is similar to licensing except that the franchising organisation tends to be more directly involved in the development and control of the marketing programme. The franchising system can be defined as a system in which semi-independent business owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its trademark, to sell its products or services, and often to use its business format and system. 4. Foreign direct investment. In this arrangement, the international firm makes a direct investment in a production unit in a foreign market. It is the greatest commitment since there is a 100% ownership. 5. International joint ventures have much in common with licensing. The major difference is that in joint ventures, the international firm has an equity position and a management voice in the foreign firm. A partnership between host- and home-country firms is formed, usually resulting in the creation of a third firm 6. A wholly owned subsidiary includes two types of strategies: Greenfield investment and Acquisitions. Greenfield investment is the establishment of a new wholly owned subsidiary. It is often complex and potentially costly, but it is able to provide full control to the firm and has the most potential to provide above average return. Acquisition has become a popular mode of entering foreign markets mainly due to its quick access.
Acquisition strategy offers the fastest, and the largest, initial international expansion of any of the alternative. 4. Development to Global supply chain Due to globalization, firms has a tendency to expand into foreign markets, both in marketing and direct foreign investment. As well as outsourcing of several activities to foreign companies. This results in a large amount of company’s supply chain going global, isn’t it? Development to global supply chain needs supporting factors too
The development to global supply chain requires the following factors. 1. Trans-border transportation infrastructure 2. Communication infrastructure 3. Free market policy 4. Rules and regulation favoring international trade • The management of global supply chain would be far more complicated than a simple supply chain • The management of logistical operation in the supply chain, coupled with its globalism meant that the management would be required to consider more aspects. The development to global supply chain also need the development of organization's capabilities. As the management of global supply chain would be far more complicated than a simple supply chain due to the need to collaborate with members of the supply chain which might be located in many countries.
The management of logistical operation in the supply chain, coupled with its globalism meant that the management would be required to consider more aspects, such as transportation method, route, transporter, trade regulations, procedures, fees and customs etc. 5. Advantages and disadvantages of developing Global Supply Chain In order to understand more about advantages and disadvantages of adopting global supply chain, let’s explore detail of each option.
Advantages of developing Global Supply Chain 1. Decreases response time 2. Increases efficiency in the procurement of materials, manufacturing and the handover of goods 3. Decreases cost, especially in the supply chain operations 4. Creates business groups, which maximizes the satisfactory of customers in a particular industrial sector and benefits every business in it. Obstacles to the development of global supply chain The biggest disadvantage of developing global supply chain management is the heavy investment of time, money, and resources needed to implement and overlook the supply chain. The other obstacles could be: 1. Limitations on not joining the World Trade Organization which reduce the opportunity to export to global market. 2. Insufficient in inter-border transport and communication infrastructures 3. Inefficiency in products distribution 4. Language barriers 5. Currency exchange and instabilities 6. Business model and cultural differences 7. Political and economic instabilities 8. Risks and delays due to transportation range 9. Tariffs and trade barriers 10. Custom procedures difficulties
6. Factors supporting Global Supply Chain development There are several factors to facilitate Global Supply Chain development. For example, the APEC’s framework includes 2 major components of Global Supply Chain development. 1. Trade Facilitation 2. Supply Chain Connectivity
Trade Facilitation 1. The streamlining of international trade focuses on the simplification the procedures and custom regulations in order to promote harmonization and set standardization 2. Increases transparency and certainty of trade regulations. 3. Decreases risk and trade uncertainties 4. Effective execution of trade regulations 5. Effective exchange of goods, services and information Supply-Chain Connectivity Framework Aimed at solving problems and barriers against the free movement of goods, services and investors in the region by 8 issues 1. Transparency: 2. Transport Infrastructure: 3. Logistics Capacity: 4. Clearance: 5. Customs Procedures & Documentation: 6. Connectivity: 7. Standards and Regulations: 8. Transit: The Supply Chain Connectivity Framework sets down eight checkpoints to smooth flow of goods, services and business travellers throughout the APEC region. These were identified as trade-impeding bottlenecks which includes: 1. Enhance transparency by encourage transparency on all aspects of policy affecting the logistics sector. Encourage the creation of a single APEC online contact point for
information on logistics regulations within the APEC region through the establishment of the ‘Transparency for Ease of Doing Logistics Business’ APEC website. 2. Encourage ‘informed’ infrastructure development through needs assessment and stakeholder consultation. Review existing models to determine the appropriate infrastructure development that contributes to the enhancement of supply chain connectivity in the region. 3. Assessment and Capacity Building by reviewing constraints affecting engagement of Small and Medium Enterprises. 4. Enhance customs clearance efficiency and facilitate coordination among border agencies. 5. Simplification of customs documents by explore the possibility of widely adopting self- certification of origin for simplifying trade. For example, conducting capacity building under the APEC Pathfinder Initiative on Self-Certification with common operating guidelines. 6. Enhance connectivity such as quantify how enhanced multi-modal connectivity could contribute to economic integration and competitiveness in APEC, including opportunity costs arising from chokepoints relating to physical infrastructure. 7. Develop common technical standards. For example, considering introduction of uniform logistics safety arrangements. 8. Transit with examine and identify issues relating to transport and customs-transit and work towards addressing them.
7. Changing to Global Supply Chain What are the factors that needs to be considered in changing to global supply chain? Well, there’s several of them, such as response time to customer’s demand, management, transportation, etc.
Changes in adaptation to global supply chain Factors that needs to be considered in adaptation to global supply chain includes: 1. Changes in response time to satisfy customer’s need. 2. Changes in transportation management 3. Changes in operation 4. Changes in information technology and data connection Changes in response time to satisfy customer’s need leads to: • The global supply chain, increasing in cycle time to satisfy the client’s demand due to more complicated communication, added international shipping distance and further procedure in logistics, such as customs. • The increase in time cycle due to further logistical activities would lead to a greater stockpiling of cargo on hand, as it compensates the lead time. Receivable Conversion Period (RCP) Cash conversion cycle = + Inventory Conversion Period (ICP) - Payable Conversion Period (PCP)
• Longer lead time affects asset turnover especially cash conversion cycle A metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. Cash conversion cycle is calculated by Receivable Conversion Period (RCP) + Inventory Conversion Period (ICP) - Payable Conversion Period (PCP) Changes in transportation management • Changes from single-modal transportation to multimodal transportation to reduce costs • Increased procedure in logistics, especially in paperwork, intermodal transportation changes and customs protocol. Changes in transportation management: According to global supply chain management, transportation objective is changed from domestic to international which is leading to development in transportation management which can be described into 4 main points as: • Alteration of transportation mode from single-modal to multimodal transportation that leads to cost reduction. In case of long range transport, multimodal has been proven that it has higher efficiency.
• Global supply chain management also increased procedure in transportation, especially in paperwork. Furthermore, Global supply chain management drives firms to consider intermodal transportation to reduce their cost increase their service level. Finally, Global supply chain management broadens inter-trade customs protocol. Decisions concerning logistics would be more complex, both The choice of transport, considering the balance between transportation cost versus inventory cost and service level. • Decisions in transportation management are more complex both in strategic and operational level. • The choice of transport, considering the balance between transportation cost versus inventory cost and service level. Each mode provides certain benefits when compared to the other, however those benefits typically entail a trade-off for some other cost. For example, sea transport is a time consuming but highly effective method of transporting large quantities of non-perishable goods but firms need to carry high level of inventory and led to its cost. On the other hand, aviation is able to quickly transport limited amounts of cargo over longer distances, but incur high costs and energy use. The strategic decision in logistics includes the layout of logistical network to move goods from manufacturing site or distribution center to retailing point. Factors that needs to be considered are • Network layout should be direct or indirect via a distribution center?
• If there is a distribution center, how many should there be? What country should it be situated in? • Which goods should pass in which distribution center in which country? The operational decision in logistics and transportation concerns multiple factors including: • Transportation infrastructure, such as rail, roads, seaports, etc. • Limitations on customer service level and distribution points • Physical properties of the product • Possibility in container transportation • Connection in international and internal transport • Each countries rules and regulations • Import and export rights Changes in operation In order to understanding changes in adaptation to global supply chain, the management of operation would be more complex, either in the purchasing phase, manufacturing phase and customer service, or distribution and quality control phase
Firstly, the developments in purchasing activities to accommodate the transition to global supply chain management consist of: • Suppliers are enlarged from only internally to internationally, which creates more choices, and more considerations • Evaluation and selection of supplier is done by considering advantages and disadvantages, including risks of conducting trade internationally. • The purchase deal must include the condition of purchase, payment, means of transport and custom process in importing those goods.
Under global supply chain, the cost of managing operation might be higher, which is a result from more procedures and time needed to fulfill tasks, such as: • Middleman fees to process customs procedures • Freight forwarder cost to manage goods between import and export • letter of credit issue fee, in order to pay suppliers • Opportunity cost due to exchange rate • Business tax in each country • Costs and lost opportunity in inventorying, including degradation, expiration, etc.
Furthermore, the changes in operations also resulting in: • Increased paperwork cost • Increased cost in protective packaging to facilitate international shipping • Increased transportation insurance cost • Increased cost in special QA • Increased cost due to direct and indirect tariffs • Supplementary port fees, such as port warehouses • Increased cost due to transportation delays Changes in information technology and data connection In the development to global supply chain, communication between each member of the supply chain, which could be in different country, is indispensable. The development of communication must coincide in order to make the connection between other organization and ours clearer. The expected result is the integration of other firm’s operation and ours into an efficient network. Major developments are 1. Changing from Enterprise Resource planning (ERP) to Extended Enterprise Resource planning (Extended ERP) which has much broader scope of work than the ERP 2. The expansion of E-business 3. Tracking and Tracing technology
1. Changing from Enterprise Resource planning (ERP) to Extended Enterprise Resource planning (Extended ERP) which has much broader scope of work than the ERP. There are three main areas of Changing from Enterprise Resource planning (ERP) to Extended Enterprise Resource planning (Extended ERP). The advancement of Extended Enterprise Resource planning (Extended ERP) has much broader scope of work than the ERP. The EERP can be explained as: EERP is the convergence of all organization’s system under central planning. It connects the organization to suppliers with SCM, and customers with CRM. EERP creates business process connection between process originating inside and outside the firm, which in turn merges value chain both inside and outside the organization. Secondly, the customer relationship management (CRM) is included in EERP function. It has detail as follow: Customer relationship management (CRM) is a system for managing a company’s interactions with current and future customers. It often involves using technology to organize, automate and synchronize sales, marketing, customer service, and technical support. It also include system support for sales department to solve customer problems. It has capability to analyze customer transactions history in order to identify and cluster customer. This could assist firms to provide suitable products and services to their customers.
Thirdly, the supplier relationship management (SRM) is also combined into EERP function. It has detail as follow: Supplier relationship management (SRM) is the discipline of strategically planning for, and managing, all interactions with third party organizations that supply goods and/or services to an organization in order to maximize the value of those interactions. In practice, SRM entails creating closer, more collaborative relationships with key suppliers in order to uncover and realize new value and reduce risk. It includes forecasting information, inventory level, suppliers database. It also assists firms to evaluate and classify their suppliers. This includes procurement automation systems such as purchasing order, delivery confirmation and payment authorization. The e-procurement which supporting online purchasing and online catalogue are designed to increase convenience of the supply process. 2.The expansion of E-business E-Business is the trade of goods and services, as well as information via electronic means. The use of computer, information technology and internet are classified as a revolutionary change which affects business process and render them more efficient and make them more agile in responding to customers need. For example, the use of Video conference in
contacting trade partners, exchange of information via EDI, Extranet and Web Application. This also includes certain transaction made in electronic, such as payment for bidding, etc. 3. Technology for Tracking and Tracing Because transaction done under the global supply chain system is usually international, the handover period is also longer. Firms must then employ a system in which its customers could Trace & Track the status of their goods. Tracing & Tracking uses GPS (Global Positioning System) which are attached to the vehicle and send signals to an orbiting satellite. Moreover, several firms have implemented the RFID (Radio Frequency Identification) to check the status of their products. The RFID chip would send an information regarding the status every time it passes and RFID reader. Example of business with global supply chain
ZARA is an example of a company with global supply chain management. It has a timely manufacturing system. ZARA operates with advanced communication system between HQ, production site, retail stores, finances, etc. It applies outsource strategy for supply and manufacturing, with focus on Asian countries and near to raw materials. ZARA has truly understand customers need, even in different regions by employ designer which are only well- known to its customers. Therefore, ZARA has and array of clothing sizes and designs. In operations area, it focuses on rapid distribution of goods by creates business alliance to cut costs and try to promote large networks. Resulting from that, ZARA’s inventory has dramatically reduced. Every bi-weekly, new products become available as ZARA has position itself as a modern and stylish brand. ZARA does not focus on advertisement, but rather word of mouth strategy to create brand awareness. Furthermore, the operations of ZARA have been aligned with its strategies. For example, ZARA has applied midrange price with appealing boutique design in downtown boutiques area. It has been accepted by customers that ZARA quickly responses to their need and high
standard of customer services. ZARA has it own website to communicate with its customer. In addition, ZARA also creates more business through joint-venture expansions. ZARA has a logistics and supply chain management from top to bottom, with more than thousand boutiques and over two hundred designers working on over ten thousand styles per year. Each region updates it sales from individual branch and sends them to the HQ, which in turn pass it on to manufacturing sites. ZARA also value the use of CAD, Computer aided design, from the creation of pattern to the manufacturing of clothing pieces itself. To summarize, ZARA being the world’s leading apparel firm due to an effective supply chain management.