Dilla University College of Business and Economics Department of logistics and supply

chain Management Global Supply Chain Management hand-out

Chapter One
Introduction to Global Supply Chain Management
Introduction

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 reductions
 Lower labor cost
 Capital subsidies
 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. Many
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.
In this chapter we will have a brief review on global supply chain management (GSCM)
1.1 Globalization and its 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:
Dilla University College of Business and Economics Department of logistics and supply
chain Management Global Supply Chain Management hand-out

1. The geographic: is used to describe the increased geographic scope of activities of

worldwide companies as well as increased location and dispersion of manufacturing
facilities.
2. The qualitative dimension. 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.

Globalization refers to the shift toward a more integrated and interdependent world
economy. It has several different facets including globalization of markets and production.

While both dimensions are of major importance for logistics, the qualitative dimension is
becoming the driving force of global SCM.
There are four clusters of globalization drivers:
I. Market,
II. Cost
III. Government
IV. Competition
These drivers can be considered as descriptive variables for the ongoing globalization
process. Effective global SCM 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
I. 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.

II. 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
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chain Management Global Supply Chain Management hand-out

(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 com- petition. 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, 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 SCM 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.
III. 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 is a part of a global item
numbering scheme used in radio frequency identification 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.
IV. Competitive Drivers
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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 SCM. 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.
1.2 Absolute and Comparative Advantages
Theory of absolute advantage
This theory is developed by Adam smith He said, the real wealth of a country consists of the
goods and services available to its citizens. Holds that different countries produce some
goods more efficiently than other countries thus, global efficiency can increase through free
trade.
Based on this theory he questioned “why the citizens of any country should have to buy
domestically produced goods when they could buy those goods more cheaply from abroad?”
He developed the theory of absolute advantage. According to this theory, a country can
produce some goods more efficiently than other countries. This is based on the fact that a
country’s advantage would be either natural (climate and natural resources) or acquired
(technology and skills) in the production of goods. Smith extended his division of labor in the
production process to a division of labor and specialized product across countries. Each
country would specialize in a product for which it was uniquely suited. More would be
produced for less. Thus, a country with absolute advantage could produce more in total and
exchange products— trade—for goods that were cheaper in price than those produced at
Home.
This theory states that, through specialization countries could increase their efficiency b/c of
three reasons. These are,
 Labor could become more skilled by repeating the same tasks
 Labor would not lose time in switching from the production of one kind of product to
another, and
 Long production runs would provide incentives for the development of more effective
working methods.
A country could then use its success specialized production to buy more imports than it could
have otherwise produced.
What products should a country specialize?
Although smith believed the market place would make the determination, he thought that a
counties advantage would be either Natural or Acquired.
Natural advantage (NA): A country may have a natural advantage in producing a product
because of climatic conditions, access to certain natural resources or availability of certain
labor / forces. A country is climate dictate which agricultural products it can produce
efficiently and export of services b/c of its eco-truism industry
Acquired advantage: Most of the world’s trade today is of services and manufactured goods
rather than goods and natural resources. Countries that produced manufactured prods and
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services competitively have an Acquired advantage, usually in either product or process

technology. An advantage of product technology is that it enables a country to produce a
unique product or one that is easily distinguished from those of competitors. An advantage in
process technology is a country ability to produce a homogenous product (one not easily
distinguished form that of competitors efficiently) and New labor saving material. Thus
countries that develop distinctive and less expensive products have acquired advantage, at
least until producers in another country emulate them successfully. Acquired advantage
through technology has created new products, displaced old ones, and altered trading partner
ships.
absolute advantage
Countries Olive oil Shoes
Spain 2 4
Italy 4 2
The relative efficiency of each country in the production of the two products is measured by
comparing the number of man-hours needed to produce 1 unit of each product.
Spain has an absolute advantage in the production of olive oil. It requires fewer man-hours (2
being less than 4) for Spain to produce 1 unit of olive oil. Italy, on the other hand, has an
absolute advantage in the production of shoes. It requires fewer man-hours (2 being less than
4) for Italy to produce 1 unit of shoes. Spain is obviously more efficient in the production of
olive oil. It takes Italy 4 man-hours to produce 1 unit of olive oil whereas it takes Spain only
2 man-hours to produce the same unit of olive oil. Italy takes twice as many man-hours to
produce the same output. Italy needs 2 man-hours to produce 1 unit of shoes that takes Spain
4 man-hours to produce. Spain therefore requires 2 more man-hours than Italy to produce the
same unit of shoes. The two countries are exactly opposite in relative efficiency of
production.
Comparative advantage (CA):
Developed by David Ricardo and he examined the question “what happens when one country
can produce all products at an absolute advantage? and developed the theory of CA.
In the theory of international trade Ricardo stated explicitly for the first time the law of
comparative costs. This theory of comparative advantage can best be illustrated by means of
the example of two countries (Spain and Italy) producing two commodities, shoes and olive
oil. If the relative cost of shoes to olive oil is the same in both countries, then no trade will
take place because there is no gain to be had by exchanging olive oil (or shoes) for shoes (or
olive oil) produced abroad for that produced at home. Trade will take place where cost
differences exist. These can be of two kinds. First, if olive oil is cheap in Spain and shoes in
Italy, Spain will specialize in olive oil and Italy in shoes, and exchange will take place to
their mutual advantage. Second, the theory of comparative advantage states the condition
under which trade will take place, even though both commodities may be produced more
cheaply in one country than in another
absolute advantage
Countries Olive oil Shoes
Spain 120 100
Italy 80 90
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chain Management Global Supply Chain Management hand-out

1.3 What is Global Supply Chain? What is Global Supply Chain Management?
Global Supply Chain Management
Global supply chain management embraces (holds) the logistics operator’s task to ensure that
goods of a saleable quality are manufactured and transported safely and cost-effectively and
are delivered on time with the continuous tax to ‘add value’. This features three aspects,
particularly:
a) Vendor management involving the processing of customers’ orders direct to their
suppliers and monitoring the production process;
b) Information featuring receipt of customers’ order via EDI download (this leads to 24-
hour monitoring and reporting of status and cost down to item level);
c) Communication, permitting customers to receive advance notice of shipments, which
are scheduled via international email links.
The key benefits are
 Reduced inventory levels,
 Improved visibility of all costs to item level,
 Improved delivery on time and clearer responsibility
The global supply chain is very complex, including numerous elements that we will examine
later.
Effective global supply chain management generates competitive advantage in the
marketplace and achieves cost reduction.
For the global supply chain to be successful, it must satisfy two main criteria.
First, there needs to be an integrated network of professionals throughout all the countries
concerned to ensure the smooth passage of goods.
Secondly, there has to be a high level of specialist expertise and knowledge relating to the
multitude of laws, conventions and regulations which weave a complex web across
international trade.
We will now examine three areas of significance in the global supply chain: delivery and
customs clearance, distribution management, and import logistics and distribution.
A. Delivery and customs clearance arises in an example of a leading drinks company with
over 50 brands worldwide. The objective is to receive and handle stock and to arrange
transport and overseas shipment. The four main features of the service include:
a) Inventory management featuring direct data exchange to provide online reporting;
b) Order picking embracing maximising deliveries of export shipments direct to the end
customer;
c) Quality control including checking on arrival, arranging, relabelling and repacking as
required;
d) Security, the adoption of sophisticated arrangements suitable for a high value
commodity.
The key results include delivery only when market demand dictates, secure and cost-effective
storage and efficient onward distribution services involving a 4PL.
B. Distribution arrangements An example is the requirement of a major sportswear
company that imports merchandise from suppliers in the Far East. The objective is to
improve upstream process controls and maximise direct delivery to high-street stores in
Europe. It embraces three main elements in the service, which include the following:
a) Quality control embracing collecting goods from suppliers and ensuring compliance
with specified quality standards .
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b) Consolidation and delivery embracing sorting labelling and packaging goods

according to end-customer and/or requirements and providing delivery direct to the
customer.
c) Information, embracing full integration via EDI between the customer purchase
order system, their financial and distribution systems, and the global supply chain
management system. The ultimate results were improved supplier quality standards,
reduced warehousing and handling cost and shortened order cycle times.

C. Import logistics and outbound distribution. An example arises involving an electronics

manufacturer that sources components in the Far East for manufacture in Europe. The
objective is to manage the inbound supply of components to exacting production
schedules and distribute the finished products across Europe. It embraces three main
features as follows:
a) Supply chain management embracing the despatch of orders, the monitoring of
production, consolidation and delivery on time to the manufacturing plant
b) Information embracing tracking progress in the supply chain so that customers can
accommodate changes to the production plan;
c) Consolidation/distribution, featuring maximising container usage to cut costs and
distribution ‘on time’ to retailers.
1.4 Challenges of Managing Global Supply Chain
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, economic and political
worries, and infrastructural insufficiency.
I. 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.
II. 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 SC, 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. Therefore, 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
Dilla University College of Business and Economics Department of logistics and supply
chain Management Global Supply Chain Management hand-out

demand picture and passes this distortion along in the form of orders that it places with its
suppliers.
III. Economic and Political Worries
Global SCs 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, 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 SCM, 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.
IV. 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.