Dornier, 1997

Global supply chain management

Supply chain involves: purchasing, manufacturing, logistics, distribution, transportation, marketing Bullwhip effect demand volatility and information distortion End users generate the demand for the last company in the supply chain, however for companies further upstream, demand is a compilation of orders from the companies downstream Distortions in demand information can occur as we move further away from the end customer along the supply chain A small variance or seasonal fluctuation in actual consumer demand can cause upstream suppliers to alternate between overproduction and downtime situations The bullwhip effect is a common occurrence e.g. Procter and Gamble in Pampers diapers Example: beer game demand actually follows a stable pattern, but players estimate that demand varies wildly Demand distortion: can lead to inefficiencies, excessive inventory, dissatisfied customers, lost revenues, ineffective production schedules What causes the bullwhip phenomenon? Managerial behaviour o Individual decisions perceived demand forecasts are different than reality drastic increase in orders / inventories o Type of incentives exaggerated shortage fear leading to over-ordering there needs to be a better balance through better coordination of decision making and appropriate alignment of functional objectives (marketing, sales, manufacturing, distribution). What causes the bullwhip phenomenon? non-behavioural causes o Demand Forecast Updating upstream manager updates forecasts for future demands and safety stock requirements based on updated forecasts of future demand determined by recently observed demand realisations -> fluctuations. The longer the lead time, the more inaccurate the forecasted demand. Avoid this by providing an accurate picture of the actual market demand for every part in the supply chain; information must be shared with all supply chain partners so they can configure their demand forecasts. EDI (Electronic Data Interchange) can be used for this information sharing. Also VMI (vendor managed inventory)

Reduce lead times, JIT supply

o Order batching economies of scale prompt companies to accumulate demand before issuing an order. Also caused through transportation costs -> companies order less frequently. Also: hockey stick phenomenon ordering (increased orders at end of quarter so sales people meet quarterly targets). Devise strategies that reduce batch sizes and promote more frequent ordering. Use information technology to cut cost of order processing (avoid paperwork); use EDI. Changes in transportation management: consolidation of shipments, use 3PL. o Price fluctuations companies often buy needed supplies well in advance if prices are low; gamble on price promotions coming up so withhold orders. Reduce frequency and magnitude of special trade deals / promotions, e.g. P&G moved to an everyday low price to stabilise prices. o Rationing and Shortage Gaming manufacturers often ration their products, hence customers exaggerate orders in periods of short supply, this is called gaming of orders. Correct for gaming behaviour by using product allocation / rationing rules, e.g. GM allocates products to dealers in proportion to past sales records. From domestic to global supply chains added complexities and uncertainties Substantial Geographic Distances longer transportation lead times, variability to lead times, unpredictable complications and delays in shipments, almost impossible to implement JIT delivery as shipments were help up in customs, documentation centres, etc. o Maintain higher pipeline inventories, increase buffer inventories -> this contributes to the bullwhip effect! Stock-level volatility can lead to costly stockout situations, unresponsiveness and high admin costs. Added Forecasting Difficulties and Inaccuracies substantial communication difficulties, highly distorted, inaccurate information, both manufacturers and retailers end up carrying higher inventory levels and must deal with higher volatility in stocking levels Exchange Rates and Other Macro Uncertainties shift purchases to suppliers who can provide inputs at lower cost in the local currency, develop operational hedge against exchange rate fluctuations Infrastructural Inadequacies o Worker skill

o Supply availability and supplier quality material scarcity can cause serious problems, imported raw materials are often scarce, supply shortages and irregular schedules can create chaos in the global supply chain planning process -> keeping higher inventories of raw materials or WIP exacerbates the dynamics of the bullwhip effect o Lack of local process equipment and technologies R&D needs to be carried out locally, local process equipment and technologies need to be developed o Inadequacies in transportation and telecommunications infrastructure this can increase distribution lead times, result in supply uncertainty, distribution costs, inability to control the distribution channel increase Explosive Dimensions of Product Variety in Global Markets supply highly customised products and services, e.g. computers keyboards and manuals to match the language. Demand uncertainties lead to erratic inventory build-ups and backorders -> high levels of safety stocks

Vertical integration issues in global supply chains Trade off between workable operating and logistics strategy worldwide Either developing a higher level of backward vertical integration (VI), or intensifying the effort to develop local suppliers (LS). Some guidelines: o The larger the market, the higher the rate of growth, the more VI o The lower the labour cost, the more LS o The higher the political risk, the more LS o The higher the concentration of the industry, the more VI o The more mature the technology, the more LS o The higher the capital and management skills, the more VI o The more globalised, the more VI Typical deficiencies of local suppliers: o Technological know-how technology transfer o Financial resources initiatives to upgrade facilities o Lack of quality and continuous improvement culture introduce performance monitoring Vertical integration for better control of distribution channels forward integration causes the company to engage in business activities that are different from their core business.