REPUBLIC OF THE PHILIPPINES

City of Manila

UNIVERSIDAD DE MANILA
One Mehan Garden, Manila City Philippines 1000
Office of the Graduate School

MASTER IN BUSINESS ADMINISTRATION

LOGISTICS AND SUPPLY CHAIN MANAGEMENT

Chapter 9: Managing the Global Pipeline

Prepared by:

Eugenio, Jeffrey
18-MBA-052

Submitted to:

Engr. Cecile P. Santiago, MBA, PhD

Professor
Chapter 9: Managing the Global Pipeline

Course Objectives:

A. The global company and the challenges of globalization

B. The trend towards globalization in the supply chain
C. Gaining visibility in the global pipeline
D. Organizing for global logistics
E. Thinking global, acting local
F. The future of global sourcing

A. The Global Company and the challenges of globalization

At the outset it is important that we define the global business and recognized its distinctiveness from an
international or a multinational business. A global company/business is one that does more than simply
export. The global business will typically:

1. Source its materials and components in more than one country

2. Often have multiple assembly or manufacturing locations geographically dispersed.
3. Market its products worldwide.

On the other hand, international company is involved in exporting and selling its goods and/or services
to other nations, but other than exporting (and/or importing, such as purchasing raw materials), has no
other investment in these other nations. All of the business functions and headquarters remain in the
country of origin, and there are no branches of the company overseas in any of the nations the business
trades with.

The logic of the global company is clear:

1. It seeks to grow its business by extending its markets.

2. Cost reduction through scale economies in purchasing and production and through focused
manufacturing and/or assembly operations.

Whilst the logic of globalization is strong, we must recognize that it also presents certain challenges:

1. World markets are not homogeneous, there is still a requirement for local variation in many
product categories.
2. There is a high level of co-ordination the complex logistics of managing global supply chains may
result in higher costs and extended lead times.

These two challenges are related: on the one hand, how to offer local markets the variety they seek whilst
still gaining the advantage of standardized global production and, on the other, how to manage the links
in the global chain from sources of supply through to end user.
The graph below illustrates some of the potential cost trade-offs to be considered in establishing the
extent to which a global strategy for logistics will be cost-justified. There is a danger that some global
companies in their search for cost advantage may take too narrow a view of cost and only see the
purchasing or manufacturing cost reduction that may be achieved through using low-cost supply sources.
In reality it is a total cost trade-off where the costs of longer supply pipelines may outweigh the production
cost saving. Clearly a key component of the decision to go global must be the service needs of the
marketplace. There is a danger that companies might run the risk of sacrificing service on the altar of cost
reduction through a failure to fully understand the service needs of individual markets.

B. The trend towards globalization in the supply chain

The trend towards globalisation and offshore sourcing has been growing rapidly for several decades.
There has been a transformation from a world where most markets used to be served from local sources
to one where there is a growing worldwide interdependence of suppliers, manufacturers and customers
in what has truly become a ‘global village’.

Once, companies established factories in overseas countries to manufacture products to meet local
demand. Now, with the reduction of trade barriers and the development of a global transportation
infrastructure, fewer factories can produce in larger quantities to meet global, rather than local, demand.
Paradoxically, as the barriers to global movement have come down so the sources of global competition
have increased. Newly emerging economies are building their own industries with global capabilities. At
the same time technological change and production efficiencies mean that most companies in most
industries are capable of producing in greater quantity at less cost. The result of all of this is that there is
now overcapacity in virtually every industry, meaning that competitive pressure is greater than ever
before.
To remain competitive in this new global environment, companies will have to continually seek ways in
which costs can be lowered and service enhanced. In developing a global logistics strategy a number of
issues arise which may require careful consideration.

Three of the ways in which businesses have sought to implement their global logistics strategies have are
discussed below:

1. Focused factories
The idea behind the focused factory is simple: by limiting the range and mix of products
manufactured in a single location the company can achieve considerable economies of scale.

Global business will treat the world market as one market and will rationalize its production so
that the remaining factories produce fewer products in volumes capable of satisfying perhaps the
entire market.

However, below are the crucial logistics trade-offs for focused factories:
a. Transport costs and delivery lead times. The costs of shipping products, often of relatively
low value, across greater distances may erode some or all of the production cost saving.
Similarly the longer lead times involved may need to be countered by local stock holding,
again possibly offsetting the production cost advantage.
b. The need for local packs exist, e.g. with labelling in different languages or even different
brand names and packages for the same product. This problem might be overcome by
‘postponing’ the final packaging until closer to the point-of-sale.

2. Centralization of inventories
It means consolidating inventory into fewer locations can substantially reduce total inventory
requirement. Many organizations are now recognizing the advantage of managing worldwide
inventories on a centralized basis. To do so successfully, however, requires an information system
that can provide complete visibility of demand from one end of the pipeline to another in as close
to real time as possible. Equally such centralized systems will typically lead to higher transport
costs in that products inevitably have to move greater distances and often high-cost air express
will be necessary to ensure short lead times for delivery to the customer.

3. Postponement and localization

Postponement, or delayed configuration, is based on the principle of seeking to design products
using common platforms, components or modules but where the final assembly or customization
does not take place until the final market destination and/or customer requirement is known.

To take full advantage of the possibilities offered by postponement often requires a ‘design for
localization’ philosophy, meaning, the final finishing will take place in the local market, perhaps
at a distribution center, and, increasingly, the physical activity outsourced to a third-party logistics
service provider.
 The advantages of the strategy of postponement includes the following:
a. Inventory can be held at a generic level so that there will be fewer stock keeping variants
and hence less inventory in total.
b. Greater flexibility, meaning that the same components, modules or platforms can be
embodied in a variety of end products.
c. Forecasting is easier at the generic level than at the level of the finished item. This last
point is particularly relevant in global markets where local forecasts will be less accurate
than a forecast for worldwide volume.
d. The ability to customize products locally means that a higher level of variety may be
offered at lower total cost – this is the principle of ‘mass customization’.

C. Gaining visibility in the global pipeline

Global pipelines has two features:

1. Higher level of uncertainty about the status of a shipment whilst in transit. This uncertainty is
made worse by the many stages in a typical global pipeline as a product flows from factory to
port, from the port to its country of destination, through customs clearance and so on until it
finally reaches the point where it is required.
2. High degree of variation in these extended pipelines. Shipping, consolidation and customs
clearance all contribute to delays and variability in the end-to-end lead time of global supply
chains.

These features are highlighted in the example shown in table below. This can be a major issue for
companies as they increasingly go global. It has the consequence that local managers tend to compensate
for this unreliability by over-ordering and by building inventory buffers.

One emerging tool that could greatly improve the visibility across complex global supply chains is supply
chain event management.
Supply chain event management (SCEM) is the term given to the process of monitoring the planned
sequence of activities along a supply chain and the subsequent reporting of any divergence from that
plan. Ideally SCEM will also enable a proactive, even automatic, response to deviations from the plan.

Features of SCEM:

a. Enables organizations to gain visibility upstream and downstream of their own operations.
b. Assume an active rather than a passive approach to supply chain risk.

Event management software is now becoming available from a number of providers. The principles
underpinning event management are that ‘intelligent agents’ are created within the software that are
instructed to respond within pre-determined decision rules, e.g. upper and lower limits for inventory
levels at different stages in a supply chain. These agents monitor the critical stage in a process and issue
alerts when deviations from required performance occurs. The agents can also be instructed to take
corrective action where necessary, and they can identify trends and anomalies and report back to supply
chain managers on emerging situations that might require pre-emptive attention.

The figure below shows the progression from the traditional, limited scope of supply chain visibility to the
intended goal of an ‘intelligent’ supply chain information system.

Clearly the complexity of most supply networks is such that in reality event management needs to be
restricted to the critical paths in that network. Critical paths might be typified by such features as: long
lead times to react to unplanned events, reliance on single-source suppliers, bottlenecks, etc.
 D. Organizing for global logistics

As companies have extended their supply chains internationally they have been forced to confront the
issue of how to structure their global logistics organization.

Because specific market environments and industry characteristics will differ from company to company
it is dangerous to offer all-embracing solutions. However, a number of general principles are beginning to
emerge:

1. Structure and control

If the potential trade-offs in rationalizing sourcing, production and distribution across national
boundaries are to be achieved then it is essential that a central decision-making structure for
logistics is established. Only through centralized planning and co-ordination of logistics can the
organization hope to achieve the twin goals of cost minimization and service maximization.

2. Customer service management

The management of customer service involves the monitoring of service needs as well as
performance and extends to the management of the entire order fulfilment process – from order
through to delivery.

Key account management (KAM) has become a widely adopted approach for managing the
interfaces between suppliers and their global customers. Because of the growing shift in the
balance of power in many industries, it is now a critical pre-requisite for commercial success that
suppliers tailor their service offerings to meet the requirements of individual customers. The
purpose of key account management in a global business is to ensure that all the resources of the
supplier are harnessed to deliver solutions that are specific to a particular customer. This contrasts
with the ‘one size fits all’ approach to global customer service which typified many companies’
policies in the past.

3. Outsourcing and partnerships

The logic of this trend is that the organization will increasingly focus on those activities in the value
chain where it has a distinctive advantage – the core competencies of the business – and
everything else it will outsource. This movement has been particularly evident in logistics where
the provision of transport, warehousing and inventory control is increasingly subcontracted to
specialists or logistics partners.

4. Logistics information
The management of global logistics is in reality the management of information flows. The
information system is the mechanism whereby the complex flows of materials, parts,
subassemblies and finished products can be coordinated to achieve cost-effective service.
 E. Thinking global, acting local

The implementation of global pipeline control is highly dependent upon the ability of the organization to
find the correct balance between central control and local management. It is unwise to be too prescriptive
but the experience that global organizations are gaining every day suggests that certain tasks and
functions lend themselves to central control and others to local management. Table below summarizes
some of the possibilities.

F. The future of global sourcing

One of the most pronounced trends of recent decades has been the move to offshore sourcing, often
motivated by the opportunity to make or buy products or materials at significantly lower prices than could
be obtained locally.

However, in recent years there has been a growing realization that the true cost of global sourcing may
be greater than originally thought. Not only have the costs of transport increased in many cases, but
exchange rate fluctuations and the need for higher levels of inventory because of longer and more variable
lead times have affected total costs. In short life cycle markets there is the additional risk of obsolescence
with consequent mark-downs or write-offs. Other costs that can arise may relate to quality problems and
loss of intellectual property. With growing concern for environmental issues, there is also now the
emerging issue of ‘carbon footprints’
References:

Logistics and Supply Chain Management by Martin Christopher