Summary of the Chapter from Chopra and Meindl
Learning Objectives
Identify factors that need to be included in total cost when making global sourcing decisions.
Define uncertainties that are particularly relevant when designing global supply chains.
Explain different strategies that may be used to mitigate risk in global supply chains.
Understand decision tree methodologies used to evaluate supply chain design decisions under uncertainty.
Impact of Globalization on Supply Chain Networks
Opportunities to simultaneously grow revenues and decrease costs
Accompanied by significant additional risk
Difference between success and failure often ability to incorporate suitable risk mitigation into supply chain design
Uncertainty of demand and price drives the value of building flexible production capacity
The Offshoring Decision: Total Cost
Comparative advantage in global supply chains
Quantify the benefits of offshore production along with the reasons
Two reasons offshoring fails
Focusing exclusively on unit cost rather than total cost
Ignoring critical risk factors
A global supply chain with offshoring increases the length and duration of information, product, and cash flows. The complexity and cost of managing the supply chain can be significantly higher than anticipated. Quantify factors and track them over time. Big challenges with offshoring is increased risk and its potential impact on cost
Key elements of total cost
Companies have failed to gain from offshoring for two primary reasons—(1) focusing exclusively on unit cost rather than total cost when making the offshoring decision and (2) ignoring critical risk factors.
Ferreira and Prokopets (2009) suggested a model to companies to evaluate the impact of
off-shoring using the following key elements that affect total cost of procuring goods from off shore sources:
Supplier price
Terms
Delivery costs
Inventory and warehousing
Cost of quality
Customer duties, value added-taxes, local tax incentives
Cost of risk, procurement staff, broker fees, infrastructure, and tooling and mold costs
Exchange rate trends and their impact on cost
Risk Management In Global Supply Chains
One must keep in mind, however, that the opportunities from globalization are often accompanied by significant additional risk. Risks include supply disruption, supply delays, demand fluctuations, price fluctuations, and exchange-rate fluctuations. It is critical for global supply chains to be aware of the relevant risk factors and build in suitable mitigation strategies. Mitigation strategies cost additional money, but increased risk due to globalization has to be moderated by undertaking suitable mitigation strategies.
Good network design can play a significant role in mitigating supply chain risk
Every mitigation strategy comes at a price and may increase other risks
Global supply chains should generally use a combination of rigorously evaluated mitigation strategies along with financial strategies to hedge uncovered risks
Flexibility, Chaining, and Containment
Three broad categories of flexibility
New product flexibility
Ability to introduce new products into the market at a rapid rate
Mix flexibility
Ability to produce a variety of products within a short period of time
Volume flexibility
Ability to operate profitably at different levels of output
Decisions Under Uncertainty
Combine strategic planning and financial planning during global network design
Use multiple metrics to evaluate global supply chain networks
Use financial analysis as an input to decision making, not as the decision-making process
Use estimates along with sensitivity analysis
Summary of Learning Objectives covered in the summary
Identify factors that need to be included in total cost when making global sourcing decisions
Define uncertainties that are particularly relevant when designing global supply chains
Explain different strategies that may be used to mitigate risk in global supply chains
Understand decision tree methodologies used to evaluate supply chain design decisions under uncertainty
First posted 6.4.2022, 4 April 2015
Read on 1 April 2016.
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