April 4, 2015

Network Design in an Uncertain Environment


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
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

Risks include supply disruption, supply delays, demand fluctuations, price fluctuations, and exchange-rate fluctuations
Critical for global supply chains to be aware of the relevant risk factors and build in 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 4 April 2015
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