Network Design in an Uncertain Environment - Global Network Design

Supply Chain Management: Review Notes Based on Chopra and Meindl's Book

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