Chapter

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Designing Global Supply
Chain
Networks

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Impact of Globalization on Supply Chain
Networks

• Opportunities to simultaneously grow revenues and decrease costs

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• 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

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Impact of Globalization on Supply Chain
Networks

Risk Factors Percentage of Supply Chains Impacted

Natural disasters 35

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Shortage of skilled resources 24
Geopolitical uncertainty 20
Terrorist infiltration of cargo 13
Volatility of fuel prices 37
Currency fluctuation 29
Port operations/custom delays 23
Customer/consumer preference shifts 23
Performance of supply chain partners 38
Logistics capacity/complexity 33
Forecasting/planning accuracy 30
Supplier planning/communication issues 27
Inflexible supply chain technology 21

Table 6-1
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 The Offshoring Decision: Total Cost

• Comparative advantage in global supply chains

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• Quantify the benefits of offshore production along with the reasons

• Two reasons for offshoring failure

Focusing exclusively on unit cost rather than total cost
Ignoring critical risk factors

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 The Offshoring Decision: Total Cost

Performance Activity Impacting Impact of Offshoring

Dimension Performance
Order communication Order placement More difficult

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communication
Supply chain visibility Scheduling and expediting
Poorer visibility
Raw material costs Sourcing of raw material
Could go either way
depending on raw
material
Unit cost Production, quality (production sourcing
and transportation)
Labor/fixed costs decrease;
Freight costs Transportation modes and quality may suffer
quantity
Higher freight costs
Taxes and tariffs Border crossing Could go either way

Supply lead time Order communication, supplier Lead time increase results in
production scheduling, poorer forecasts and higher
production time, customs, inventories
transportation, receiving
Table 6-2

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 The Offshoring Decision: Total Cost

Performance Activity Impacting Impact of Offshoring

Dimension Performance
On-time delivery/lead Production, quality, customs, Poorer on-time delivery and
time uncertainty transportation, receiving increased uncertainty

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resulting in higher inventory
and lower product availability
Minimum order quantity Production, transportation Larger minimum quantities
increase inventory
Product returns Quality Increased returns likely

Inventories Lead times, inventory in transit Increase

and production
Working capital Inventories and financial Increase
reconciliation
Hidden costs Order communication, invoicing Higher hidden costs
errors, managing exchange
rate risk
Stock-outs Ordering, production, Increase
transportation with poorer
visibility Table 6-2
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 The Offshoring Decision: Total Cost

• A global supply chain with offshoring increases the length

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and duration of information, product, and cash flows

• The complexity and cost of managing the supply chain

canbe significantly higher than anticipated

• Quantify factors and track them over time

• Big challenges with off shoring is increased risk and its potential
impact on cost

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 The Offshoring Decision: Total Cost

• Key elements of total cost

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Supplier price
Terms
Delivery costs
Inventory and
warehousing
Cost of
quality
Customer
duties, value
added-taxes,
local tax
incentives
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Risk Management in Global Supply
Chains

• Risks include supply disruption, supply delays,

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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

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Risk Management in Global Supply
Chains

Category Risk Drivers

Disruptions Natural disaster, war, terrorism

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Labor disputes
Supplier bankruptcy
Delays High capacity utilization at supply source
Inflexibility of supply source
Poor quality or yield at supply source
Systems risk Information infrastructure breakdown
System integration or extent of systems
being networked
Forecast risk Inaccurate forecasts due to long lead
times, seasonality, product variety, short
life cycles, small customer base
Information distortion
Table 6-3

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Risk Management in Global Supply
Chains

Category Risk Drivers

Intellectual property risk Vertical integration of supply chain

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Global outsourcing and markets
Procurement risk Exchange-rate risk
Price of inputs
Fraction purchased
from a single
Receivables risk source
Industry-wide
capacity utilization
Inventory risk
Number of
customers
Financial strength
of customers
Capacity risk
Rate of product obsolescence
Inventory holding cost
Product value Table 6-3
Demand and supply
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
uncertainty
Risk Management in Global Supply
Chains

• Good network design can play a significant role in

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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 evaluated mitigation strategies along with
rigorously
financial strategies to hedge uncovered risks

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Risk Management in Global Supply
Chains
Risk Tailored Strategies
Mitigation
Strategy

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Focus on low-cost, decentralized capacity
Increase capacity for predictable demand. Build
centralized capacity for unpredictable
demand.
Increase decentralization as cost of
Get redundant suppliers capacity drops.
More redundant supply for high-volume
products, less redundancy for low-volume
products. Centralize redundancy for low-
volume products in a few flexible
Increase responsiveness suppliers.
Favor cost over responsiveness for
commodity products. Favor responsiveness
over cost for short–life cycle products.
Table 6-4

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Risk Management in Global Supply
Chains

Risk Tailored Strategies

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Mitigation
Strategy Decentralize inventory of predictable, lower value
Increase inventory products. Centralize inventory of less predictable,
higher value products.
Favor cost over flexibility for predictable, high-
Increase flexibility volume products. Favor flexibility for unpredictable,
low-volume products. Centralize flexibility in a few
locations if it is expensive.
Pool or aggregate demand Increase aggregation as unpredictability grows.
Increase source capability Prefer capability over cost for high-value, high-risk
products. Favor cost over capability for low-value
commodity products. Centralize high capability in
flexible source if possible.

Table 6-4

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Flexibility, Chaining, and
Containment

• Three broad categories of flexibility

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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
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Flexibility, Chaining, and
Containment

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Figure 6-1

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Flexibility, Chaining, and
Containment

• As flexibility is increased, the marginal benefit derived from the

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increased flexibility decreases
With demand uncertainty, longer chains pool available capacity
Long chains may have higher fixed cost than multiple smaller
chains
Coordination more difficult across with a single long chain

• Flexibility and chaining are effective when dealing with demand

fluctuation but less effective when dealing with supply disruption

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Discounted Cash Flow
Analysis

• Supply chain decisions should be evaluated as a sequence of cash

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flows over time

• Discounted cash flow (DCF) analysis evaluates the present value

of any stream of future cash flows and allows managers to
compare different cash flow streams in terms of their financial
value

• Based on the time value of money – a dollar today is worth more

than a dollar tomorrow

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Discounted Cash Flow
Analysis

1
Discount factor
1

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
T
 k1  t
NPV  C 0    Ct
1 
where  t 1 
k
C0, C1,…,CT is stream of cash flows over T periods
NPV = net present value of this stream
k = rate of return
• Compare NPV of different supply chain design options
• Theoption with the highest NPV will provide
the greatest
financial return
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Trips Logistics Example

• Demand = 100,000 units

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• 1,000 sq. ft. of space for every 1,000 units of demand
• Revenue = $1.22 per unit of demand
• Sign a three-year lease or obtain warehousing space on the spot
market?
• Three-year lease cost = $1 per sq. ft.
• Spot market cost = $1.20 per sq. ft.
• k = 0.1

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Trips Logistics Example

Expected annual profit if warehouse = 100,000 x $1.22

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space is obtained from the spot – 100,000 x $1.20
market = $2,000

C1 C2
NPV(No lease)  C0  
1 k (1 k) 2

 2,000  2,000
1.1  2,000
1.12 
$5,471

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Trips Logistics Example

Expected annual profit with = 100,000 x $1.22

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three year lease – 100,000 x $1.00
= $22,000

C1 C2
NPV(Lease)  C0  
1 k (1 k) 2

 22,000  22,000
1.1  22,000
1.12  $60,182

• NPV of signing lease is $60,182 – $5,471 = $54,711 higher

than spot market