Supply Chain Management Lecture 5 –

Globalization

David Sharpe

Lecture 5 - Learning ObjectivesOn completion you will be able to:• Define globalization as a phenomenon• Recognise the key drivers for change in the global

economy• Explain the evolution of multinational and international

logistics strategies• Recognise sources of risk from operating globally and in

particular recognise the exchange rates risks that arise and identify methods to manage these risks

Definitions of Globalization• The growing integration of economies and

societies around the world (Source: http://www1.worldbank.org/economicpolicy/globalization/ accessed 15th October 2007)

• Has implications not just for trade and financial flows but for broader cultural, political and environmental dimensions (Source: http://www.imf.org/external/np/exr/ib/2000/041200to.htm#II accessed 15th October 2007)

• Is a trend, the destination has not been reached• Is the convergence of trends in markets,

products, consumer behaviour and society. • Tony Hines, “Supply Chain Strategies”, 2004, Elsevier, page 7

Drivers of GlobalisationGrowth in world tradegreater than growth in

GNP/GDP

Liberalization of trade via WTO Development of global

transport infrastructure

Information technology improves global communications

Global competition increases search for lower labour costs

RegionalisationTriads - North America, EU,

Japan/Pacific Rim

Overcapacity in many industries

World GDP vs. Global Exports

0

5

10

15

20

25

30

1950 1960 1970 1980 1990 2000

World GDP Exports VolumeSource: WTO 2005

Drivers of GlobalisationGrowth in world tradegreater than growth in

GNP/GDP

Liberalization of trade via WTO Development of global

transport infrastructure

Information technology improves global communications

Global competition increases search for lower labour costs

RegionalisationNAFTA, EU, ASEAN etc

Overcapacity in many industries

International Trade Statistics 2008, page 3, http://www.wto.org/english/res_e/statis_e/its2008_e/its2008_e.pdf, accessed 20/10/2010

Scenarios in 2020• Globalisation unbound

– trade barriers progressively dismounted; accelerated technological progress; integrated financial markets

• Controlled globalisation – further gradual trade liberalisation constrained by security concerns

and protectionist pressures

• Globalisation in retreat– protectionist sentiment thrives in a climate of insecurity

• Globalisation sunk – global markets disrupted, stagnant consumption; technical advances

dwindle; restrictions on trade, migration and investment

10%

65%

20%

5%

Source: Economist Intelligence Unit (2006) Foresight 2020: Economic, industry and corporate trends

Stages in Global Supply Management

• Stage one: International purchasing• Stage two: Global sourcing• Stage three: Global supply management

Burt, D. (2010) Global Supply Management. In: Burt, D. et al. Supply management. 8th ed., London : McGraw-Hill, Ch.12, pp.276

Evolution of Logistics Strategies

Sourcing Manufacturing Inventory Distribution Sales

Stage 1 – Direct export

Sourcing Manufacturing Inventory Distribution Sales

Stage 2 – National warehouses

Activities in home country

Activities inEurope

Evolution of Logistics Strategies

Sourcing Manufacturing Inventory,Distribution

Sales

Stage 3 – Logistics centralisationSourcing and primary

manufacturing

Stage 4 – Postponed manufacturing

Activities in home country Activities in Europe

Inventory,Distribution

Sales

Harrison A. and van Hoek R. “Logistics Management and Strategy”, Pearson, 2nd edition 2005, p. 115

Company’s Reasons for Global Sourcing

To benefit from:• Superior quality• Better timeliness• Lower total cost• More advanced technology• Broader choice of suppliers• Expanded customer base

Burt, D. (2010) Global Supply Management. In: Burt, D. et al. Supply management. 8th ed., London : McGraw-Hill, Ch.12, pp.276-277

Problems faced by Company’sfrom Global Sourcing

• Cultural issues• Long lead times• Additional inventories• Lower quality• Social and labour problems• Higher cots of doing business• Higher opacity

Burt, D. (2010) Global Supply Management. In: Burt, D. et al. Supply management. 8th ed., London : McGraw-Hill, Ch.12, pp.277-278

Global Pipeline – Transport Variability

From point of origin to

port

Freight forwarding/

consolidation

Arrive in country of destination

Customs clearance

Transit to

point of use

Total elapsed

time

Maximum 5 7 15 5 5 37

Average 4 3 14 2 4 32

Minimum 1 1 12 1 2 17

Christopher M., Logistics & Supply Chain Management, Pearson, 3rd edition, 2005, p. 217

Broader Risks from Global SCM

• Geopolitical threats– SARS, Iraq war, terrorist attacks like 9/11/2001

• Transportation breakdowns– Strikes, UK postal strike, baggage handlers at airports

• Economic risks– Problems outside of your industry, market & country affect demand– i.e. problems in US sub-prime mortgage market

• Currency risk– Hedge in the Forward Exchange Rate market.– Hedge in the Money Market– Hedge in the Options Market

Illustrative Case — Dayton Manufacturing’s Transaction Exposure

Scout Finch is the chief financial officer of Dayton, a US -based manufacturer of gas turbine equipment. She has just concluded negotiations for the sale of a turbine generator to Crown, a British firm, for £1,000,000. This single sale is quite large in relation to Dayton’s present business. Dayton has no other current foreign customers, so the currency risk of this sale is of particular concern. The sale is made in March with payment due three months later in June. Scout has collected the following financial and marketing information for the analysis of her currency exposure problem.

See lecture handout

Lecture 5, Key Points• Globalization is defined here as the convergence of trends in

markets, products, consumer behaviour and society. • Many factors have encouraged the growth in globalization and of

particular relevance to manufacturing supply chain strategies are the lowering of some trade barriers, convergence of consumer tastes, potential to exploit mass customisation & postponement strategies to meet local tastes, availability of low cost production and need to utilise over capacity.

• This has created phases in internationalisation of operations, normally starting from the firm’s home country for truly global industries such as cars. However, some sheltered industries remain relatively unaffected because of the need for local supply, such as house building. Trading industries concentrate design and manufacturing in relatively few locations due to limited economies of scale (aerospace) or need to access low cost production (apparel) but trade globally. Finally multinational industries, such as banking, locate in many global locations but only trade with local customers in that location.

Lecture 5, Key Points• Global supply chain management and logistics requires a

rationalisation of sourcing, production and distribution and offers potential improvements via low labour costs, economies of scale and centralisation of inventories. However, it has to cope with extended supply lead times, extended & unreliable transit times, multiple consolidation & break points, multiple freight modes & cost options and multiple possible locations. It also needs to balance local needs against the benefits of global rationalisation.

• Being global is not without risks. Primary sources of risk include geopolitical uncertainty in both supply and market locations and transportation breakdowns in the longer global pipeline. Economic risk increases as the interdependency of markets grows as shown by the US problems in the sub prime mortgage market in 2007. Trading globally creates currency risk and managing this risk creates added cost.

For the next lecture• Read the case study currency risk, M&S and Nike• Possible oral presentation questions

– Are inventories centralized in global regions in this supply chain or firm?

– How does the supply chain meet local tastes and preferences whilst organizing globally?

– Does (or how could) the supply chain use postponement strategies to cope with global markets?

– Will the supply chain become more or less global in the next 10 years?

– What risks arise from the global operations of this supply chain or firm?