CH-1-2 Supply Chain Management: An Overview – Supply Chain Management: A Logistics Perspective : Book Guide

This Document Contains Chapters 1 to 2 CHAPTER 1 SUPPLY CHAIN MANAGEMENT: AN OVERVIEW LEARNING OBJECTIVES The major objectives of this chapter are: • Explain how efficient and effective supply chains can improve customer fulfillment and cash flow. • Discuss the development and shaping of supply chains in leading organizations and understand their contributions to their financial viability. • Appreciate the important role of supply chain management among private as well as public or nonprofit organizations. • Understand the contributions of supply chain management to organizational efficiency and effectiveness for competing successfully in the global marketplace. • Explain the benefits that can be achieved form implementing supply chain best practices. • Understand the major supply chain challenges and issues facing organizations currently and in the future. CHAPTER OVERVIEW Introduction The first decade of the twenty-first century was a period of rapid change for most organizations, especially businesses. That rate of change has not slowed down, and the second decade has been more volatile than previous years. The external forces of change require organizations to be much more nimble and responsive; that is, organizations need to be able to change and/or transform themselves to survive in the intensely competitive, global environment. Shaping the Supply Chains of the 21st Century: Evolution and Change The rate of change has accelerated, both in U.S. domestic business and globally. A key to understanding how to respond to this change is to gain a perspective on the forces of change. Globalization Many believe that globalization has replaced the “cold war” of the post-World War II era as the driving force for world economics. Beginning in the 1970s, U.S. firms began procuring more globally. Firms started asking: • Where in the world should they source? • Where in the world should they manufacture • Where in the world should they market their products? • From where in the world should they warehouse and distribute? • What global transportation strategies should they utilize? This Document Contains Chapters 1 to 3 Some important issues or challenges for supply chains of the global economy are: (1) more volatility of supply and demand, (2) shorter product life cycles, and (3) the blurring of traditional organizational boundaries. All three deserve some discussion. Supply and demand have become more volatile for a number of reasons. Acts of terrorism, for example, the ISIS attacks in the Middle East and pirates attacking cargo ships, have serious implications for the flow of commerce. Companies have put in place security measures to protect their global supply chains. Visit the webpages for the Department of Homeland security and Transportation Security Administration to see how their activities can impact the Supply Chain Natural catastrophes such as hurricanes, floods, earthquakes, etc., have become more problematic because of the scope and extent of global trade; therefore, they pose a significant potential problem. Longer-run issues of supply and demand also arise with the global competition of sources of supply and markets. The global supply chains of the best companies must be adaptive and resilient to meet the challenges of the global marketplace. Shorter product life cycles are a manifestation of the ability of products and services to be duplicated quickly. Technology companies are particularly vulnerable to the threat of their new products being reengineered, with life cycles as short as 18 months. To maintain their profitability, companies may have to outsource some parts of their operation to another domestic or global company that can provide what they need more efficiently and hopefully maintain the same quality. Outsourcing has been going on for some time. From a supply chain and logistics perspective, the growth in outsourcing increases the importance of effective and efficient global chains which are more complex and challenging. Discuss the concept of “Core Business,” or concentrating on what the company does best and outsourcing the rest. A brief discussion of 3PLs may be appropriate here as well. Technology It is also a major force in changing the dynamics of the marketplace. Individuals and organizations are “connected” 24/7 and have access to information on the same basis via the Internet. The speed and availability of information over the Internet has caused consumers to be much more aware of delivery cycles and to have a greater desire for instant gratification. Social networks such as Facebook or Twitter are playing an ever increasing role in business organizations and influence supply chain because of their impact on customer demand and the speed of information transfers. Some individuals have argued that another relevant mantra for businesses in the 21st century is ”TWITTER AND TWEET OR RETREAT”. Many companies see opportunities to “data mine” the social media to uncover demand related information for improved forecasting and marketing. As will be discussed in more detail, CLOUD COMPUTING, is more than a “buzz word” and is revolutionizing information systems. Collaboration opportunities with individuals and companies throughout the globe have increased which has created market opportunities as employment opportunities increased. Technology has spawned the development of UBER, AIRBUB and other such organizations which have disrupted their respective marketplaces. Organizational Consolidation After World War II, manufacturing became the leading driver of supply chains. As markets became more fragmented and competitive, these manufacturing firms sought advantage through logistics excellence. Retail giants such as Walmart, Sears, Kmart, Home Depot, Target, Kroger, McDonald’s, and other Big Box Store chains have become powerful market leaders in driving logistics change. The importance of the consolidation and power shift is that the large retailers are accorded special consideration from consumer product companies. The value added services that these retailer demand allows them to operate more efficiently and often more effectively. The scale of the retailers can also provide possible economies (read cost savings) to the producers of the products but may also add complexity. The Empowered Consumer The impact of the consumer is much more direct for supply chains because the consumer has placed increased demands at the retail level for an expanded variety of products and services. The implementation of an omni-channel distribution strategy by large retailers is an excellent example of a current strategy made feasible with technology that is having a major impact on marketing sales at the retail level. Today’s consumers are more empowered by the information they have at their disposal from the internet and other sources. The internet enables buyers to expand their buying alternatives and quickly make comparisons before they purchase. The omni-channel distribution option provides additional flexibility. The demographics of our society with the increase in two-career families and single-parent households have made time a critical factor for many households so demand quicker response times and more convenient offerings according to their schedules. Government Policy and Regulation The fifth external change factor is the various levels of government which impact businesses and their supply chains. The deregulation of the 1980s and 1990s included transportation, communications, and financial institutions. Now that domestic transportation is deregulated, it has become possible for transportation services to be purchased and sold in a much more competitive environment. New carriers entered the marketplace while other sectors of transportation underwent consolidation through mergers and acquisition. Many service providers are offering logistics services companies and offer an array of related services that can include order fulfillment, inventory management, warehousing, etc. The financial sector was also deregulated at the federal level and this has fostered changes in how businesses can operate. The deregulation of financial institutions fostered changes in how businesses can operate with respect to cash flows, purchasing cards and short term investments. The changes made organizations more cognizant of the role that supply chain management could play with asset efficiency and cash flows. The communications industry was also made more competitive and like the other two industries discussed earlier, the communications industry has undergone much change and has become part of the information revolution with a number of other “players” including cable companies, Internet companies, etc. Communications efficiency and effectiveness have led to dramatic improvements and opportunities in logistics and supply chains The omni-channel option is a mjorv change in meeting customer needs at the retail level. Supply chain practices have been improved leading to lower cost and better customer service. Supply Chains: Development and Shaping for the 21st Century Development of the Concept: The concept started in the 1960s with the development of the idea of physical distribution which focused on the outbound side of a firm’s logistics system. The focus of physical distribution was on total systems cost and analyzing tradeoff scenarios to arrive at the best or lowest system cost. During the 1980s, the logistics or integrated logistics management emerged. In its simplest form, it added inbound logistics to the outbound logistics of physical distribution. This increased coordination between the outbound and inbound logistics systems provided opportunities for increased efficiency and, perhaps, improved customer service. International or global sourcing of materials and supplies for inbound systems was growing, which presented some special challenges for production scheduling. The systems or total cost concept was also a rationale for logistics management. This includes a tool called value chain analysis developed for competitive analysis and strategy purposes. The potential savings of $30 billion demonstrated in the grocery study showed the power of optimizing the supply chain as opposed to just one individual company or one segment of the supply chain. A study of “best-in-class” companies showed they spent 7.0 cents of every sales/revenue dollar for supply chain-related costs, while the median company spent 13.1 cents of every sales dollar on supply chain-related costs. For a hypothetical company with $100 million in sales in 1997, being best in class would mean an additional $5.3 million of gross profit to an organization, which frequently would be the equivalent profit from an additional $80– 100 million of sales. Integration across the boundaries of several organizations in essence means that the supply chain needs to function similar to a single organization satisfying the ultimate customer. Products and related services has traditionally been an important focus of logisticians and can be considered the “life blood” of the supply chain. Customers expect their orders to be delivered in a timely, reliable, and damage-free manner. Note that product flow is a two- way flow in today’s environment because of the growing importance of reverse logistics systems for returning products that are unacceptable to the buyer, because they are damaged, obsolete, or worn out. The information flow has become an extremely important factor for success in supply chain management, noting the two way flow. In a sense, the supply chain is being compressed or shortened through timely information flows back from the marketplace, which leads to a type of supply chain compression or inventory compression. Sharing sales information leads to less demand distortion which is known as the bullwhip effect. The third flow is financials or, more specifically, cash, and a major impact of supply chain compression and faster order cycle times has been faster cash flow. The faster cash-to-cash cycle or order-to-cash cycle has been a bonanza for companies because of the impact on working capital. The fourth flow is demand flow. Integrated information systems enable demand signals to be identified early and responded to with appropriate production or delivery quantities. Best-in-class companies have developed a more flexible production schedule with the opportunity to make adjustments in 24 hours. Production costs may be higher, but the trade-off is the ability to meet spikes in demand or slow production of some SKU’s that may not be selling at the level anticipated. Supply chain management provides organizations with an opportunity to reduce cost (improve efficiency) and improve customer service (effectiveness). However, certain issues or challenges must be addressed before SCM will be successful. Major Supply Chain Issues Supply Chain Networks The network facilities must be capable and flexible to respond and change with the dynamics of the marketplace whether in the short run or the long run. Technology companies, for example, may have to move manufacturing operations to a different country in six to nine months because of changes that can occur that affect their cost and/or customer service. At times, the flexibility may be required for a shorter duration—for example, a port strike, floods, hurricanes, etc. Mitigating the risk from such disruptions is a critical strategy in today’s global networks. Private sector companies are placing increased emphasis on strategies to deal with the risk of disruption. Such a level of responsiveness requires information systems to provide as much warning as possible and plans in place on how to respond. Complexity Globalization and consolidation in supply chains increase complexity for organizations in terms of SKUs, customer/supplier locations, transportation requirements, trade regulations, taxes, etc. Companies need to take steps to simplify, as much as possible, the various aspects of their supply chains such as rationalizing SKUs, physical locations, and customer service. Inventory Deployment SCM provides an opportunity to reduce inventory levels with coordination or integration, which can help reduce inventory levels on horizontal (one firm) and/or vertical (multiple firms) levels in the supply chain. Information Today’s technology and communication lead to the collection and storage of vast amounts of data unless data is shared horizontally and vertically in the supply chain and used to make better decisions. Information can be a powerful tool if it is timely, accurate, managed, and shared. Cost/Value A challenge for supply chains is the prevention of suboptimization. Global supply chains compete against other global supply chains which accentuates the importance of cost and value at the very end of the chain. Organizational Relationships Supply chain management emphasizes a horizontal process orientation that cuts across traditional functional silos within organizations and necessitates collaboration with external vendors, customers, transportation companies, 3PLs, and others in the supply chain. Communication is critical to explain the opportunities for system tradeoffs that will make the supply chain more competitive. Performance Measurement Most organizations have measures of performance or metrics in place to analyze and evaluate their efficiency and progress over different time periods. In some instances, metrics are set that appear logical for the subunit of the organization but are suboptimal for the overall organization or supply chain. Technology Technology can be viewed as a change driver, but it is also important as a facilitator of change that will lead to improved efficiency and effectiveness. The approach necessary is to analyze and adjust or change processes, educate the people involved, and then select and implement the technology to facilitate the changes in the processes. Transportation Management Transportation can be viewed as the glue that unites the supply chain model. The critical outcomes of the supply chain are to deliver the right product, at the right time, in the right quantity and quality, at the right cost, and to the right destination. Economic changes among transportation providers such as shortages of drivers, higher fuel costs, and changes in driver hours of service regulations have led to what some individuals have called a transportation crisis or the “perfect storm,” a much greater challenge for users. Supply Chain Security Safe reliable delivery of products to customers is expected of the supply chain. In the past, this was often accepted as a given; but today it is a concert and a potential challenge. Globalization has today increased the risk of supply chain disruptions. Talent Management As supply chains have become more complex and comprehensive for reasons explicated in this chapter and subsequent chapters, the criticality of having educated and talented managers involved in supply chains has attracted much more attention in many organizations. The effort to attract, develop and maintain the appropriate pool of talent from entry level to executive level is attracting much more attention. SUMMARY • Cash flow has become one of the most important measures of financial viability for business organizations in today’s global markets. Supply chains are very important determinant of improved cash flow since they directly impact cost, revenues and asset requirements. • Supply chains are an important determinant of working capital consumption since they impact inventory, accounts receivable and cash. • Efficient and effective supply chains can free up valuable resources and improve customer fulfillment so as to increase return on investment or assets and improve shareholder value. • The accelerated rate of change in the global economy has increased the necessity of continual changes in supply chains or even transformation of the organization to remain competitive. • The rate of change has been driven by a set of external forces including but not limited to globalization, technology, organizational consolidation and shifts in power in supply chains, an empowered consumer, and government policy and regulations. • The conceptual basis of the supply chain is not new. In fact, organizations have evolved from physical distribution management to logistics management to supply chain management which are all based upon effective systems analysis. • Supply chains are extended enterprises which require managing four flows—products, information, financials (cash) and demand on a collaborative basis. • Information systems and technology are an important part of successful supply chains. • Supply chain performances should be measured in terms of overall corporate goals for success and supply chain strategies must be consistent with organizational strategies. • Supply chains need to focus on the customers at the end of the supply chain and be flexible and responsive. • Technology is important to facilitate change, but it should follow process change and employee education to address problems and issues appropriately. • Transportation management, security and sustainability have become increasingly important in the twenty-first century because of the political and economic changes that have occurred. • Change with the changes, or you will be changed by the changes! ANSWERS TO STUDY QUESTIONS 1. Globalization and technology developments have led to some significant changes in the global economy. Discuss the importance of such changes to the United States. What is the impact upon supply chains? Globalization was the most frequently cited change factor by business leaders, and it replaced the post – World War II Cold War as the dominant driving force in world economics. The concept of the global marketplace or the global economy took on a special meaning for all enterprises (profit and nonprofit; small, medium, and large; products or services) and for individual consumers in the 1990’s and the first decade of the 21st century. Globalization led to a more competitive economic and geopolitical environment which resulted in opportunities and threats both economic and political. Some individuals have argued that there is no “geography” in the current global environment (figuratively speaking) or, perhaps more aptly, that TIME AND DISTANCE have been compressed. Supply and demand have become more volatile for a number of reasons. Acts of terrorism, for example, the ISIS attacks in the Middle East and pirates attacking cargo ships, have serious implications for the flow of commerce. Companies have put security measures in place to protect their global supply chains and to act quickly to offset challenges to their supply chains which has increased their cost, but the risk is ever present. Natural catastrophes such as hurricanes, floods, typhoons and earthquakes have become more problematic because of climate changes and because they pose a very significant challenge for global supply chains. Challenges to supply and demand are usually exacerbated in number and severity by the distances involved, which necessitates risk mitigation strategies. It has been argued that an interruption or disruption to a supply chain that cuts off the flow of information and products is analogous to a HEART ATTACK that cuts off the flow of blood to the heart. Like a heart attack, supply chain disruption can have lasting effects. The global supply chains of the best companies must be adaptive, resilient and responsive to meet the challenges of the global economy and develop mitigating strategies for disruptive forces. Shorter product life cycles are a manifestation of the ability of products and services to be duplicated quickly. Technology companies are particularly vulnerable to the threat of their new products being reengineered. However, almost all products in the highly competitive global environment are faced with this issue. From a supply chain perspective, shorter product life cycles present a challenge for inventory management. Products that are duplicated will most likely face a faster reduction in demand and require new pricing policies, both of which present challenges to effective inventory management. The risk of obsolescence as new products are developed is another challenge for inventory management. It also means continually developing new products or reconfiguring old products to maintain market share. The rate of development and change in technology is particularly disruptive to existing enterprises and has led to the demise of some. A strong compliment to the growth in the global economy has been the growth and development in the technology related to supply chains. Mention has been made of time and distance being compressed, and technology has certainly played a major role in making this happen. Technology has had a major impact on supply chains as a facilitator of change as companies have transformed their processes. However, it is also a major force in changing the dynamics of the marketplace. Individuals and organizations are “connected” 24/7 and have access to information on the same basis via the Internet. Search engines, such as Google and others, have made it possible to gather timely information quickly. We no longer have to wait for information to be “pushed out” to us; we can “pull” information as we need it. Vast stores of data and information are virtually at our fingertips. Social networks such as Facebook or Twitter are playing an ever increasing role in business organizations and influence supply chains because of their impact on customer demand and the speed of information transfers. Technology has allowed individuals and smaller organizations to connect to the world’s “knowledge pools” to create and establish opportunities for collaboration in supply chains. Outsourcing to the less-developed countries was enhanced by technology. Collaboration opportunities with individuals and companies throughout the globe have increased which has created market opportunities as employment opportunities increased. 2. The consolidation that has developed at the retail end of many supply chains has had an important impact. What changes have occurred in supply chain management because of retail consolidation and the related power shift? During the 1980s and especially the 1990s, a significant change occurred as retail giants such as Wal-Mart, Sears, Kmart, Home Depot, Target, Kroger, McDonald’s, etc., became powerful market leaders and engines for change. While other retailers are not as large as Wal-Mart, their size and economic buying power have also increased significantly. An important aspect of the economic power shift toward the retail end of the supply chain is that many consumer product companies find that 15 to 20 percent of their customers account for 70 to 80 percent of their total sales. The large retailers were accorded services such as scheduled deliveries, “rainbow” pallets [mixed arrays of products or stock-keeping units (SKUs)], advance shipments notices (ASNs) shrink-wrapped pallets, etc. These services allowed retailers to operate more efficiently and often more effectively and provide scale economies to the producers which was a win-win arrangement with savings passed on to the consumer. As more collaboration is practiced among organizations in the supply chains; they can gain shared cost savings and improved customer service. For example, sharing point-of-sale data is a powerful collaborative tool for mitigating the so-called BULL WHIP EFFECT of inventory in the supply chain which has multiple benefits for supply chain collaborators. Companies that report innovative best practices usually obtain about half of their innovative insights outside their company through collaboration with suppliers and customers. The power of information sharing and collaboration cannot be overstated. 3. Consumers are considered to have much more influence in the marketplace today. What factors have led to this “empowered consumer” situation? How has this factor changed supply chains in the last 10 to 15 years? Will this influence continue? An important aspect of the economic power shift toward the retail end of the supply chain is that many consumer product companies find that 15 to 20 percent of their customers account for 70 to 80 percent of their total sales. The large retailers were accorded services such as scheduled deliveries, “rainbow” pallets [mixed arrays of products or stock-keeping units (SKUs)], advance shipments notices (ASNs) shrink-wrapped pallets, etc. These services allowed retailers to operate more efficiently and often more effectively and provide scale economies to the producers which was a win-win arrangement with savings passed on to the consumer. 4. Describe the three phases of the evolution of the supply chain concept The first phase started in the 1960s with the development of the physical distribution concept that focuses on the outbound side of a firm’s logistics system. The system relationships among transportation, inventory requirements, warehousing, exterior packaging, materials handling, and other activities or cost centers were recognized. For example, the selection and use of a mode of transportation, such as rail, affects inventory, warehousing, packaging, customer service, and materials-handling costs, whereas motor carrier service would probably have a different impact on the same cost centers. The decision should be based upon lowest total system cost. The systems perspective is also an important concept underlying supply chain management. The second phase was during the 1980s, which was a decade of change in the United States with the deregulation of transportation and financial institutions, and the integrated logistics management concept which added inbound logistics to the outbound logistics of physical distributions developed in a growing number of organizations. This was logical since deregulation of transportation provided an opportunity to coordinate inbound and outbound transportation movements of large shippers, which could positively impact a carrier’s operating cost by minimizing empty backhauls, leading to lower rates for the shipper. Also, international or global sourcing of materials and supplies for inbound systems was growing in importance. Therefore, it became increasingly apparent that coordination between the outbound and inbound logistics system provided opportunities for increased efficiency and improved customer service. Supply chain management represents the third phase of the evolution of the supply chain concept. This phase was created from the underlying logic of the systems or total cost concept and was also the rationale for logistics management. Porter’s value chain concept was developed as a tool for competitive analysis and strategy. The value chain identifies inbound and outbound logistics as primary components of the value chain; that is, they can contribute value for customers and make the company financially viable to increase sales and improve cash flow. The more integrated nature of marketing, sales, and manufacturing with logistics is also an important dimension of the value chain and has become more important with the supply chain management focus. 5. Why should senior executives be concerned about supply chain management in their organizations? How can effective Supply Chain Management improve the financial viability of their companies? Supply chain management attracts significant attention among CEOs, CFOs, COOs, CIOs, and other senior executives, and the business case for supply chain management demonstrated by two well-known studies in the text provide ample reasons. The potential savings of $30 billion demonstrated in the grocery study showed the power of optimizing the supply chain as opposed to just one individual company or one segment of the supply chain. A study of “best-in-class” companies showed they spent 7.0 cents of every sales/revenue dollar for supply chain-related costs, while the median company spent 13.1 cents of every sales dollar on supply chain-related costs. For a hypothetical company with $100 million in sales in 1997, being best in class would mean an additional $5.3 million of gross profit to an organization, which frequently would be the equivalent profit from an additional $80– 100 million of sales. 6. Supply chains encompass four flows. Describe the four flows, and why are they important? How are they related to each other? The four flows--products and services, information, financials and demand --are very important to the success of supply chain management. Integration across the boundaries of several organizations in essence means that the supply chain needs to function similarly to one organization in satisfying the ultimate customer. Services and products have traditionally been an important focus as customers expect their orders to be delivered in a timely, reliable, and damage-free manner; and transportation is critical to this outcome. The information flow has become an extremely important factor for success in supply chain management, noting the two way flow. The third flow is financials or, more specifically, cash, and a major impact of supply chain compression and faster order cycle times has been faster cash flow. The fourth flow demand reflects the growth in technology which provides organizations the ability to better synchronize supply and demand by detecting and understanding demand “signals” and making appropriate adjustments to inventory replenishment and order fulfillment. 7. During the 1980s and 1990s, managing the transportation function in supply chains was recognized as being important but not critical. Has this perspective changed, and if so, how and why? What special challenges does transportation face in the future? Transportation can be viewed as the glue that unites the supply chain model. The critical outcomes of the supply chain are to deliver the right product, at the right time, in the right quantity and quality, at the right cost, and to the right destination. Economic changes among transportation providers, such as shortages of drivers, higher fuel costs, and changes in driver hours of service regulations, have led to what some individuals have called a transportation crisis or the “perfect storm,” a much greater challenge for users. Transportation has gone from being a readily available commodity to potential users, especially in the 1990s, to today where transportation service can be scarce in some market areas. A major challenge is the maintenance of the existing transportation infrastructure (roads, bridges, ports, waterways, tracks, and airports) and the need to increase capacity to meet the growth in demand. The transportation infrastructure is a major cause of concern for global supply chains especially for water transportation in the port areas. 8. Collaboration is a very critical ingredient for successful supply chains. Why? What types of collaboration are important? What are some of the challenges and issues that need to be addressed? Supply chain management emphasizes a horizontal process orientation which cuts across traditional functional silos within organizations and necessitates collaboration with external vendors, customers, transportation companies, 3 PLs, and others in the supply chain. In other words, internal collaboration or cooperation with marketing, sales, operations/manufacturing, and accounting/finance are very important as well as collaboration or cooperation with external organizations. Communication is critical to explain the opportunities for system tradeoffs that will make the supply chain more competitive. Some of the challenges are optimizing between various entities and insuring the least cost solution is achieved even if some of those entities have a higher cost. 9. Why is information so important in supply chains? What are the challenges to the successful development and implementation of effective information? What is the role of technology and information management? The technology and communication systems that are available to organizations today lead to the collection and storage of vast amounts of data, but interestingly enough, organizations may not be taking advantage of the abundant data to develop information systems to improve decision making. The accumulation and storage of data unless they are shared horizontally and vertically in the supply chain and used to make better decisions about inventory, customer service, transportation, etc., are almost useless. Information can be a powerful tool if it is timely, accurate, managed, and shared. It can be a substitute for inventory because it can reduce uncertainty. The latter is one of the major causes of higher inventory levels because it leads to the accumulation of safety stock. The challenge, frequently, is the sharing of information along the supply chain and the discipline to ensure the integrity of the data collected—a big challenge but one with much potential. 10. Describe the major challenges and issues facing supply chain in the future? The challenge to develop and sustain an efficient and effective supply chain(s) requires organizations to address a number of issues. They are summarized as follows: Supply Chain Networks Network facilities (plants, distribution centers, terminals, etc.) and the supporting transportation services are considered to be very important. However, the network system in a dynamic, global environment is critical. One of the challenges is the rapid changes that can take place. Companies and other organizations need a network system that is capable and flexible to respond and change with the dynamics of the marketplace whether in the short run or the long run. Complexity The globalization and consolidation in supply chains have caused an increased complexity for organizations in terms of SKUs, customer and supplier locations, transportation requirements, trade regulations, taxes, and so forth. Companies need to take steps to simplify, as much as possible, the various aspects of their supply chains. For example, the number of SKUs has expanded for many companies, which exacerbates problems for inventory management and order fulfillment. Consequently, companies have been rationalizing SKUs to eliminate the slow movers and items that do not contribute to profitability. Locations also need to be analyzed to eliminate high-cost or duplicative operations. Customer service levels need to be rationalized as do vendors or supplier alternatives. Layers of complexity develop and may seem necessary, but organizations need to continually evaluate those areas of complexity by evaluating processes, training people and exploiting technology. Inventory Deployment Two interesting characteristics of supply chains are that inventory is often being duplicated along the chain and the bullwhip effect. Effective SCM usually provides an opportunity to reduce inventory levels. Coordination or integration can help reduce inventory levels on horizontal single-firm) and vertical (multiple-firms) levels in the supply chain. Strategies such as compression and postponement can also have a positive impact. Inventory deployment is an important issue for supply chains because of the associated cost and related opportunities for increased efficiency. However, it is important to remember that inventory is a necessary ingredient for successful supply chains, but inventory levels must be managed carefully to reduce working capital. As discussed in the next section and subsequent chapters, information technology is a key ingredient for efficiency of inventory management. Information The technology and communication systems that are available to organizations today lead to the collection and storage of vast amounts of data, but interestingly enough, organizations may not be taking advantage of the abundant data to develop information systems to improve decision making. The accumulation and storage of data unless it is shared horizontally and vertically in the supply chain and is used to make better decisions about inventory, customer service, transportation, etc, is almost useless. Information can be a powerful tool if it is timely, accurate, managed, and shared. It can be a substitute for inventory because it can reduce uncertainty. The latter is one of the major causes of higher inventory levels because it leads to the accumulation of safety stock. The challenge, frequently, is the sharing of information along the supply chain and the discipline to ensure the integrity of the data collected—a big challenge but one with much potential. Cost and Value Frequent reference has been made in this chapter to efficiency (cost) and effectiveness (value). A challenge for supply chains is the prevention of sub-optimization. In today’s environment, global supply chains compete against global supply chains, which means that the cost and value at the end of the supply chain are critical. This is another reason why supply chain collaboration is so important. All the members of a supply chain need to appreciate and understand the challenges and issues along the supply chain. Organizational Relationships Supply chain management emphasizes a horizontal process orientation that cuts across traditional functional silos within organizations and necessitates collaboration with external vendors, customers, transportation companies, 3PLs, and other service providers in the supply chain. In other words, internal collaboration or cooperation with marketing, sales, operations or manufacturing, and accounting or finance are very important as well as collaboration or cooperation with external organizations. Communication is critical to explain the opportunities for system tradeoffs that will make the supply chain more competitive. For example, the vice president of manufacturing may present a rationale for operating plants on a 24/7 basis to lower production costs, but what about the cost of warehousing and inventory of goods that have to be stored until sales are finalized? Looking at manufacturing cost in isolation could lead to higher overall system costs. Performance Measurement Most organizations have measures of performance or metrics in place to analyze and evaluate their efficiency and progress over different time periods. Sometimes, such measures are used for setting baseline performance objectives or expected outcomes, for example, orders filled and shipped per day. At this juncture, it is important to recognize that lower-level metrics in an organization must connect directly to the high-level performance measures of the organization and the supply chain, which are usually net profit, return on investment, or assets and cash flow. In some instances, metrics are set that appear logical for the subunit of the organization, but are suboptimal for the overall organization or supply chain. The previous example of the vice president running the plants 24/7 to achieve the lowest possible unit cost of products could have been saving 3 cents per unit on manufacturing, but the extra expense of holding excess inventory could have cost 4 to 5 cents per unit, thus lowering the company’s net profit margin. The warehouse manager who is measured by the cost per cubic foot of units stored will be motivated to fill the warehouse to the ceiling (what is the tradeoff cost?). Consequently, the overall financial metrics of an organization should be the “drivers” of the lower level metrics. Technology Technology, as indicated previously, can be viewed as a change driver, but it is also important as a facilitator of change that can provide improved efficiency and effectiveness. The challenge is to evaluate and successfully implement the technology to make the improvements desired. Sometimes technology is, figuratively speaking, thrown at a problem, which usually leads to frustration and then failure. The approach necessary is to analyze and then adjust or change processes, educate the people involved, and then select and implement the technology to facilitate the changes in the processes. Skipping the first two steps is analogous to the frequently cited bad approach to strategic planning—ready, fire, aim. The technology available today is almost overwhelming, but analysis and planning are necessary to achieve the expected outcomes. Technology cannot solve or mitigate problems without appropriate up front analysis and planning. Transportation Management Transportation can be viewed as the glue that helps the supply chain system function. The critical outcomes of the supply chain are “TO DELIVER THE RIGHT PRODUCT AT THE RIGHT TIME, IN THE RIGHT QUANTITY AND QUALITY,AT THE RIGHT COST, AND TO THE RIGHT DESTINATION”. Transportation plays an important role in making these “rights” happen. Another aspect of the importance of transportation is related to some of the strategies that are being used by companies to remain competitive in today’s economy—for example, just-in-time inventory, lean logistics and manufacturing, and scheduled and one-day deliveries, etc. The challenge has been exacerbated by challenges and changes among transportation providers; shortages of drivers, fuel costs, and changes in driver hour regulations, which have led to what some individuals have called a transportation crisis or the “perfect storm.” Transportation has gone from being a readily available commodity to potential users, especially in the 1990s, to today where transportation service can be scarce in some market areas. A major challenge is the maintenance of the existing transportation infrastructure (roads, bridges, ports, waterways, tracks, and airports) and the need to increase capacity to meet the growth in demand. The transportation infrastructure is a major cause of concern for global supply chains especially for water transportation in the port areas. Supply Chain Security As indicated, safe, reliable delivery of products to customers is expected of the supply chain. In the past, this was often accepted as a given, but today it is a concern and potential challenge. Globalization has obviously increased the risk of supply chain disruptions. Consequently, organizations must be prepared for potential disruption. Terroristic threats have changed some of the planning and preparation for supply chains that now often include some type of scenario analysis that can consider possible threats, assess probabilities, and plan for alternatives. This situation is not likely to improve in the near future, and companies need to be prepared. With global supply chains, vulnerability is exacerbated by distance and complexity. Talent Management As supply chains have become more complex and comprehensive for reasons explicated in this chapter and subsequent chapters, the criticality of having educated and talented managers involved in supply chains has attracted much more attention in many organizations. The effort to attract, develop and maintain the appropriate pool of talent from entry level to executive level is attracting much more attention. At one time, it was assumed that anyone with experience in another functional area of the organization (marketing, manufacturing, accounting, etc.) could easily transition to a position in logistics and/or supply chain management. While that still does occur, most organizations recognize that the complex and special challenge of 21st century supply chains require experience and expertise in this area. Consequently active recruiting at universities with supply chain and logistic programs is taking place. In addition, educational programs offered for logistics and supply chain managers are increasing in number and popularity. Those are offered by universities and professional organizations. There are other examples, but all are indicative of the growing importance and need for talented and experienced managers. CHAPTER 1 CASES LEHIGH VALLEY TRANSPORT AND LOGSTICS SERVICES (LVTLS) 1. Discuss the Challenges faced by the Pharmaceutical Industry The challenges and issues faced by this industry are reflective of the discussion about the changing economic landscape discussed in Chapter 1. The Pharmaceutical industry is literally under siege with criticism from the government, business and health care organizations, consumers and global competition. This is an industry which has been a mainstay of the U.S. economy for many years providing jobs and good incomes for employees, good returns for investors, and good tax revenues for federal, state and local government and highly regarded by local communities for its economic impact. While still “popular”, the industry has attracted a lot of negative publicity in recent years for pricing practices and slow development of new drugs. This very good case for beginners because there so much information available on the internet about this industry and their challenges. Students will not encounter any problems finding information and data. Rather their problem may be too much information to sort through. So, you may have to give them some guidance. Their major problems appear to be rising costs, slower development of new drugs, government regulation, global competition, responding to knowledgeable customers, etc. plenty of “food for thought and discussion. 2. WHICH OF THE CHALLENGES PROVIDE THE BEST OPPORTUNITY FOR LVTLS? WHY? Logistics service companies can offer a variety of beneficial services which will be explored in a later chapter, but after reading Chapter 1 and any related class discussion, the students should understand the reducing cost is especially important for this company. Any improvements that can be offered in terms of customer service would also be beneficial and help to improve their customers’ competitive position for the future. LVTLS should be able to help reduce transportation and warehousing related costs since this is their specialty. They would look for opportunities to combine shipments for lower rates and try to improve delivery times to customer locations. Given their location in proximity to several major ports, New York, Philadelphia and Baltimore, they may be able to help with global shipments both pick up and delivery. The basic message is cost savings will be the driver for this relationship initially, but it can develop into a more comprehensive set of services for cost savings and service improvement. CASE 2 CENTRAL TRANSPORT 1. Why and how has the market place changed for SAB in the last five to seven years? The traditional wholesaler has experienced tremendous pressure from the development of the supersize retailers who have sufficient volume to buy in large quantities from producers of food and related products to gain the lower price traditionally available to the wholesalers. This has a double negative impact on wholesalers like SAB because these large retailers do not need SAB and the smaller retailers are at a disadvantage buying from SAB since SAB would have to “mark-up” their purchase price to maintain their profitability. Therefore SAB has to either offset their higher purchase price improved service to lower the smaller retailers cost of doing business, e.g., inventory cost or help them to stock unique products that the big retailers do not offer such as local fresh produce or meat products. The other alternative is to provide logistics related services to the large retailers such as warehousing, order fulfillment, delivery, etc. They would have to be careful that that did not put their smaller retail customers at a disadvantage. They could also help the smaller retailers to develop some additional business opportunities like preparing food for pick up and/or delivery via internet sales. In other words, SAB could rethink their services and related options and provide expertise and collaborative service to help the small retailers survive through expansion of what these retailers provide to their customers. These smaller businesses are usually more familiar with their customer needs and can see opportunities that SAB can help them with to retain and increase their market share. 2. WHAT ADVANTAGES MIGHT CENTRAL TRANSPORT EXPERIENCE IN THE PROPOSED NEW VENTURE? Central Transport has another unique opportunity to help SAB move aggressively into new areas of service for the benefit of both companies. Susan Weber seems to understand the changing dynamics of the current market place and the need to be aggressive to avoid a takeover by another company. She is attempting to really change and expand SAB from a traditional wholesaler to an aggressive third party logistics service company offering their customers the opportunity to not only reduce their logistics related costs but also to improve their service to customers. It appears that they would still provide traditional wholesaler services of buying larger quantities from producers to sell to medium and small retailers but also to offer warehousing and transportation services in conjunction with companies like Central Transport. As indicated in Chapter 1, this type of collaboration is the wave of the future, i.e., to operate vertically and horizontally in the channel. They would be helping their customer, SAB, to sustain and grow their business which would be mutually beneficial. 3. WHAT ISSUES WOULD SAB AND CENTRAL FACE IN THE PROPOSED NEW APPROACH? Their collaborative approach would probably change the nature of their relationship from buyer- seller to collaborators or partners in the supply chain channel. They would have to agree on the parameters of this new relationship and negotiate the pricing in a more collaborative- information sharing arrangement. They would be more dependent upon each other to provide the expanded services and sales expertise necessary to serve the smaller retailers but also to offer third party services to the bigger retailers. Central could play the lead role in the latter by providing transportation services and warehousing while SAB could provide the marketing and sales expertise as well as other related services to old and new customers. They would have to rely on their mutual trust and previous experience in forging ahead with these new opportunities. Another possibility would be for SAB to purchase Central and integrate them into a new larger organization with the potential of expanding even more aggressively. CHAPTER 2 GLOBAL DIMENSIONS OF SUPPLY CHAINS Learning OBJECTIVES • Appreciate the complex issues facing managers of global supply chains and the challenges of the more volatile global economy • Understand the rationale for global trade flows (imports and exports) and especially the concepts of absolute and comparative advantage in explaining international trade • Discuss the role and importance of the Factors of Production in providing a trade advantage to countries and/or regions for participating in global trade • Appreciate how population size and age distribution differ among various countries and the impact that they have on their economic growth and vitality • Recognize and understand how the growth in urban areas around the world provides challenges and opportunities for their countries especially, the development of the so-called mega-cities • Discuss the challenges and importance of migration for the economies of the world, especially the developed countries • Understand the internal and external roles of technology and information systems for economic growth and development • Appreciate and discuss the trade flow volumes (imports and exports) among and between countries of the world • Recognize and appreciate the importance of the various trading partners of the United States • Discuss the importance and nature of the major trade agreements that impact the United States and its trading partners INTRODUCTION Global Supply Chains are dependent on the efficient and effective flow of commerce between and among the countries and regions of the world. There are numerous factors that can impact and influence the flow of global goods and services, especially economic and political factors. Before discussing the Global Drivers, the rationale for global and regional trade will be summarized. RATIONALE FOR GLOBAL TRADE AND COMMERCE As European countries advanced economically, particularly during the 18th century, there was a growing awareness of the potential value of international trade. Adam Smith in his renowned treatise, THE WEALTH OF NATIONS, provided not only a rationale for a market economy based upon competition, but also advanced a rationale for trade among nations called the Theory of Absolute Advantage. Smith argued that countries would be better off if they would trade commodities where each country had an economic or cost advantage for one or more of the products that they produced The underlying logic of Absolute Advantage was also used by Adam Smith to advance the rationalization what he called “division of labor” or specialization of labor. The theory of Comparative Advantage was advanced about 40 years later by several economists. The analyses were also somewhat simplistic because not all of the relevant costs were considered. However, the logic was sound as long as total landed costs were considered. The importance of both Absolute and Comparative advantage is they demonstrate that global trade and related global supply chain flows can be based not only upon scarcity of items among countries but also differences in the cost of production with implicit benefit to all parties involved. Later economists explored more fully the rational of global trade and specialization. The Factor Endowment Theory postulates that when a country has more of one of the four so- called Factors of Production (land, labor, capital and entrepreneurship), they may have a comparative advantage in producing one or more products. The current more complex global economy means that there are more variables than the traditional factors of production that can provide advantages to countries and be a basis for global trade flows. Some of these factors help to explain the development of the so-called BRIC (Brazil, Russia, India and China) and VISTA (Viet Nam, Indonesia, South Africa, Turkey and Argentina) countries. India and China have developed and prospered in recent years because of improved global transportation, faster communication systems, population growth, education, and technology advancement. CONTRIBUTING FACTORS FOR GLOBAL COMMERCE AND SUPPLY CHAIN FLOWS Essential factors for economic growth and increased development of global trade flows include population growth and age distribution, urbanization, land and resources, economic integration, knowledge dissemination, labor mobility, financial flows and investment in infrastructure by public and/or private sources, faster communication systems, improved financial services for the effective flow of goods and services. These factors are the driving forces for globalization around the world and need to be discussed in order to understand the future course of global trade and development. Population and Distribution The top ten countries account for almost 60% of the total world population. Interestingly, two countries account for about 36% of the total, China and India. The U.S. is a distant third and China and India have over four times as many people as the U.S. Another interesting statistic is that India is projected to have a larger population than China by 2050 and that Russia (#9) and Japan (#10) are projected to have fewer people in 2050 than they had in 2015. The sheer size of the populations in China and India will provide these two countries with a potential economic advantage in terms of labor for growth as long as the economies can support that population size. The decrease in size for Russia and Japan reflects an aging population and has the potential of being an economic disadvantage in terms of labor availability and the social cost to support an aging population. The median age is increasing, with one exception, over the course of the four years for all categories. Developed countries have the highest median age in each year, and the least developed counties have the lowest median age. The differences are generally explained by the level of education, quality of health care and economic well-being. The difference in median age between the most developed and least developed is interesting to note. It is 21 years in 2010 and 2025 but drops to a projected 18 years by 2050. Overall, however, the challenge is evident that the more developed countries have a lower birth rate and an aging citizenry which has implications for future economic development and prosperity. Japan and three European countries are projected to have populations with median ages over 50. The aging populations in these countries will result in increased health care costs and a reduction in the size of the working population. This could result in a lowering of labor productivity and increased taxes. The consequences of this phenomenon could mean high unemployment, scarcity of some resources, and a need for more housing, infrastructure (water, sewers, roads, etc.) education and other services thus straining their economic viability even more. However, the size of the potential workforce can attract industries that are labor intensive. Migration to countries with aging populations is another possibility if not constrained. From the perspective of world business and global supply chains, this data has some important implications relative to economic growth, market size and development, capital flows, labor availability consumer needs and utilization of natural and strategic resources. A related issue is urbanization with the increase in migration in many countries from rural areas to cities or urban areas. As one would expect this shift will be most profound in the less and least developed countries of the world. The United Nations projects by 2025 that 50% or more of the total Asian population will be in cities with China having the largest urban population. A new category of city has been identified, namely, Megacities (10 million or more inhabitants) which is a manifestation of the migration to urban areas. One of the interesting and important dimensions of the new Megacities is “where” they will develop. The private sector can play an important role in the developments of these large urban communities. The sheer size and density of the cities will require much effort and innovation. To address the infrastructure shortages of transportation, fresh water, sewage disposal, health services, educational facilities, etc. Meeting these needs will require public and private funding. Global trade flows and global supply chains will be impacted and businesses must be prepared to take advantage and participate for the welfare of the citizenry.2 Migration can be disruptive and dysfunctional when it occurs with large numbers under conditions of political upheaval. Absorbing that crush of humanity strains the existing economic and social systems and causes unstable conditions. However, humanitarian concerns dictate that every effort possible be made to accommodate this mass migration from Syria and other nearby countries. The European Union countries have felt the major impact of migration pattern because of their proximity and economic status. The United States should be given some attention. Table 2.4 addresses the U.S. population (third largest) by age and gender for five years from 2010 to 2014. While the population has increased during this period, the increase has been modest, an increase of about 9.5 million people over the five year period. Interestingly, there are more females than males which is primarily due to their longer life expectancy. The median age has remained stable during this period unlike some other developed countries because of migration from various countries of the world Land and Resources Two other “Factors of Production” land and resources are also important for economic advancement and development. These are general terms and would include such items as energy, food and water which are critical for economic viability and future development. Technology can play an important role in mitigating scarcity of key resources, from desalinization of ocean water and fracking for gas and oil production to bio-technology for improving crop yield and agricultural production. Public and private sector collaboration and partnerships, could be very instrumental in alleviating global economic disparities that currently exist around the world. Investment in infrastructure will be required but most important will be the elimination of terroristic acts along with economic and political stability! Technology and Information Technology has two important dimensions. It can be viewed as an internal change agent that can enhance organizational efficiency and effectiveness and enhance the ability to compete in the global marketplace. Technology, however, can also be viewed as an external driver of change similar to globalization. In fact, one could argue that its external role in recent years has moved technology ahead of globalization as an agent or driver of change. The rapid development of new technology whether it be hardware or software has changed the “rules of engagement” and enabled new sources and forms of competition and especially new “business models”. The availability and sharing of such information has become a major force for driving competition and the development of new business models. A very important outcome of these developments has been the opportunities for expanding global participation with efficient and effective supply chains via outsourcing to other countries of the world. It has made it possible for relatively small companies to participate in some of the processes and expand their footprint. Global Supply Chain Flows As indicated previously, early in the 21st century there was frequent reference made to the acronyms, the BRIC countries and the VISTA countries. The former were identified as the top emerging economies and the latter as developing at a fast pace.. The development of global supply chains provided an opportunity for these economies to participate in the global landscape because of material resources, the size of their workforce, their technical skills or some other economic advantage that made them attractive to companies from more developed economies. Their population size also made them attractive as potential markets to businesses in the United States, the European Union (E.U.), and Japan. They were hailed as a sign of more global economic balance, and one author declared that the “world was becoming flat” on an economic development basis.5 Their status at the time was largely based on inherent factors of production and related development. At this point there have already been some shifts and the future importance of some of the VISTA countries is not clear. The political upheaval occurring during the 2nd decade of the 21st century along with terrorism have disrupted some economic development, Never-the-less, global supply chain flows are significant and an examination of some of the related trade data provides some important insights into the significance of various countries on the world stage. Figure 2.2 and the related Table provides data on the volume of export trade moving from the top 12 countries of the World and the associated world map depicts numerous circles which indicate, by their size, the volume of exports .Looking at the map with its numerous circles indicating exports or out flow of merchandise, it reflects good news and bad news. The good news is the number of countries participating in exporting or global commerce. The bad news is the disparity among the countries in terms of volume of exports. Certainly, some of this is attributable to the size of the country, its stage of economic development, and the value of the merchandise being exported, but the concentration of economic power is obvious. The Table indicates that the European Union as a whole with its 28 countries is the leader in terms of exports. This listing may seem unfair to some readers. But, the total geographic size of the E.U. is smaller than of Russia and China, for example, and it is considered an economic entity. Also, it is interesting to note, that in spite of their relatively small geographic size, four European countries are among the top nine countries on the list. Overall, the EU is an important component of the global economy and a major economic force. China is the leading individual, exporting country followed the United States which exports about 30% less than China. The U.S. is followed closely by Germany, and Japan is a somewhat distant 4th on the list. It is also, interesting to note that the Republic of Korea and Hong Kong and both compare favorably with Italy and France in terms of their exports. If the Table were expanded to include the top 12, the United Kingdom and the Russian Federation would make the list at 11th and 12th respectively. Figure 2.3 and the related table provide data on the volume of imports moving into various countries. Again, the EU is at the top of the list, but the U.S and China have changed positions with the U.S. being number two. The two tables indicate China’s position as a net exporter and the U.S. as a net importer. Keep in mind, however, that these table are showing merchandise flows, and are not the equivalent of the Balance of Payments which also reflects financial flows. The trade data in terms of value is the most relevant to the instant discussion for global supply chains but one could argue that the actual physical volume of the flows could also be important from a supply chain perspective. An overall comparison of imports and exports is interesting. Note the data for China and Germany in terms of exports versus imports. Another set of data that is of interest for this discussion is the trading partners of the U.S. with respect to exports and imports. Table 2.4 shows the total exports of the U.S. and their top 25 export partners for 2014. Canada, Mexico and China are the top three recipients of exports from the United States, in that order. Japan is a distant fourth with about half of what is exported to China, and China only receives about half of what is exported to Mexico. Canada is by far the most important trading partner of the U.S., in terms of exports. Note that six European countries are in the top 25and an array of Asian and South American countries, for the most part, complete the list. As indicated above, the U.S. is a major global exporting country with some concentration of trade with its two closest “neighbors”, but also with a broad reach throughout the world. The U.S. imports presented in Table 2.5 indicate a counterbalancing global flow as one might expect. However, in this case China is the top partner followed by Canada and Mexico. Supply Chains in a Global Economy An important characteristic of today’s world economy is the increasing regional economic integration. The globalized economy, the establishment of the General Agreement on Tariffs and Trade (GATT) and its 1995 successor, the World Trade Organization (WTO) have together led to multilateral trade promotion and lowered barriers to international business transactions. Nevertheless, a growing number of countries have grouped together to form Regional Trade Agreements (RTAs). The biggest and best known example of an RTA is the European Union (EU), with number of memberships growing from six members in the 1950s to 28 members by 2015. Operating globally has become easier to accomplish for even individuals and small companies, because of the advances in information/communications technology, as noted above, and the continuing improvement of specialists such as UPS, FedEx, DHL, etc., which can provide global supply chain services at a very reasonable cost. A growing number of specialists and continuing improvements in information technology/communications are contributing to the flattening of the world. Obviously, large global companies are also contributing to this phenomenon. Global supply chains impact all with lower prices, increased array of products, and convenience (read 24/7, one-stop shopping, etc.), but some are critical of the outcomes when individuals lose their jobs; businesses are closed, and so forth. Many would argue the advantages outweigh the disadvantages, for instance, lower prices have saved consumers billions of dollars in purchase prices. There are tradeoffs (advantages and disadvantages), but there is no turning back. Global Markets and Strategy The global business environment has changed significantly and companies are not just importing and exporting products but are also locating plants and other facilities in other parts of the world. Honda and Toyota used to produce cars in Japan and ship them to the United States. Now their cars are also produced in the United States for sale in North America. Tariffs and other trade barriers have been significantly reduced among many countries, allowing a much more competitive global economy. Many Fortune 500 companies experience 50 percent or more of their sales in global markets. Small and medium-sized companies have also been able to be players in global markets, with the opportunity to source and sell on a global basis by developing appropriate relationships. Success in the global market-place requires development of a cohesive set of strategies including product development, technology, marketing, manufacturing, and supply chains. Global companies tend to be more successful when their strategies help them to simultaneously achieve their business objectives at their various global locations. From a supply chain perspective, this means strategically sourcing materials and components worldwide, selecting global locations for key supply depots and distribution centers, evaluating transportation alternatives and channel intermediaries, providing customer service, understanding governmental influences on global supply chain flows, examining opportunities for collaboration with third-or fourth-party logistics companies, and other supply chain issues. From a customer service perspective, global markets and strategy have four important characteristics. • First, companies attempt to standardize to reduce complexity, but they have to recognize that global markets need some customization. • Second, global competition often reduces the product life cycle, Technology companies are faced with this phenomenon even in the U.S. market, but globally other products are faced with similar experiences. Technology companies counteract with continual upgrades and new products. • Third, traditional organizational structures and related business models frequently change since companies get more involved in outsourced manufacturing and some logistical activities such as transportation, warehousing, and order fulfillment. All of this impacts the supply chain and its related customer service activities. • Fourth, globalization introduces more volatility and complexity The need for flexibility and responsiveness is a requisite for customer service throughout the supply chain. The expanded networks cover long distances and many are complex. Trade policy, regulations, tariffs and currency exchange rates exacerbate the level of complexity for global supply chains. Furthermore, the number of intermediaries that can be involved adds another additional layer of complexity. In addition to the four areas indicated above, some of the customary strategies used in the domestic market are also challenged. The increased length and complexity of the supply chain make it more difficult to achieve shorter lead times. Also, demand-driven supply or pull systems can lower inventory levels significantly, but they are challenged by the longer distance and complexity of multi-layered supply chains. Other strategies such as compression and lean supply chains are also more difficult to achieve in the global environment. Supply Chain Security: A Balancing Act Given the importance of global trade to the United States, a delicate balance exists between security and the efficient flow of global commerce. If security is too tight it could impede the flow of needed goods or materials, causing delays and decreased efficiency. Ports and border gateways can become congested because of security measures. Consequently, clearance time has increased from hours to days in some instances. Steps have been taken to improve the flow through border crossing. This is necessary for our global economy. Electronic filing of cargo information has helped to improve the border clearance times. The Trade Act of 2002 requires exporters to electronically submit shipping documents to U.S. Customs 24 hours after delivery to a port or 24 hours before vessel departure. For imports, the manifest must be filed by the ocean carrier or the consolidator 24 hours before the U.S.- bound cargo is loaded on the vessel in the foreign port. Because of Canada’s importance as a trading partner, an expedited procedure (FAST) has been developed to speed up clearance through the U.S.-Canadian border. The U.S. Coast Guard was authorized by the U.S. Maritime Transportation Security Act of 2002 to assess the vulnerability of U.S. ports and to deny entry to ships from countries that do not meet U.S. security standards. This act requires the development of standards for container seals and locks, cargo tracking, identification, and screening systems for ocean containers. In addition, the Customs Trade Partnership Against Terrorism (C-TPAT) was established under the direction of the U.S. Department of Homeland Security in November 2001. This voluntary initiative to secure the global supply chain was started with seven companies; by 2007, some 7,400 corporations were involved in this cooperative effort to secure the global supply chain and to facilitate legitimate cargo and conveyance. C-TPAT functions under the U.S. Customs and Border Protection (CBP) Agency, which previously was known as the U.S. Customs Service.7 CBP has responsibility for the traditional role of the U.S. Customs Service, namely, preventing illegal entry of people and drugs, protecting agriculture from harmful pests and diseases, protecting the intellectual property of businesses, collecting import duties, and regulating and facilitating global trade. Partner companies in C-TPAT agree to be responsible for keeping their supply chains secure to agreed standards and to implement needed changes. One of the key features of this program is information sharing of best practices for security among members. The goal is to develop a “green lane” to speed goods across the border but also to protect the United States and the global supply chains of the participants. Ports Ports are a critical part of global supply chains and also a major focus for global security. Over $2 trillion in trade value per year passes through U.S. ports, and over $20 billion is collected in industry fees and taxes. The 50 states utilize about15 ports to handle their imports and exports; over $6 billion worth of goods moves in and out every day. About 99 percent of the international cargo of the United States moves through its ports, or about 3 billion tons annually. In 1960, international trade accounted for about 9 percent of U.S. gross domestic product (GDP). Today, it is over 30 percent.8 The North American Free Trade Agreement was signed by leaders of Canada, the United States, and Mexico in 1993 and was ratified by Congress in early 1994. NAFTA establishes free trade between these three countries and provides the way the agreement is to be interpreted. NAFTA states that the objectives of these three countries is based on the principles of an unimpeded flow of goods, most favored nation (MFN) status, and a commitment to enhance the cross-border movement of goods and services. MFN status provides the lowest duties or customs fees, if any, and simplifies the paperwork required to move goods between the partner countries. In the long run, the goal of NAFTA is to create a better trading environment. NAFTA’s goals involve making structural changes to operate a borderless logistics network in North America. Information systems, procedures, language, labels, and documentation are being redesigned to expedite the border crossings and the flow of commerce. There are continuing challenges to achieving the established goals among all three countries. Migration from Mexico into the U.S continues to be a political “hot button” because of the relative ease of entry into the U.S. SUMMARY • Global companies usually are faced with more complex and longer supply chains which challenge them in terms of efficiency, effectiveness and execution. • Successful global companies have transformed their supply chains on a continuing basis as economic and political circumstances have changed to enable them to deliver best cost and best value to the ultimate customer. • The scope and magnitude of trade flows between the United States and other countries have grown considerably in the last several decades. One very important development has been the growth in the volume of trade with China and several other Asian countries. • Global trade is based upon economic factors of production including land, labor, capital, and entrepreneurship. Population and the age distribution of a country total population are important factors for labor availability • Migration and urbanization are important issues for economic development and vitality of the economy. • Success in the global marketplace requires ongoing development of a cohesive set of strategies including customer service, product development, business model, and supply chains management. Supply chains have become increasingly more important during the 21st century. • Supply chain security has taken on increased significance since September 11, 2001. Companies individually, jointly, and in cooperation with the various levels of government are actively involved. The federal government, in particular, has expanded the scope of its regulations and policies for global security. • U.S. ports play a critical role in global supply chains since over 90 percent of global trade U.S. passes through them. Ports are also an important focus for security. The U.S. needs to focus more attention upon port infrastructure. • Canada and Mexico are ranked number 1 and 3, respectively, on the list of most important trading partners with the United States. That relationship is enhanced by the North American Free Trade Agreement ratified by Congress in 1994. While the treaty had lofty goals, it still is experiencing problems with full implementation of its objectives. Nevertheless, it has helped to foster trade in North America. STUDY QUESTIONS 1. Explain the underlying rationale for global trade and explain the difference between comparative and absolute advantage. Adam Smith in his renowned treatise, THE WEALTH OF NATIONS, provided not only a rationale for a market economy based upon competition, but also advanced a rationale for trade among nations called the Theory of Absolute Advantage. Smith argued that countries would be better off if they would trade commodities where each country had an economic or cost advantage for one or more of the products that they produced. In other words, sell or trade products where they had a cost advantage and buy or trade for products where they did not have an advantage. Smith concluded that all participants in such transactions would be better off than trying to be self-sufficient. While the analysis was relatively simplistic, it was valuable advice, especially for that time period. The underlying logic of Absolute Advantage was also used by Adam Smith to advance the rationalization what he called “division of labor” or specialization of labor. The latter concept led to mass production or assembly lines in manufacturing plants. The underlying logic was that the specialization led to increased aggregate output and lower unit cost, and provided an opportunity for regional specialization and inter-region commerce for an overall economic benefit. The theory of Comparative Advantage was advanced about 40 years later by several economists. They maintained that even if one country had a comparative advantage (lower cost) in the production of two products, they should focus on the production of the one that they had the greatest advantage and trade for the other. The analyses were also somewhat simplistic because not all of the relevant costs were considered. However, the logic was sound as long as total landed costs were considered. The importance of both Absolute and Comparative advantage is they demonstrate that global trade and related global supply chain flows can be based not only upon scarcity of items among countries but also differences in the cost of production with implicit benefit to all parties involved. As one would expect, later economists explored more fully the rational of global trade and specialization. For example, the Factor Endowment Theory postulates that when a country has more of one of the four so-called Factors of Production (land, labor, capital and entrepreneurship), they may have a comparative advantage in producing one or more products. For example, a country with an abundance of capital and an educated workforce may produce high tech products and import labor intensive products and agriculture products. 2. What are the essential factors for economic growth and increased development of global trade flows? Why are they so important in today’s global economy? Essential factors for economic growth and increased development of global trade flows include population growth and age distribution, urbanization, land and resources, economic integration, knowledge dissemination, labor mobility, financial flows and investment in infrastructure by public and/or private sources, faster communication systems, improved financial services for the effective flow of goods and services. These factors are the driving forces for globalization around the world and need to be discussed in order to understand the future course of global trade and development. 3. A number of authors have observed that traditional, hierarchical organizations have changed in the current global economy. How have organizations changed? Why have they changed? What are the impacts of those changes likely to be? Changes have resulted in shorter product life cycles, new forms of competition and new business models. Traditional organizational structures and related business models frequently change as companies get more involved in outsourced manufacturing and some logistical activities such as transportation, warehousing, and order fulfillment. All of this impacts the supply chain and its related customer service activities. Out sourcing, off-shoring and insourcing have become part of the lexicon of 21st century businesses, and information technology has allowed supply chains to be redesigned for more efficiency and effectiveness as well as better execution. Supply chain management has become an important and for some organizations, even critical ingredient for their competitive strategy and success in this global environment. Companies have transformed themselves by changing their supply chains to take advantage of global opportunities. The synergism between globalization and technology, especially, has permanently changed the dynamics of the world’s marketplace. This new era has and will continue to spotlight supply chains as a critical part of the ability of organizations to compete economically. 4. What private sector company epitomizes the concept of a global company with a well managed global supply chain? Provide a rationale for your response. Evaluate each student on the merits of their work 5. What special role do supply chains play in the globalization of organizations? What contributions do successful supply chains make to companies? A supply chain is boundary spanning; that is, encompassing a group of interrelated firms focused on delivering the best price or value products and services to the ultimate customer at the end of the supply chain. It was also noted a supply chain can manage four important flows, namely, materials/products, information, financials and demand. An important characteristic of today’s world economy is the increasing regional economic integration. The globalized economy has led to multilateral trade promotion and lowered barriers to international business transactions. The best supply chains allow organizations to compete very successfully on a national, regional and global basis. 6. What is meant by the current description of the global economy that “time and distance have been compressed”? Do you agree? What has been the impact of this compression? One can hardly dispute that the exponential rise and evolution of information technology, boundary spanning trade agreements, advances in transportation medium capabilities/capacities (better shipping, better over-ground transportation, access to ports and shipping lanes, etc.), and reduced product life cycles, along with many other factors, have combined to relatively “compress” time and distance when compared to business models of yesteryear. Whereas a customized personal computer may have taken weeks to build and ship in the mid-90s, an accepted standard due to lack of available alternative, can now reach the customer in a matter of days, if not hours. It can be argued supply chains help to establish the limits of what is competitively possible in the market. In other words, the cost and value at the end of the supply chain help determine a firm’s ability to compete in a global marketplace. Good supply chains are business power and good supply chain managers are continually pushing the limits of their supply chains to be viable in both domestic and global markets. Operating globally has become easier to accomplish due to advances in information/communications technology, as noted above, and the continuing improvement of specialists such as UPS, FedEx, DHL, etc., which can provide global supply chain services at a very reasonable cost. A growing number of specialists and continuing improvements in information technology/communications are contributing to the flattening of the world. Obviously, large global companies are also contributing to this phenomenon. It is safe to conclude supply chains and supply chain management play an important role in the global economy and have helped to push the growth and success of companies that do “supply chaining” very well. Reduced order cycle time, for example, has become an important part of supply chain management since it can lead to lower inventory levels for customers, improved cash flow, lower current assets and accounts receivable. Conversely, the increased length and complexity of the supply chain make it more difficult to achieve shorter lead times. Global supply chains impact all with lower prices, increased array of products, and convenience (read 24/7, one-stop shopping, etc.), but are not without challenges. 7. Why are customer service and its related strategy so important for companies operating global supply chains? Do you think that customer service is more important than lower cost to the customers? From a customer service perspective, global markets and strategy have four important characteristics. First, companies attempt to standardize to reduce complexity, but they have to recognize that global markets need some customization. For example, in contrast to the U.S. market where large retail stores buy in volume quantities for delivery to their large warehouses, less developed countries may have tiny retail stores that are only 80 to 100 square feet. This means deliveries of small quantities, more frequent deliveries, different packaging, etc. Customer service levels have to be adjusted for these markets in terms of delivery schedules, volumes, order fulfillment, and other areas. Second, global competition often reduces the product life cycle, as previously mentioned, since products can be copied or reengineered quickly by competitors. Technology companies are faced with this phenomenon even in the U.S. market, but globally other products are faced with similar experiences. Technology companies counteract with continual upgrades and new products. Apple, for example, had great success with its iPod, but it quickly followed this with the iPhone, and now the iPad, to maintain financial momentum. Shorter product life cycles present challenges for inventory management with respect to obsolete items. Customer service levels are also impacted because changes have to be made as the product matures in terms of sales volume and then declines, which reduces product profitability. Usually, companies cannot afford to provide the same level of customer service when the product volume declines. Third, traditional organizational structures and related business models frequently change since companies get more involved in outsourced manufacturing and some logistical activities such as transportation, warehousing, and order fulfillment. All of this impacts the supply chain and its related customer service activities. The collaboration indicated requires effective coordination among the various parties to ensure that customer service levels (on- time delivery, complete orders, reliability, etc.) are maintained. There are many challenges for supply chain managers. The soft side of global supply chain management presents significant challenges. The social and cultural elements come into play when dealing with foreign business partners and require daily effort to ensure smooth supply chain execution. This is because “soft” issues and physical problems are, in many cases, not mutually exclusive. Misunderstanding the culture and miscommunicating can cause havoc on the physical side of global supply chain planning and execution. Cross-cultural communication is made complicated by not only different languages and time zones, but also other culturally-rooted practices such as communication styles, different approaches to completing tasks, different attitudes toward conflict, and different decision-making styles, among other factors. Fourth, globalization introduces more volatility and complexity. It is much more likely that global supply chains will experience challenges with weather, terrorism, strikes, and other disruptions. The need for flexibility and responsiveness is a requisite for customer service throughout the supply chain. The expanded networks cover long distances and many are complex. Trade policy, regulations, tariffs and currency exchange rates exacerbate the level of complexity for global supply chains. Furthermore, the number of intermediaries that can be involved adds another additional layer of complexity. When considering which is more important, customer service or lowered cost, one must take into consideration not only physical, but “soft”, cultural factors as well. Some, more affluent sectors may be willing to pay an increased price for goods so long as those goods are backed by a good and robust customer service “tail” – think customer loyalty. However, more developing nations and counties, whose population may be more defined by “fickle” youth and rapid change of taste, customer service becomes less important when compared to price point. These phenomenon must then be weighed against the physical cost of providing either prime customer service, competitive cost, or a delicate balancing of both. 8. What is meant by the phrase “that supply chain security, especially on a global basis,” is a balancing act? Is the pendulum swinging in one direction or the other? Given the importance of global trade to the United States, a delicate balance exists between security and the efficient flow of global commerce. If security is too tight it could impede the flow of needed goods or materials, causing delays and decreased efficiency. Ports and border gateways can become congested because of security measures. Consequently, clearance time has increased from hours to days in some instances. Steps have been taken to improve the flow through border crossing that include infrastructure improvements/adjustments, and regional and global trade agreements. This is necessary for our global economy. There are continuing challenges to achieving this balance, for certain. For example, migration from Mexico into the U.S continues to be a political “hot button” because of the relative ease of entry into the U.S. Due to globalizations inherent threats, physical, geopolitical, weather related, or otherwise security measures are necessarily increasing to adjust, while still attempting to pay homage to cross-boundary principals that help define global supply chains and corresponding management thereof. 9. Why are regional trade agreements among countries so important in the global economy? What is your evaluation of NAFTA and its impact on the participating countries? Steps have been taken to improve the flow through border crossing that include infrastructure improvements/adjustments, and regional and global trade agreements. This is necessary for our global economy. Electronic filing of cargo information has helped to improve the border clearance times. The Trade Act of 2002 requires exporters to electronically submit shipping documents to U.S. Customs 24 hours after delivery to a port or 24 hours before vessel departure. For imports, the manifest must be filed by the ocean carrier or the consolidator 24 hours before the U.S.- bound cargo is loaded on the vessel in the foreign port. Because of Canada’s importance as a trading partner, an expedited procedure (FAST) has been developed to speed up clearance through the U.S.-Canadian border. The North American Free Trade Agreement was signed by leaders of Canada, the United States, and Mexico in 1993 and was ratified by Congress in early 1994. NAFTA establishes free trade between these three countries and provides the way the agreement is to be interpreted. NAFTA states that the objectives of these three countries is based on the principles of an unimpeded flow of goods, most favored nation (MFN) status, and a commitment to enhance the cross-border movement of goods and services. MFN status provides the lowest duties or customs fees, if any, and simplifies the paperwork required to move goods between the partner countries. In the long run, the goal of NAFTA is to create a better trading environment. NAFTA’s goals involve making structural changes to operate a borderless logistics network in North America. Information systems, procedures, language, labels, and documentation are being redesigned to expedite the border crossings and the flow of commerce. Canada and Mexico in the top three recipients of exports from the United States. Canada is by far the most important trading partner of the U.S., in terms of exports. The U.S. is a major global exporting country with some concentration of trade with its two closest “neighbors”, but also with a broad reach throughout the world. 10. What is the role of ports for global commerce and why is that role important? Is our current port infrastructure sufficient? Why or why not? Ports are a critical part of global supply chains and also a major focus for global security. Every day, thousands of containers from countries all around the world arrive at U.S. seaports. Over $2 trillion in trade value per year passes through U.S. ports, and over $20 billion is collected in industry fees and taxes. The 50 states utilize about15 ports to handle their imports and exports; over $6 billion worth of goods moves in and out every day. About 99 percent of the international cargo of the United States moves through its ports, or about 3 billion tons annually. In 1960, international trade accounted for about 9 percent of U.S. gross domestic product (GDP). Today, it is over 30 percent.8 Accounting for a threefold increase in international trade using largely the same historical number and locations of ports, infrastructure may need to be reevaluated, particularly if, due to globalization and global warming other shipping routes gain primacy (Suez Canal widening, Northeast with Northwest Passage, etc.). U.S. ports also play a vital role for the cruise industry. In 2015, about 80 million passenger nights were booked on North American cruises. The top five departure ports account for about 60 percent of the North American cruise passenger departures. The top three are Florida ports: Miami, Fort Lauderdale and Port Canaveral. This flow of passenger traffic has a very positive economic impact on the U.S. economy because of the expenditures to support the cruise industry.9 The ports also play a vital role in national defense and security. The ports are bases of operation to deploy troops and equipment. Port security is very important for military and civilian purposes, and it is a shared responsibility between the public and private sectors. Case Study CASE 2-1 Red Fish, Blue Fish, LLP: 1. Explain the advantages of a trade agreement and how it might impact a company like red fish-blue fish? While the answer to this question is straight forward, an option for the instructor is to have the students do some research on the internet about the so-called Trans-Pacific Trade Agreement which was a major goal of the Obama Administration and was supported and opposed by legislators and others. It is a far reaching agreement intended to have a major influence on trade between the U.S. and many Asian countries. Students could be assigned to present the case for and/or against the agreement. It will elevate their understanding and appreciation of the discussion pro and con about such agreements. As indicated in the Chapter the advantages of such an agreement is that it eases the trade barriers between the various countries and promotes a flow of commerce (goods and services) that can have a very positive impact on the countries participating as suggested by the concepts of Absolute and Comparative advantage in the Chapter. The expectation is that the long run advantages of lower prices, improved product availability enhanced employment along with economic growth will outweigh any short run economic displacement. 2. What makes the demographics of the Asian countries attractive for future trade development? One of the important dimensions of the Asian populations is the size of the potential workforce. The median age of some of these countries is also important along with their education. As Adam Smith and other economists have pointed out Labor is one of the four most important factors of production. European countries and even the U.S. are faced with aging populations that can be a disadvantage to economic growth in terms of a dynamic work force but also a liability in terms of the health care needed for an aging population. The very important related aspect of the larger, younger population is the size of the consumer market and their need ( if gainfully employed ) for goods and services. Some of these countries can be a source for minerals and agriculture products also. Developed countries can frequently be the source of the needed capital for economic expansion. The mutually beneficial dimension is an important argument for such a relationship. The U.S. was an example during the Colonial Era of such a relationship in terms of its development. An interesting addition to this discussion is to ask the students to examine the data presented in the chapter (as well as other sources) and present an analysis of what countries would be most attractive for U.S. trade relations. 3. What challenges would red fish-blue fish likely experience? Like many small companies they would probably be faced with the challenge of not enough experience and talent to exploit all the opportunities. However, they have been selling and buying in these countries using intermediaries and the internet which they can continue to do. They need to add resources ((people and capital) to be more aggressive. Also they need to analyze the comparative data presented in the chapter and from other sources to determine if the are focused upon the right market opportunities. This question can also be refocused by assigning groups of students to work as teams to analyze assigned countries to evaluate for Red Fish-Blue Fish, Solution Manual for Supply Chain Management: A Logistics Perspective John J. Coyle, John C. Langley, Robert A. Novack, Brian J. Gibson 9781305859975