The Establishment of Global Supply Chain

1. APEC e-Trade and Supply Chain Management Training Course(Phase III: Logistic Management for SMEs) The Establishment of Global Supply Chain November 9th, 2010 Hong Kong China Eric Futin

2. Agenda Prologue: The International Context • Roadmap to Global Supply Chains • Objectives of Global Supply Chains • Characteristics of Global Supply Chains • Benchmarking the Global Supply Chains • Global Supply Chains Management and the Role of Logistics • Global Supply Chain Management in the future • Beyond Global Supply Chains: Global Value Chains

3. Agenda Prologue: The International Context • Roadmap to Global Supply Chains • Objectives of Global Supply Chains • Characteristics of Global Supply Chains • Benchmarking the Global Supply Chains • Global Supply Chains Management and the Role of Logistics • Global Supply Chain Management in the future • Beyond Global Supply Chains: Global Value Chains

4. Supply Chains become more Internationally linked Source: OECD (2007)

5. Trade has grown faster than GDP Average of exports and imports as a percentage of GDP, 1980 and 2008 Source: OECD (2010)

6. Intermediate trade has become more important? Share of intermediate trade in total trade, OECD Source: OECD (2010)

7. Intermediate trade has become more global (1) Intra- and inter-regional imports of intermediate goods (Billion USD, 2005) Source: OECD (2010)

8. Intermediate trade has become more global (2) Intra- and inter-regional imports of intermediate services (Billion USD, 2005) Source: OECD (2010)

9. Trade within industries… Index of intra-industry trade in manufactures, average 1997-2008 Source: OECD (2010)

10. … and within firms Share of intra-firm exports in total exports of affiliates under foreign control, 1997-2007 Source: OECD (2010)

11. … and increasing international sourcing of Intermediates Imported intermediates/domestic intermediates Source: OECD (2010)

12. How imports can distort competitiveness figures (1) Contribution to the manufacturing trade balance, 2008 Source: OECD (2010)

13. How imports can distort competitiveness figures (2) Import content of exports Source: OECD (2010)

14. How imports can distort competitiveness figures (3) Import content of exports with partner countries Source: OECD (2010)

15. Agenda Prologue: The International Context • Roadmap to Global Supply Chains • Objectives of Global Supply Chains • Characteristics of Global Supply Chains • Benchmarking the Global Supply Chains • Global Supply Chains Management and the Role of Logistics • Global Supply Chain Management in the future • Beyond Global Supply Chains: Global Value Chains

16. What are Global Supply Chains • Global Supply Chains (GSCs) are worldwide networks of suppliers, manufactures, warehouses, distribution centers and retailers through which raw materials are acquired, transformed and delivered to customers • (OECD, Supply Chains and the OECD Guidelines for Multinational Enterprises, 2002)

17. Globalization has changed the way firms do business… • Since the end of WWII, the importance of trade and international investment has grown steadily. • Large multinational firms have become the main players in all major sectors. • Through FDI and international mergers and acquisitions, they were able to jump tariff barriers and tap into natural resources, labour, and technology, around the world. • Production chains were traditionally vertically integrated, i.e. multinational firms owned an entire production process. But recent phenomena are fundamentally changing the way global firms operate.

18. … driven by key factors • Rapid technical progress • Low and falling telecommunication costs • Technological advances • Falling transportation costs • The adoption by a large number of countries of more open economic policies • (e.g. lower tariffs, lower FDI restrictions) • The emergence of developing, low wages economies Cost of 3 min. call to U.S. ($U.S.) Source: IFS V5.28, WDI CD 05. Average Tariffs Goods and services can be delivered globally at lower cost. Source: Yi (2003)

19. GSCs are becoming increasingly important • GSCs have existed as long as trade in intermediate products has taken place, but they are now increasingly important. • World exports and FDI outward stock has been growing faster than global GDP • Foreign affiliates (FA) no longer only engage in serving local markets in host countries but often export more than host country domestic firms

20. …while technology is changing the way firms do business… • Technological advances, particularly in ICTs, have enabled a better coordination of activities between different links in the chain through logistics. • Technologies are used to undertake joint design, to coordinate shipping in just-in-time systems, and to manage inventories in real-time. • There is rapid growth in Supply Chains and Logistics Services.

21. … giving rise to GSCs as a more established way of doing business. • In recent years, we have seen a change in how firms organize their production into global supply chains: • Firms are increasingly outsourcing some of their activities to third-parties. • They are locating parts of their supply chain outside their home country (offshoring) • They are increasingly partnering with other firms through strategic alliances and joint ventures. • Smaller firms and suppliers are now becoming global • These new business strategies have allowed firms to specialize on “core” competencies (vertical specialization) to sustain their competitive advantage.

22. Offshoring is gaining importance… • Companies now offshore more activities, both in terms of size and scope • Business process outsourcing (BPO) and information technology (IT) services are supplied from a large number of locations • Some firms also offshore other high-knowledge activities such as R&D.

23. … strategic alliance are on the rise… • Worldwide, the number of new strategic alliances (both domestic and international) have significantly increased in recent decades. • Alliances are seen as crucial in GSCs to facilitate entry in new markets, commercialize products, share risk and costs, including for R&D. • The top four industries for alliances are: Business services, financial services, retail trade and software.

24. … and ownership is evolving. • Production chains used to be almost exclusively owned by a single multinational. • Today, the trend is toward multiple ownership of complex supply chains, where several business partners are located in different countries. • This trend is prevalent when: • Products or activities can easily be defined or standardized • The technology can be protected or is difficult to copy • It is possible for business partners to write and enforce legal contracts. • It is possible to monitor (to a certain extent) the activities of business partners • New technologies such as ICTs, modern transportation and communication infrastructures, and establishment of international (e.g. WTO) have facilitated the emergence of global supply chains.

25. Key enablers of Global Supply Chains • Globalization, falling transportation and telecom costs, low tariffs, and technological improvements have changed global supply chains. • Firms are increasingly: • Outsourcing / offshoring some of their activities. • Relying on alliances and joint ventures for global competitiveness. • Using logistics to improve supply chain efficiency. • Firms are increasingly part of global supply chains, mostly through trade and investment relationships with the foreign countries. • In order to thrive, firms need: • Smart Borders and world-class transportation infrastructure. • Leading edge communication infrastructure. • Free trade and investment. • Smart Regulations.

26. Agenda Prologue: The International Context • Roadmap to Global Supply Chains • Objectives of Global Supply Chains • Characteristics of Global Supply Chains • Benchmarking the Global Supply Chains • Global Supply Chains Management and the Role of Logistics • Global Supply Chain Management in the future • Beyond Global Supply Chains: Global Value Chains

27. The objectives of Global Supply Chains Two main objectives could be identified: • Prompt and reliable delivery of high-quality products and services at the least cost. • To effectively meet rising customer expectations.

28. Top 3 challenges for North American Exporters Top 3 challenges are SCM based Greatest Facing North American Exporters (2003)

29. Why integrating a GSC: practicality and usefulness • Help companies compete all over the world • Expand business operations • Offer new services and applications to meet global customers needs • Give company a competitive advantage • Falling international trade barriers mean rising profits

30. Recent changes affecting Global Supply Chains • Internet and technological change • Proliferation of trade agreements • Falling Trade Barriers • Increase in international trade groups • New Markets

31. Reduced total costs Inventory reduction Improved fulfilment cycle time Reduce cycle time Increased forecast accuracy Productivity increase Improve capacity Expand international connexion Increase intellectual asset Delivery improvement Diversified business and trading Competitive advantage Untapped markets Enhance speed and efficiency Advantages of Global Supply Chains

32. Member nations VS. Non member nations Inefficient transportation and distribution systems Market instability Different languages Differences in currencies Differences in measurement systems (metric versus decimal) Different customs, beliefs and cultures Political turmoil Trade imbalances Export surges and recessions Greater distance Tax policies Operational threats Strategic challenges Technological capabilities Potential obstacles to Global Supply Chains

33. Duty specialists and trade specialists Join nation groups Banding together Form consortiums Vertically integrate Be innovative & Be flexible Research New technology Infrastructure improvements Reduce the number of “stops” in the chain Combating these obstacles

34. APEC Supply-Chain Connectivity Framework • APEC is addressing issues by identifying 8 chokepoints • Chokepoint 1 • Lack of transparency/awareness of the full scope of regulatory issues affecting logistics; • Lack of awareness and coordination among government agencies on policies affecting logistics sector; • Absence of single contact point or champion agency on logistics matters. • Chokepoint 2 • Inefficient or inadequate transport infrastructure; • Lack of cross border physical linkages (e.g. roads, bridges). • Chokepoint 3 • Lack of capacity of local/regional logistics sub-providers. • Chokepoint 4 • Inefficient clearance of goods at Customs; • Lack of coordination among border agencies, especially relating to clearance of regulated goods ‘at the border.

35. APEC Supply-Chain Connectivity Framework • Chokepoint 5 • Burdensome customs documentation and other procedures (including for preferential trade). • Chokepoint 6 • Underdeveloped multi-modal transport capabilities; • Inefficient air, land, and multimodal connectivity. • Chokepoint 7 • Variations in cross-border standards and regulations for movement of goods, services and business travelers. • Chokepoint 8 • Lack of regional cross-border customs-transit arrangements

36. Some other impediments to GSCs • Increased border security and customs requirements • Port and border congestion, and the increased security measures, require better shipment planning and coordination • Impact of natural disasters and pandemics • Regional disruptions in key component supplies • Reduced productivity • Capacity re-directed to emergency causes • Reduced manpower availability • Need for robust contingency plans • Need for infrastructure investment

37. GSCs entail additional considerations • Security • Port issues • Tax and tariff issues • Partnerships with local experts • Cultural differences • Technology abilities and capabilities • Risk management

38. Some reasons for extending businesses globally • Cost, Access to raw-material • Increase sales, New Markets • Satisfy shareholders • Falling tariffs • Increase in International Trade, Multi-Point Communication • Increase in internet use throughout the world.

39. Agenda Prologue: The International Context • Roadmap to Global Supply Chains • Objectives of Global Supply Chains • Characteristics of Global Supply Chains • Benchmarking the Global Supply Chains • Global Supply Chains Management and the Role of Logistics • Global Supply Chain Management in the future • Beyond Global Supply Chains: Global Value Chains

40. Globalization is a driver for GSCs

41. So, GSC means making operations globally Global operations Markets Suppliers Operations Global distribution - Local content regulations - Managing global distribution - Managing risk Global sourcing - Dealing with foreign suppliers - Managing international logistics - Managing risks Global manufacturing - Facility location - Coordinating networks of plants - Coordinating networks of R&D facilities - Operations in other countries

42. A GSC as its simplest expression Simple Supply Chain Materials and components Design and Product Development Production Marketing Distribution Consumption/ recycling

43. Major entities in a GSC Capacity, inventory levels, delivery schedule, payment terms Supplier Manufacturer Distributor Retail Outlets Customer Orders, return requests, repair and service requests, payments

44. Supply chain fundamental

45. A PBMMS model… Plan Buy Make Move Sell Demand & Supply Planning Sourcing & Supplier Management Manufacturing Storage & Transportation Customer & Order Management

46. … would look like this. Plan Source Make Deliver Buy Suppliers Manufacturers Warehouses & Distribution Centers Customers Transportation Costs Transportation Costs Material Costs Transportation Costs Manufacturing Costs Inventory Costs

47. Application of a GSC Source: Chuck Poirier (CSC Consulting), Frank Quinn (Supply Chain Management Review), “Survey of Supply Chain Progress– Best Practices and More,” U-Connect 2007.

48. Traditional domestic supply chain Plants Supplier Locations • Limited border crossings • Coordinated customs processes • Regional plant locations • Integrated logistics centers and cross-docks • Stable distances • Established carrier base • Existing infrastructure • Effective regulatory agencies • National distribution capacity • Specialized equipment • Static supplier base • Established logistics networks Source: AutoDiversity Management inc. (ADMi) (2009)

49. Extended Global supply chain • Multiple plant locations • Flexible manufacturing • Parts commonization • Multiple International border crossings • Complicated customs regulations • Various data requirements Plants Supplier Locations • Multiple mode requirements • Broad and diverse carrier base • Multiple language requirements • Regional customs • High level of coordination • Increased mileage • International dealership network • Dynamic supplier base • Increased number of supplier options • Multiple source countries Source: AutoDiversity Management inc. (ADMi) (2009)

50. A more detailed GSCs: Aerospace supply chain Upstream supply chain Downstream supply chain Source: KPMG, 2009.