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Summer 2017・CTL.SC3x – Supply Chain Dynamics Key Concepts・MITx MicroMasters in Supply Chain Management MIT Center for Transportation & Logistics・Cambridge, MA 02142 USA ・scm_mm@mit.edu This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
CTL.SC3x-SupplyChainDynamics
KeyConceptsDocument
ThisdocumentcontainstheKeyConceptsfortheSC3xcourse.ThisisaDRAFTversion.
Additionalmaterialwillbeaddedthroughoutthiscourse–theversionwillbeupdated
whennewmaterialhasbeenadded.Wewillupdatethroughcourseupdateswhenita
newversionhasbeenupdated.
Thesearemeanttocomplement,notreplace,thelessonvideosandslides.Theyareintendedtobereferencesforyoutousegoingforwardandarebasedontheassumptionthatyouhavelearnedtheconceptsandcompletedthepracticeproblems.ThisdraftwasrevisedandupdatedbyDr.AlexisBatemanintheSummerof2017.Thisisadraftofthematerial,sopleasepostanysuggestions,corrections,orrecommendationstotheDiscussionForumunderthetopicthread“KeyConceptDocumentsImprovements.Thanks,ChrisCaplice,EvaPonceandtheSC3xTeachingCommunitySummer2017v6
Summer 2017・CTL.SC3x – Supply Chain Dynamics Key Concepts・MITx MicroMasters in Supply Chain Management MIT Center for Transportation & Logistics・Cambridge, MA 02142 USA ・scm_mm@mit.edu This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
TableofContentsIntroductiontoSupplyChainDynamics...................................................................................3
Complexity..................................................................................................................................3ProcessAnalysisinPractice.........................................................................................................6
SystemDynamics...................................................................................................................15SupplyChainsasComplexSystems...........................................................................................15FeedbackorCausalLoopDiagrams..........................................................................................16StockandFlowDiagrams..........................................................................................................17ModelingSystemDynamics......................................................................................................19
Dealingwithpartners:CollaborationandSupplyContracts....................................................26Collaboration............................................................................................................................26SupplyContracts.......................................................................................................................28
SupplyChainStrategy.............................................................................................................32Supplychainstrategy................................................................................................................32Strategictools...........................................................................................................................34RethinkingyourSupplyChainStrategy.....................................................................................38
GlobalSupplyChainManagement..........................................................................................42GlobalSupplyChainManagementConcepts............................................................................42InternationalTransportation....................................................................................................47CurrencyIssuesandFinancing..................................................................................................51SourcingandShoring................................................................................................................57
EnterpriseResilience..............................................................................................................62RisksandDisruptions................................................................................................................62DetectabilityandPreparation...................................................................................................65
ExogenousFactors..................................................................................................................69SourcesofExogenousFactors(STEEPFramework)...................................................................69Regulations...............................................................................................................................69ImpactsontheSupplyChain.....................................................................................................70FirmResponseandApproach....................................................................................................76
PalmOilCaseStudy................................................................................................................78TheRiseofPalmOil..................................................................................................................78PalmOilEndtoEnd..................................................................................................................80TheProblemwithPalmOil........................................................................................................80CorporateResponses................................................................................................................82
Summer 2017・CTL.SC3x – Supply Chain Dynamics Key Concepts・MITx MicroMasters in Supply Chain Management MIT Center for Transportation & Logistics・Cambridge, MA 02142 USA ・scm_mm@mit.edu This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
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IntroductiontoSupplyChainDynamics
SummarySupplychaindynamicsillustrateshowrealitycanimpactsupplychains.Weintroducetheideaofcomplexityandweidentifyfivemaindriversofsupplychaincomplexity.Supplychainsarecomplexsystems.However,asystemismorethanjustthesumofitscomponents,butratheralsoinvolvestheproductoftheirinteractionsandtheneedfortheiralignment.
ComplexitySupplychainsarecomplex,areonlygettingmorecomplex,complexityaddcoststothesupplychain!Thereforeweneedtomitigateorminimizecomplexity.Firstweneedtounderstandwhatcomplexityis!
Productcomplexity CustomercomplexitySmallbatchsizes CustomizedproductsLongset-uptimes ShortleadtimesUniquecomponents UnpredictableordersSpecialtests/inspections ExtensivetechnicalsupportExtensivematerialhandling Extensivepost-salessupportSpecialvendors Specialtestsorrequirements
Table1-1.Sourceofcomplexity
Figure:Traditionalcostsestimationunderestimatedadditionalcomplexity
Twotypesofcomplexity(Senge,1990):
• Detailcomplexity:Distinctnumberofprocessesorpartswithinthesystem• Dynamiccomplexity:Unpredictabilityofresponseofthesystemduetointeractions
AccordingtoHerbetSimon(1962):“Asystemiscomplexif it ismadeupofalargenumberofpartsthatinteractinanon-simpleway”.
overcosted
undercosted
volume
complexity
low
high
low high
traditional5costs
Summer 2017・CTL.SC3x – Supply Chain Dynamics Key Concepts・MITx MicroMasters in Supply Chain Management MIT Center for Transportation & Logistics・Cambridge, MA 02142 USA ・scm_mm@mit.edu This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
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DriversofComplexityDriversofSCcomplexity(complexityincreasesaccordingtothesedrivers):
• Numerousness-numberofsuppliers,products,customers…• Variety/diversityofthedifferententitiesorcomponents• Interconnections/interactionsbetweenthoseentities• Opacityofinteractions• Dynamiceffects
Whydowecarewhatthediversofcomplexityare?Driversofcomplexity=thedriversofprofitability.Driversofprofitability:
• Increaserevenueperunit• Increasethenumberofcustomers• Increasenumberofunitssold• Decreasecostperunit
SourceofComplexityMostcomplexityentersfromtheends!
Figure:ComplexityenterstheSCthroughnewproductsorthroughmarketingandsales
Startbymappingthecomplexityfingerprint:identifyingwherecomplexityliesbyidentifyingthepotentialcomplexitydriversandcounttotalnumberused.AnyinitiativetoreducecomplexityintheSCneedstoinvolvepeoplefrommarketingandsalesaswellasfromnewproductdevelopmentundertheR&Dprocess.Complexity-adjustedmargin
𝐶𝑜𝑚𝑝𝑙𝑒𝑥𝑖𝑡𝑦𝑅𝑂𝐼 =𝐼𝑛𝑐𝑟𝑒𝑚𝑒𝑛𝑡𝑎𝑙𝑀𝑎𝑟𝑔𝑖𝑛 − 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝐶𝑜𝑚𝑝𝑙𝑒𝑥𝑖𝑡𝑦𝐶𝑜𝑠𝑡
𝐹𝑖𝑥𝑒𝑑𝐶𝑜𝑚𝑝𝑙𝑒𝑥𝑖𝑡𝑦𝐶𝑜𝑠𝑡
VariableComplexityCostLowvolumeofaSKUdrivescosts
source make deliverresearch'&development
customers'and'market'
marketing'&'sales
Summer 2017・CTL.SC3x – Supply Chain Dynamics Key Concepts・MITx MicroMasters in Supply Chain Management MIT Center for Transportation & Logistics・Cambridge, MA 02142 USA ・scm_mm@mit.edu This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
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• Volumediscountsforprocurement• Excesscosts(obsolescence,storage,etc.)• Shortagecosts(expedite,lostsales,etc.)
FixedComplexityCostHighSKUvarietydrivescosts
• Resourcecosts(R&D,testing,etc.)• Externalcashoutlays(tooling,etc.)• Indirectimpacts(manufacturingswitching,returns,etc.)
LearningObjectives• Learnwhatcomplexityisandhowtorecognizeit• Understandhowtomanagecomplexityinsupplychains• Identifyhowtoassesscomplexityandmitigationoptions• Helpunderstandthedynamicswithinasystem
ReferencesForSupplyChainSystems
• Bozarth,C.C.,Warsing,D.P.,Flynn,B.B.,&Flynn,E.J.(2009).Theimpactofsupplychaincomplexityonmanufacturingplantperformance.JournalofOperationsManagement,27(1),78-93.
• Kaplan,R.S.(2001)“IntroductiontoActivity-BasedCosting”,HarvardBusinessSchoolPublishing,(ProductNumber:197076)
• Mitchell,M.(2009)“Complexity–AGuidedTour”,OxfordPress.• Senge,P.M.(1990)“TheFifthDiscipline:TheArt&PracticeoftheLearning
Organization”.CurrencyDoubleDay.• Simon,H.A.(1962)“TheArchitectureofComplexity”.ProceedingsoftheAmerican
PhilosophicalSociety,Vol.106,Nº6,December.• Sterman,J.D.(2000).Businessdynamics:systemsthinkingandmodelingforacomplex
world.McGraw-Hill.ForSupplyChainsasComplexSystems
• Morecroft,J.(2015),StrategicModellingandBusinessDynamics:AFeedbackSystemsApproach.Willey.
• Senge,P.M.(2006)“TheFifthDiscipline:TheArt&PracticeoftheLearningOrganization”.CurrencyDoubleDay.
• Sterman,J.D.(2000).Businessdynamics:systemsthinkingandmodelingforacomplexworld.McGraw-Hill.
• http://www.systemdynamics.org/
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ProcessAnalysisinPracticeProcessanalysisisanimportantperspectiveinsupplychainmanagement.AccordingtoWallaceHopp(2011),“asupplychainisagoal-orientednetworkofprocessesandstockpointsusedtodelivergoodsandservicestocustomers.”
ImpactofvariabilityVariabilitywithinaprocessoccursduetoeitherarrivaland/orprocessvariability.Sourcesofinputorarrivalvariabilityinclude:
• Scheduling• Transportationdelays• Qualityissues• Upstreamprocessing• Randomdemand
Sourcesofprocessvariabilityinclude:• Varietyofitems• Operatorspeed• Failures• Setups• Qualityproblems.
SupplychainprocessvariabilityOneofthekeyproblemsinSupplyChainsisdealingwithvariability.Therearetwomainsourcesofvariability:interarrivalvariabilityandprocessvariability.
Figure:Supplychainprocessvariability
ReducingvariabilityThereareseveralapproachesforreducingvariability:
• Identify&measuresourcesofvariabilityanddefects• Developplansandcoursesofaction• Segmentcustomers,SKUs,suppliers,etc.
outputsarrivals processqueueCVa CVp
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Inaddition,theapproachesforbufferingagainstvariabilityare:• Inventory–traditionalapproach,implieshighinventorylevelsORflexibleinventory–
moduleparts,commonplatforms,genericstock• Capacity–maintainexcesscapacityatfacilitiestohandlepeaksORflexiblecapacity–
crosstrainerpersonnel,multi-useequipment/facilities• Time–plantimeforsystemtorecoverORflexibletimedynamicallyallocatewaiting
timeacrosscustomersegments
CoreSupplyChainProcessesMainactorsandprocessesinasupplychain:
Figure:Mainactorsandprocessesinasupplychain
ProcessesfollowtheworkflowsocoordinationacrossfunctionsisthekeytoSCM.
Figure:CoordinationacrossthefunctionsinaSCM
According toLambert (2014) therearesevencoresupplychainprocesses.Wecancategorizethemininternalandexternalprocesses.Internalfacingprocesses:
• Demandmanagement• Orderfulfillment• Manufacturingflowmanagement• Newproductdevelopment• Returnsmanagement
Internal(Supply(Chain(Management(Processes
ISCM“make,(move,(store”
Customer(Management(Processes
CRM“sell”
Supp
lier
Custom
er
Firm
SRM“source”
Supplier(Management(Processes
Finance
Procurement
Production/M
anufacturing
Research5&Developm
ent
Logistics
Marketing5&5Sales
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Externalfacingprocesses:• Customermanagement• Supplierrelationshipmanagement
• Thesearecriticallinksinthesupplychain,theymirrorprocess–toalargedegree.Aroughprocesstoassess:
1. Review/alignfirmstrategy2. Identifysegmentationcriteria3. Establishproductandserviceagreement(PSA)guidelinesfordifferentsegments4. Developmetrics–primarilyprofitability5. Createguidelinesforsharingimprovementbenefits
ToworkonCRMandSRM–youcanalsosegmentbasedondifferentcriteria.Forcustomersitcouldbeprofitability,growth,stability,volume,competitivepositioning,buyingbehavior,sophistication,andlocation.Forsuppliers,theycanbesegmentedonprofitability,growth,volumepurchased,criticality,innovation,quality,sophistication,andpotentialtoco-createvalue.
InternalFacingProcessesInternalFacingProcessesincluding:demandmanagement,orderfulfillment,manufacturing,newproduct,management.
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DemandManagement–potentialvariabilitydriversSource Potentialproblems PossiblesolutionsPromotions Createslumpydemand;
Cannibalizesfuturedemand;Misdirectsscarceresources
Planandcoordinatetiming,duration,andlevelwithoperationsandcustomersinadvance
Salesmetrics
Createshockeystickeffectatendofperiods;Createssurgesandlumpydemand
Designsalesmetricstolessenendofquartereffect
Minimumorderquantities
Createslumpydemand;Increasespotentialforobsolescenceandspoilage
IncorporateallcostswhendeterminingMOQ;WorktominimizetheMOQinordertospeedupinventoryvelocity
Table:Mainsourcesofvariabilityfordemandmanagement
OrderFulfillmentStrategicTasks
1. Review/alignfirmstrategy–coordinatewithCRMteams2. Definerequirements–specificleadteamandcustomerservicerequirements3. Evaluatenetwork–how/wherecustomerswillbeservice4. DefinePlan–establishrulesforallocatingscarceproduct,informationalflow5. Developmetricstomonitor–cash-to-cashcycletime,orderfillrates,perfectorder
OperationalTasks
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ManufacturingflowmanagementStrategicTasks
1. Review/alignfirmstrategy2. Determinelevelofflexibility3. DeterminePush/Pullboundaries4. Identifymanufacturingconstraints&capabilities5. Developmetricstomonitor
Figure:Typeofmanufacturingprocesses
Order%to%Delivery-Lead-Time
Order Deliver Assy Mfg Procure Design
Ship-to-Stock
Make-to-Stock
Assemble-to-Order
Make-to-Order
Buy-to-Order
Engineer-to-Order
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NewProductDevelopment
ReturnsManagementStrategicTasks
1. Review/alignfirmstrategy2. Defineavoidance,gatekeeping,anddisposition3. Createnetworkforreturnflows4. Definecredit/refundrules5. Developmetricstomonitor
OperationalTasks
ProcessmapA processmap is amodel that is a symbolic representation of theworkflow used to betterunderstand,communicate, level-set,codify,andconvergeonhowaprocessworks.Therearedifferenttypes:flowcharts,relationshipmaps,cross-functional(swimlane)maps,valuestreammaps,etc.
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Mainstepstocreateaprocessmap:• Determinethescopeandlevelofdetail• Basedonscope,identifyandlistthepeopleorfunctionsinvolved• Usingstickypads,brainstormthestepsinvolved• Workthroughtheprocesschronologically,placingthestickypadsintheappropriate
swimlanes• Discussanddebatethedraftprocessmapandadjustaccordingly• Dofunctionstouchthesameitemsmultipletimes?• Arethererepeatedandredundanthandoffs?• Arestepsmissingorextraneous?• Transferthediagramtopaper;addadateandversion
ExampleSwimLaneDiagram
ProcessimprovementtoolsToolsforcheckingvariability
• Histograms:helpunderstandoutliers• Timeseriescharts:helpunderstandwheretofocus
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ExampleHistogram
Toolsforidentifyingcausesofvariability
• 5Whyso toolforencouragingbrainstormingo forcesteamtolookbeyondsuperficialsolutionso goodexcusetoactlikea5yearold
• Causeandeffectdiagrams(fishbone/Ishiwaka):o Toolthatprovidesstructureforunderstandingrootcuasedso Ensuresthatabalancelistofideashavebeenconsidered
LearningObjectives• UnderstandtheSupplyChainasaprocess• Learnhowtomeasuretheperformanceofaprocess• Identifysourcesofprocessvariability• Quantifyhowprocessvariabilityimpactstheperformanceofaqueue• Understandsupplychainprocessesandvariability• Identifystrategiestoreducevariability• Describethesevencoreprocessesinasupplychain• Learntoolsandtechniquestohelpwithprocessanalysis
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References
• Lambert,D.etal.(2014)SupplyChainManagement:Processes,Partnerships,andPerformance,SCMI.
• Damelio,R.(2011)TheBasicsofProcessMapping,CRCPress.• George,M.L.,Maxey,J.,Rowlands,D.,Price,M.(2004).TheLeanSixSigmaPocket
Toolbook:AQuickReferenceGuideto100ToolsforImprovingQualityandSpeed.McGraw-HillEducation.
• Goldratt,E.M.(1990).Theoryofconstraints.Croton-on-Hudson:NorthRiver.• Swink,M.,Melnyk,S.(2013).ManagingOperationsAcrosstheSupplyChain.McGraw-
Hill/Irwin.ForInPractice
• Hopp,W.J.(2011).Supplychainscience.WavelandPress.• Hopp,W.J.,&Spearman,M.L.(2000).Factoryphysics.FoundationsofManufacturing
Management.SecondEdition.McGraw-Hill.• Anupindi,R.,Chopra,S.,Deshmukh,S.D.,VanMieghem,J.A.,&Zemel,E.
(2011).Managingbusinessprocessflows:principlesofoperationsmanagement.PearsonHigherEd.
• Taha,H.A.(2010).OperationsResearch.Anintroduction.9thedition.PearsonPrenticeHall.Chapter15.
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SystemDynamics
SupplyChainsasComplexSystemsInthislessonwereviewthebasiccomponentsofsystemdynamics,whatitis,howtoapplyit,andhowtousemodelstounderstandit.Wegooverfeedbackloops,causalloopdiagrams,timelags&delays,andstock&flowdiagrams.Allapproachestovisualizesystemcomplexity.Wethenmoveintoadiscussiononmodelingthesystems.Throughoutthecourseofthelesson,webuilda“toolbox”forsystemdynamicswhichincludescausalloopdiagrams,behaviorovertimecharts,stock&flowdiagrams,andmodels.“Asystemisnotthesumofitsparts,itistheproductoftheirinteractions.”RussellAckoff
Figure:Event-orientedapproachtosolveproblems
EventOrientedThinkingEvent-orientedthinkingisproblematicbecause:
• Assumesproblemisanisolatedeventtobesolvedinisolation• Linearthinking-doesnotconsiderfeedbackfromothers• “pragmatic,actionoriented,alluringlysimple,andoftenmyopic”• Sometimesthesolutionisworsethantheoriginalproblem!!!
MovingfromlineartocircularthinkingMoveawayfromlinearthinkingtobeabletoincorporateoureffectsonothersaswellastheactionsofothers.
Goals/Objective
Situation/Environment
Problem Decision Action/Result
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Figure:Circularthinkingand“side”effects
FeedbackorCausalLoopDiagrams• Causallink(arrows):capturescausalrelationshipbetweentwovariablesalongwith
polarity,toindicatehowthedependentvariablechangeswhentheindependentvariablechanges
• Positivelink(+):thecauseincreases,thentheeffectincreasesabovewhatitwouldhaveotherwisebeen
• Reinforcingloop:acollectionoflinksthatformaloopthatispositive• Negativelink(-):thecauseincreases,thentheeffectdecreasesbelowwhatitwouldhave
otherwisebeen• Balancingloop:acollectionoflinksthatformaloopthatisnegative
Figure:CausalLoopDiagramnotation
Goals/Objective
Environment3/3State3of3 the3System
Decisions
“Side”3Effects
Actions3of3Others
Goals3of3Other3Agents “Side”3Effects
chickenseggs+
+R road/crossings
+
0B
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TimeLags&DelaysThelongerthedelaythemore“aggressive”theresponseandthelongertoreachsteadystate.Delaysbetweenactionsandconsequencesareeverywhere...suchasthebullwhipeffect!Anexampleofatimelagintheshower:
“informationtransferredintheformoforderstendstobedistortedandcanmisguideupstreammembersintheirinventoryandproductiondecisions…thevarianceofordersmaybelargerthanthatofsales,andthedistortiontendstoincreaseasonemovesupstream”Lee,PadmanabhanandWhang(1997)CommonlyRecognizedPatternsinSupplyChains: Oscillation–fluctuationinordersincreaseaswemoveupstream Amplification–thesizeofthefluctuationsincreaseaswemoveupstream PhaseLag–theimpactisdelayedlongeraswemoveupstream
StockandFlowDiagramsStocks FlowsDefinethe“state”ofthesystem DefinetherateofchangeofsystemstatesExamples:
• Balancesheet• Wealth• Waterinabathtub• InventoryinaDC• Integrals
Examples:• Cashflowstatement• Income–Expenses• Flowsinthroughfaucetandoutdrain• Throughput(replenishment–shipments)• Derivatives
Table:StocksandFlows
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Stocks:
• Definethe“state”ofthesystem• Stockshavememory• Stockschangethetimepathofflows• Stocksdecoupleflows• Stockscreatedelays• Examples:
o BalanceSheeto Wealtho Waterinabathtubo InventoryinaDCo Integrals
Flows:
• Definetherateofchangesystemstates• Examples:
o CashFlowStatemento Income–Expenseso Flowsinthroughfaucetandoutdraino Throughput(replenishment-shipments)o Derivatives
Figure:StockandFlowsDiagrams
eggsegg$laying$rate hatching$rate
chickensexpiring$rate
road$crossings
RB+
+
++
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Stock&FlowDiagram–Chicken&Eggs
ModelingSystemDynamicsSofarinthislessonwehavereviewedCausalLoopDiagramsandStock&FlowDiagrams,wewillnowaddtwomoreapproachestoyoursystemdynamicstoolboxincludingBehaviorOverTimeChartsandModels.
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Behaviorovertimecharts• BOTchartsarisefromtherelationshipsdescribedintheCLD• BOTstrackaprimaryattributeofthesystem(#customers,profit,sales,#eggs,etc.)• ABOTchartisNOTapointforecast,insteadthecriticalaspectisitsshape
ExaminingtheBehaviorovertimecanpreventunintendedconsequencesforthefuture.Forinstances,focusingmyopicallycanleadtoapooroutcome.BOTchartsinformthisprogressionovertimetoassessthisoutcome.Seeexamplebelowregardinghighrawmaterialscosts,theBOTchartwasabletovisualizetheunintendedconsequenceofashortsightedfix.
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ConvertingStock&FlowDiagramsintoaModelIntheexamplediscussedinthelecture,ofegglayingandhatching,wewanttosimulatethebehaviorofthesystem:
• ArrowsinCLDthatarenotconnectedtoanythingareconstantsorinputs!
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SimulationModelExample
Notes:• Thisisadeterministicsimulation–thereisnorandomnessorstochasticity• Allbehaviorresultsfromtheinteractionsoftheratesofegghatchingandlaying• Noneedtoconverttointegers–remember–thisisNOTanexactforecast
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VLOOKUP• VLOOKUPFunctionletsyou“lookup”avaluefromatable.Thefirstcolumnofthelookup
tablemustbeinascendingorder.Itreturnsthecorrespondingvalueinthecolumnspecified
• VLOOKUPhascommonstructureinExcel,GoogleSheets&LibreOfficeforthefirst3parametersofthefunction:
• VLOOKUP(criteria,array,column)• Optional4thparametersdoslightlydifferentthingsthatarenotimportantforouruse
here.
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IncludingaDecisionMatrix
Includingadecisionmatrixallowsyoutoexamineactionsandresults.Allowformoreinformeddecision-making.
LearningObjectives
• Introductiontotheconceptsandtoolsofsystemdynamics• ReviewFeedbackLoopsandtheirrolesystemdynamics• RecognizeTimeLagsandDelays• LearnToolstoCaptureandModelSystems,CausalLoopDiagrams,andStockandFlow
Diagrams• Reviewthetoolsofsystemdynamicsincludingbehaviorovertimechartsandmodeling• Learnhowtomodelsystemdynamicsstocksandflowsincludingmanagementpractices
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ReferencesSterman, John, (2000), Business Dynamics: Systems Thinking and Modeling for a Complex World, McGraw-Hill. Morecroft, John, (2015), Strategic Modelling and Business Dynamics: A Feedback Systems Approach, Wiley. Senge, Peter, (2006), The Fifth Discipline, Doubleday. http://www.systemdynamics.org/ Don Woodlock’s videos on System Dynamics https://www.youtube.com/playlist?list=PL7490F4FA4B45DA26
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Dealingwithpartners:CollaborationandSupplyContracts
CollaborationThislessonfocusesoncoordinatingtheinterfacebetweenafirmanditsimmediatedownstreampartner–orcustomer.Thecoordinationrequiresexchanginginformationandunderstandingtheimpactofonefirm’sactionsontheother.
TheBullwhipEffectwasintroduced.EssentiallytheBullwhipEffectiswhentheupstreamvariabilityofdemandisgreaterthanthedownstreamvariability.Thiscanoccurformanyreasonstoinclude:orderbatching,demandforecastingupdates,rationingandshortagegaming,andpricefluctuations.TheconceptwaspioneeredinitiallybyJayForresterandwasobservedinpracticeinthesupplychainbyP&Ginitsdisposablediaperline.TheeffectinsupplychainswasfirstdescribedandquantifiedbyLee,Padmanabhan,andWhangin1997.
TheBullwhipEffectisessentiallyasignalthatasupplychainisnotcoordinated.Thecostsofthislackofcoordinationincludes:
• Increasedmanufacturingcosts• Higherinventorylevels&costs• Longerreplenishmentleadtimes• Highertransportationcosts• Lowerproductavailability• Deterioratestradingpartnerrelationships• Lowerssupplychainprofitability
ThelessondiscussesapproachestocounteractingtheBullwhipEffecttoinclude:Improveforecastingmethodology,Designsingle-stagereplenishmentcontrol,Shortenleadandreviewperiodtimes,Reducebatchingoforders,Reducetheincentiveofforwardbuying,andBettersharingofinformation.
TheBullwhipEffectTheBullwhipEffectisthesituationwherethevariabilityofdemandinthesupplychainincreasesasonemovesupstreamfromtheconsumertosuppliers.Itisprimarilycausedbyfourfactorsandisexacerbatedbytheobservationthatsupplychainsconsistofmultipleindependentfirmsandthatindividualfirmswilltendtooperateinordertomaximizetheirownprofits.:
• DemandForecasting–whereforecastingreliesonthedemandeachfirmseesfromits
immediatedownstreampartnerorcustomerandnottheenddownstreamdemand
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• RationingandShortageGaming–wheresuppliersrationsupplyandcustomers,knowingthis,inflateordersorsubmitphantomordershowever,ordersevaporatewhensupplyismadeavailable.Theneteffectisfalsedemandsignalsthatrippleandareamplifiedupstream
• OrderBatching–wherecustomersbunchorbatchordersformanydifferentreasonstoinclude:o Orderingsetupcostso Optimallot-sizingo Periodicreviewpolicies
• PriceFluctuations–wheretheretailerincentivizesbehaviorfromitsconsumersbychangingpricesthatinturncausesbatchingoforders.Theseinclude:
o Volumediscountso Minimumorderquantitieso Limitedtransportationmodeoptionso Forwardbuying
QuantifyingtheBullwhipEffectWecanmeasuretheroughimpactoftheBullwhipEffectundercertainconditions:
• OneretailersellingoneitemreplenishedbyonewholesalerDCo Dailydemandatstoreis~N(100,10)o Dailyreviewperiodwith(R,S)inventorypolicy(orderupto)o St=µtL+kσt√Lo μt=expecteddailydemandestimatedattimeto σt=standarddeviationofdailydemandestimatedattimeto L=leadtimeindayso k=Safetyfactor
• ForecastingusessimplemovingaverageofthelastMtimeperiodswhichimpliesthatμandσwillchangeeachperiodbasedonnewforecastandimpacttheorderuptolevelandsafetystock.
Then,wecanseethat:
CounteractingTheBullwhipEffectThereareseveralmethodsorapproachestocounteractingtheBullwhipEffect.Theseinclude:
• Improveforecastingmethodology
o Eliminatemultipleforecaststhatonlyuseimmediatepartnerorderdatao Employpoint-of-saleorendconsumerdata,ifpossibleo Avoid“nervous”forecastingtechniques
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• Designsingle-stagereplenishmentcontrolo Haveupstreampartnermanageitsdownstreampartner’sinventoryo ReferredtoasVendorManagedInventory(VMI)orContinuousReplenishment
Programs(CRP)o Bypassthedownstreamstages–consumerdirectpolicies
• Shortenleadandreviewperiodtimeso Morefrequentreviewandfasterdeliveryreducesimpacto Lesstimeforuncertaintytobuildo Incentorderstobebetterdistributedovertime
• Reducebatchingoforderso Reducethefixedcostofordersetupanddelivery(lowerfriction)o Shiftfromminimumorderquantity(MOQ)ofindividualSKUs(orfamilies)tominimum
volumequantityofawiderassortmentofproductso Reducetransportationcostsbyusing:milk-runs,multi-zonetrucks(ambient,
refrigerated,andfrozen),3PLsolutions...• Reducetheincentiveofforwardbuying
o Beselectiveontheuseofpricepromotionso AnalyzethetruecostsofapromotionusingABCaccountingo Shiftsalesincentivesfrom“Sell-To”to“Sell-Through”o Usesupplychainriskandothercontractstocoordinatesales
• Bettersharingofinformationo AllowingvisibilityintoPOSorendcustomerdemando Sharingofplansandintentions–sometimescalledCollaborativePlanning,Forecasting,
andReplenishment(CPFR)
SupplyContractsInthislesson,wecoveradifferentaspectofthebuyer-sellerrelationship.Ratherthanlookingatanauction,welookedatthetypeofcontract,orthetypeofrelationshipwiththebuyersandseller.Thatis,oncetheprocurementdepartment,orthebuyer,decideshowmuchtheyaregoingtobuyfromthesupplier,thequestionishowthecontractshouldbedesigned,andwhattypeofcontracttohave.
Asitturnsout,therearequiteafewtypesofcontracts.Sointhislesson,wefirstwentthroughcontractsingeneral.Wediscussedsupplycontractsandwhattheproblemiswiththem.Thiswasmainlycoveredthroughwhatiscalledwholesalepricecontracts.Then,wecontinuedthisdiscussionbyintroducingbuybackcontracts,revenuecontracts,andoptioncontracts,whicharecontractsthataredesignedtoalleviatesomeoftheproblemsresultingfromstraightforwardwholesalepricecontracts.
Throughoutthelesson,wefocusedonaparticularscenario.Wehadonesuppliersellingtooneretailer,andtheretailerwassellingintosomeuncertainmarket.
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WholesalepricecontractsThisisacontractwherethebuyerpaysapriceperunitforeveryunitordered.Normally,thispriceislowerthantheretailprice(hencethetermwholesaleprice).
OveragecostandunderagecostOveragecost:Thecostperunitoforderingmorethanneededinasalesperiod.Whenproductsaresoldinasinglesalesperiod(likenewspapers,whicharesoldonlyforoneday),thecostofhavingtoomanyproductsattheretaileristhepurchasepriceminusanysalvagevalue.
Underagecost:thecostperunitoforderinglessthanneededinasalesperiod.Whentherearefewerproductsthanthereisdemand,thecostofnothavingenoughproductsfortheretaileristheproductmargin–thisistheamounttheretailerwouldhavereceivediftherewasenoughgoods.
OptimalorderquantityinasingleperiodmodelConsideraretailersellingproductsoverasinglesalesperiod.TheforecasteddemandhascdfF(x).Insuchasituation,theretailer’soptimalorderquantityisfoundfrombalancingexpectedunderageandexpectedoveragecosts.
The(informal)explanationisthefollowing:consideranarbitrarypotentialorderquantityQ.GiventhisQthereisaprobabilityF(Q)thatdemandislessthanQandaprobability(1-F(Q))thatdemandisgreaterthanQ.IfdemandislessthanQ,theretailerwillincuroveragecosts.IfQislow,thereisaverylowprobabilityofthis,sotheexpectedoveragecostislow.IfinsteaddemandisgreaterthanQ,theretailerwillincurunderagecosts.IfagainQislow,thereishighprobabilityforthis,sotheexpectedunderagecostishigh.Clearly,byincreasingQ,theexpectedoverageincreaseswhiletheexpectedunderagedecreases.Ifexpectedoverageincreaseslessthanexpectedunderagedecreases,thenincreasingQleadstohigherexpectedprofits.Atsomepoint,thetwoexpectedcostsareequal.ThisistheoptimalorderquantityQ*.Thatis,
coF(Q)=cu(1-F(Q))Withawholesalepricew,aretailpricer,andasalvagevalues,wecansolveforF(Q):
F(Q)=cu/(cu+co)=(r-w)/(r-s).
Thisisoftenreferredtoasthecriticalfractileorthecriticalratio.Takingtheinverseofthecdfyieldstheoptimalorderquantity.
Channel(supplychain)coordinationAchannelorsupplychainissaidtobecoordinatedwhentheindividuallyoptimalorderquantityisthesameasthechanneloptimalorderquantity.Foranormalwholesalepricecontract,thismeansthatthe
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criticalfractilefortheretailermustbethesameasthecriticalfractilefortheintegratedchannel.Itiseasilyseenthatthisisonlythecaseifthewholesalepriceisequaltothemarginalcostofthesupplier–inthatcasethesuppliermakesnoprofit.
BuybackcontractWithabuybackcontract,thesupplierofferstheretailertobuybackallunsolditems.Thisreducestheretailer’sriskofoverage–ifthereareunsolditemsattheendoftheseasontheycanbesoldbacktothesupplier.Theretailer’soptimalorderquantityisthusgivenbythesolutionto
F(Q)=(r-w)/(r-b),wherewisthewholesalepriceandbisthebuybackrate.Thechanneliscoordinatedwhentheretailer’scriticalfarctileisequaltotheintegratedchannel’scriticalfractile,whichmeansthatthechanneliscoordinatedwhen
b=((r-s)/(r-c))w-(r(c-s)/r-c))wherecisthemarginalcostofthesupplier.Notethatthismeansthatthechanneliscoordinatedformanydifferentcombinationofwandb.However,ahigherwholesalepricerequiresahigherbuybackrateforthechanneltostaycoordinated.Notealsothatasthewholesaleprice(andthebuybackrate)grows,thesupplier’sshareoftheprofitincreases.
RevenuesharingcontractRevenuesharingisanothertypeofcontractthatcanreducetheretailer’sriskofoverage.Withthiscontractualsetup,thesupplierlowersthewholesalepricebuttakesapercentage(1-p)oftherevenue.Withthis,theretailer’soptimalorderquantityisgivenasthesolutionto
F(Q)=(pr-w)/(pr-s),
wherepisthepercentagerevenuekeptbytheretailer.Aswiththebuybackcontract,thechanneliscoordinatedwhentheretailer’scriticalfarctileisequaltotheintegratedchannel’scriticalfractile,
p=w(r-s)/(r(c-s))-s(r-c)/(r(c-s))
Inpractice,thesecontractsmaybedifficulttoimplementinmanyindustriessincethesuppliermustkeeptrackofretailerrevenues.
RealoptionsWitharealoptionscontract,theretailerbuysQcalloptionsatpricew,givingtheretailertherighttobuynomorethanQunits.Exercisinganoption,oncedemandisknown,comesatanextrafeeofE.Aswiththeotherbuybackandtherevenuesharingcontracts,thisreducestheretailer’sriskofoveragesothatthechannelcanbecoordinated.
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LearningObjectives• Understandhowfirmsshouldcollaboratetoimproveoverallefficiency• UnderstandtheBullwhipEffect,howitiscaused,theimpact,andhowtomitigateit• FamiliaritywithdifferentinitiativesoncollaborationtoincludeVendorManaged
Inventory,ContinuousReplenishment,andCollaborativePlanning,Forecasting,andReplenishmentprograms.
• Introductiontosupplycontracts• Theproblemsofnormalwholesalesupplycontracts• Howtodesigncontractparametersofcertaincontractstocoordinateachannel(supply
chain)• Understandthebenefitsofbuybackcontracts,revenuesharingcontracts,andreal
options
Additionalreferences:Cachon,G.P.(2003).Supplychaincoordinationwithcontracts.Handbooksinoperationsresearchandmanagementscience,11,227-339.
LeeHL,PadmanabhanV,WhangS(1997a)Informationdistortioninasupplychain:Thebullwhipeffect.ManagementSci43(4):546–558LeeHL,PadmanabhanV,WhangS(1997b)Thebullwhipeffectinsupplychains.SloanManagementReview38(4):93–102ChenYF,DreznerZ,RyanJK,Simchi-LeviD(2000a)Quantifyingthebullwhipeffectinasimplesupplychain:Theimpactofforecasting,leadtimesandinformation.ManagementSci46(3):436–443FransooJC,WoutersMJF(2000)Measuringthebullwhipeffectinthesupplychain.SupplyChainManagement5(2):78–89
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SupplyChainStrategy
SummaryStrategyiskeytoaneffectivesupplychain.Tounderstandthis,wereviewthemostcommonbusinessstrategyframeworksandmethodologies.Weprovidesomeexamplesthathelptounderstandhowsupplychainsneedtoaligntotheselectedcompany’sstrategyinordertoenableit.Thereisnotasinglebestsupplychainforeveryfirm.Typically,eachcompanyshoulddevelopandutilizeaportfolioofdifferentsupplychains.Wealsointroduceanovelwayofthinkingaboutsupplychainstrategy.Itdemonstratesawayoftacklingtheproblemofsupplychainstrategizing.OurprimaryresourceforthislessonisthematerialdevelopedbytheMITCTLSupplyChainStrategyLabledbyDr.RobertoPerezFranco.Wediscussthenatureoftheproblemthatsupplychainstrategizingpresentstosupplychainpractitionersandpresenttensupplychainstrategyevaluationcriteria.
KeyConceptsStrategy isan“art”,notexactlya science, thismeans focusingon thebigpictureandoverallresultsofaneffort.Herearesomedefinitions:According to the Oxford English Dictionary: “The art of a commander-in-chief; the art ofprojecting and directing the larger military movements and operations of a campaign.”Perspectivesandchallengesofthegeneralandsoldierareverydifferent.According toMerriam-Webster: “Thescienceandartofmilitarycommandexercised tomeettheenemyincombatunderadvantageousconditions.”
SupplychainstrategyTheimportanceofstrategyforsupplychainmanagementhasbeenrecognizedforalongtime.ShapiroandHeskett(1985)highlightedthat“logistics’mostimportantroleisstrategic”.Theyrecommendedthatlogisticsmanagersapplyavarietyofperspectiveswhilerunningtheirlogisticssystems:
• Internalperspective:understandstructure,economicsandrequirementsofthelogisticssystemsaswellasconstraintsandcomponents
• Interfunctionalperspective:interactconstantlywithotherfunctionalmanagersinareassuchasmarketing,production,andfinance
• Channelperspective:thinkintermsofmaximizingthetotalchannelbenefit,consideringthatthefirm’sdecisionsaffectandisaffectedbychannelpartners
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• Strategicperspective:welldesignedlogisticsmanagementcaninfluencecompany’sstrategyandhasthepotentialto“advanceacompany’sstrategicgoals”
Adichotomy:Thetwofacesoflogistics(supplychainmanagement)Successful supply chainmanagement requires attention to detail, to day-to-day control andcoordination,and to the tacticalandanalytic.However,managers shouldalsobeable to see“thebigpicture,”andbecognizantofthebroad,qualitative,long-termaspectsofsupplychainmanagement.Thisawarenesswillensurethatthefirm’ssupplychainfunction,combinedwiththeotherfunctionalareas,canfurthertheoverallobjectivesoftheorganization.
Figure:“Adifficult,yetfundamentaldichotomy”.BasedonShapiroandHeskett(1985)
ShapiroandHeskett(1985)pointoutthatthis“ever-presenttensionbetweenthestrategicandthe tactical, the broad and the detailed”, “all conspire to make the job of a supply chainmanagerachallengingone.”
TwostrategicrolesforthesupplychainAsinputtoformulatenewoverallstrategySupplychainmustbeaninputwhenformulatinganewoverallstrategy.Organizationsusuallyhave–andshouldhave–anoverallstrategythatgivesthemdirectionandhelpsthemsucceed.Thisoverall strategy is calledbymanynames,dependingon the typeoforganizationwearereferringto.Inthecaseoforganizationsthatcompeteagainstothers,thisisoftencalledtheircompetitivestrategy.Inthecaseofbusinessunits,itisoftencalledtheirbusinessstrategy.Butinall cases, theoverall strategyseeks toprovide theorganizationwithapathordirection tosuccess.Asenablerofanexistingoverallstrategy
Tactical
Short+term
Quantitative
Detailed
Strategic
Long+term
Qualitative
Broad
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Implementinganoverallstrategymeanstranslatingobjectivesintodecisions,goalsintoaction.Anoverallstrategythatprovidesasetofhigh-levelstrategicobjectivehastobeelaboratedintomorespecificobjectives,policiesandchoicesacrossawiderangeofareasofactivity.Thismayinclude many diverse functions that are relevant to the supply chain, such as purchasing,logistics,operationsandsales.Themeansthatthestrategyexecutedhastobeinlinewiththeprinciples and values the organization embraces, across a series of areas of interest such asquality,sustainability,service level,safety,etc.There isagapbetweentheoverallstrategyofanorganizationand theexecutionof this strategy. Supply chain strategyhelps tobridge thisgap.
Strategictools
Porter’sFiveForcesPorter argues that a company’s ability to increase profit is affected not only by rivalry ofimmediate competitors but also by four other forces, which determine the intensity ofcompetitionandtheattractivenessofanindustry.Thesefiveforcesare:
1. Internalrivalryamongexistingcompetitors,whichisinfluencedbydifferentfactorssuchasnumberofexistingcompetitors,rateofmarketgrowth,balancebetweensupplyanddemand,amongothers.
2. Threatofnewentrants,whichreferstohowdifficultitistobecomeacompetitorinagivenmarketandisinfluencedbyaccesstospecifictechnology,brandcredibilityandrecognition,lawsandregulations,etc.
3. Easeofsubstitution,whichdependsonalternativeproductsorservicesavailablethatcustomerscouldchoosetobuyinstead.
4. Relativepowerofsuppliers,whichisinfluencedbythenumberofsuppliersavailable,availabilityofsubstitutesforthematerialorcomponentyouareprocuring,numberofcustomersthesupplierhas,costofswitchingtoanothersupplier,amongothers.
5. Relativepowerofcustomers,whichisdeterminedbythequantityboughtbyeachcustomer,availabilityofsimilarproductsfromcompetitors,costofswitchingfromonesellertoanother,amountofinformationthatisavailabletocustomers,customers’profitmargin,etc.
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Figure1-2.Porter'sFiveForces
Growth-ShareMatrixTheGrowth-ShareMatrix isatoolthatwasdevelopedbytheBostonConsultingGroupinthe70’s,usedtomanageaportfolioofbusinesseswithinafirm.Itisimportanttounderstandthecategorizationsforeachbusinesslinebecausethesupplychainrequiredforeachcategorywillbeverydifferent.Accordingtothemarketshareandthebusinesspotentialgrowthrate,wecanclassifythelinesofbusinessesina2x2matrix.Thefourtypesofbusinessesare:
• Stars:arelinesofbusinesswithhighgrowthrateandhighmarketshare,whichgeneratealotofcashandrequireinvestmentstomaintainthemarketshare.
• CashCows:arelinesofbusinesswithhighmarketsharebutlowgrowthrate.Likethestars,cashcowsgeneratealotofcashbut,becauseofthelowgrowthrate,investmentsdonotmakesense.
• Dogs:arelinesofbusinesswithlowmarketshareandlowgrowthrate,whichdonotgenerateanyprofit;thestrategyfortheseistodivest.
• Questionmarks:arelinesofbusinesswithhighgrowthrateandlowmarketshare,therearetwopotentialstrategiesfortheselinesofbusinesses:investtoincreasemarketshareordivestandreallocateyourresources.
MIT Center for Transportation & Logistics
Porter’s5Forces
AdaptedfromPorter(1980),Assen etal(2009),Weiss(2011),Evans(2013)
Relativepowerofcustomers
Relativepowerofsuppliers
Easeofsubstitution
Threatofnewentrants
Internalrivalryamongexistingcompetitors
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Figure:Growthsharematrix.Source:adaptedfromHedley(1977)
SWOTAnalysisTheSWOTanalysis,developedbyKennethAndrews,isusedtocategorizeinternalandexternalfactors that influence strategic decisions. SWOT is an easy way to have a structuredbrainstormingsessionwithateamtobetterunderstandthe layofthe land.SWOTstandsforStrengths,Weaknesses,OpportunitiesandThreats.
Figure:SWOTAnalysis
lowBu
siness*Grow
th*Rate
Relative*Competitive*Position*(Market*Share)
high
high
low
Stars• High*growth,*High*share• Should*generate*large*
amounts*of*cash• Requires*investment*to*
maintain*leadership*position• Best*opportunities* for*firm• Secure*share*for*when*the*
market*matures• Strategy:) Invest)for)growth
Cash*Cows• Low*growth,*High*share• Entrenched*and*superior*
market*position• High*profit*and*revenue*
generation*with* low*costs• Limited*investment*needs• Funds* investments* in*other*
areas*and*businesses• Strategy:) )Invest)to)maintain)
or)harvest
?
Question*Marks• High*growth,*Low*share• Cash*needs*are*high*due*to*
growth• Cash*generation*is*small*due*
to*low*share• Two)Potential)Strategies
• Invest)&)move)to)star• Divest)(sell)or)shut)down)
Dogs• Low*growth,*Low*share*• Poor*competitive*position• Low*profits*and*low*growth*
potential• Often*a*“cash*trap”*for*a*firm• Strategy:) )Divest
MIT Center for Transportation & Logistics
SWOTAnalysis
Strengths• Whatdoestheorganizationdowell?• Whatareasofexpertisedoesithave?• Examples:lowcostmanufacturing,
productdesign,technicalcapabilities
25
Weaknesses• Whatdoestheorganizationnotdo
well?• Whatdoesitlack?• Examples:weakbrandidentity,
ineffectivesalesgroup,customization
Opportunities• Whatfutureopportunitiesarethere
fortheorganization?• Examples:expansiontonewregion,
extendproductlinetonewpurposes
Threats• Whatfuturethreatsareloomingfor
theorganization?• Examples:changesinregulations,new
competingtechnology,shiftingconsumertastes
InternalFactors ExternalFactors
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StrategicFitPorter introduces the concept of “fit”, whichmeans that activities are consistent with eachotherandreinforceeachothertocreateacompetitiveadvantageandsuperiorprofitability.Porteridentifiesthreetypesof“fit”,which“arenotmutuallyexclusive”:
• Firstorderfitensuresthat“competitiveadvantageofactivitiescumulateanddonoterode”
• SecondOrderfit“occurswhenactivitiesarereinforcing”• Thirdorderfitis“optimizationeffort”
WhatisStrategy?AccordingtoPorter’sfamouspaper:
• Strategyiscreatingfitamongacompany’sactivities• Successfulstrategyisaresultofdoingmanythingswell,andintegratingthem• Ifthere’snofitamongactivities,there’snodistinctivestrategyandthestrategywillbe
unsustainable
SupplyChainStrategyAccordingtoNarasimhanetal.(2008):“supplychainstrategycanbeviewedasthepatternofdecisionsrelatedtosourcingproducts,capacityplanning,conversionofrawmaterials,demandmanagement,communicationacrossthesupplychain,anddeliveryofproductsandservices.”AccordingtoCiglonietal.(2004):“whatcompaniesactuallydid,ratherthanwhattheyclaimedtheir strategic intent to be, is the best clue to reveal their very supply chain managementstrategies.”
MatchandMismatchinSupplyChainStrategiesMarshall Fisher introduced the concept ofmatch andmismatchof supply chain strategies in1997.Figure3-5includeshis2x2matrix.
Figure:Fisher’s2*2matrix.Source:Fisher,1997
Match Mismatch
Mismatch Match
FunctionalProducts
InnovativeProducts
EfficientSupply9Chain
ResponsiveSupply9Chain
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Lee’sMatchedStrategiesLee (2002)uses theuncertainty frameworkasaway toclassify risks.Figure3-6presents this2x2matrix.
Figure:Lee’smatchedstrategies.Source:Lee,2002
RethinkingyourSupplyChainStrategy
TheBasicChallengesSupplychainstrategypresentsasetofinterrelatedchallenges:
Figure:Thebasicchallenges
TensupplychainstrategyevaluationcriteriaThefirstchallenge is toassess thecurrentsupplychainstrategy,whichmeansunderstandingwhatyouhave inplace today.Tounderstand thestrategy,youmustmap thecurrent supply
Demand'UncertaintySupp
ly'Uncertainty
Low'(Functional'Products)
High'(Innovative'Products)
Low
(Stable'P
rocess)
High
(Evolving'P
rocess)
EfficientSupply'Chains
ResponsiveSupply'Chains
RiskEhedgingSupply'Chains
AgileSupply'Chains
Challenge(1Assess$your$current$supply$chain$strategy
Challenge(2Anticipate$future$$$supply$chain$needs
Challenge(3Craft$an$improved$
supply$chain$strategy
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chainstrategyandevaluate it.Toevaluatewhetherthecurrentsupplychainstrategy isgoodenoughthereare10evaluationcriteria.First criterion is coverage. A good supply chain strategy must be comprehensive and covereveryareathatmattersforacompany’ssupplychain.Itmusthaveclarity–policiesandchoicesinasupplychainstrategymustbeunambiguousandunderstoodbyallofthedecisionmakers.Itmustbefeasible,realisticandabletobeachieved.Internalconsistencyiskeytosupplychainstrategywithdifferent objectives, policies and choices and canbe thought in threedifferentlevels:compatibility,coherence,andsynergy.Eachcomponentofagoodsupplychainstrategymustsupport,enable,advanceorhelprealizesomeelementoftheoverallorganization’sstrategy.Supply chain strategy must also have: sufficiency, external consistency, advantageousness,parsimony,andriskiness.
1 Coverage2 Clarity3 Feasibility4 InternalConsistency5 Support6 Sufficiency7 ExternalConsistency8 Advantageousness9 Parsimony10 Riskiness
Table:SupplychainstrategyevaluationcriteriaEvaluation criteria can be summarized as: “a good supply chain strategy should becomprehensive,clear,feasible,consistentbothinternallyandexternally,sufficientlysupportive,competitively advantageous, not wasteful, and not riskier than is acceptable to theorganization.”
ScenarioPlanningThesecondchallengeisanticipatingfuturesupplychainneeds,whichinashort-termtimelineareidentifiedusingforecastingtechniques.However,foralongertimelineweusethescenarioplanning technique. Scenario planning is a method that shifts from predicting events topreparing for multiple potential futures. It is defined as: “a structured brainstormingmethodology that immerses decisionmakers of an organization in different potential futurescenarios inorder tobetterunderstandpotential risks,blind spots,opportunities,and futureneeds.”Creatingscenarios
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Ascenarioisessentiallyastoryaboutafuturebasedonasetofdrivingforces.Theyhavehighimpactandhighuncertaintyforyourselectedtimeframe.Somecriteriaforcreatingagoodsetofscenariosare:
• Avoidthepreferredand/orprobablefuture• Capturetherightdecision• Plausible,withinrealisticlimits• Includerealalternatives• Consistent• Different• Memorablenames• Challengethestatusquo
In addition to creating scenarios, we need to translate events into effects and apply thescenarios.Fivecategoriesofeffectsforsupplychains:
• Impactonsourcingpatterns• Impactonflowdestination• Impactonrouting• Impactonflowvolume• Impactonvaluedensity
ApplyingScenarios1. Immersealargegroupofpeopleineachscenario2. Bringeveryonetogetherandevaluate,compareandcontrastthesolutions/strategies
proposedacrossthedifferentscenarios3. Eliminatethenogainerstrategies4. Monitorwithsensorsinthegroundwhethertoapplystrategiesthatareonlyapplicableto
somescenarios
ProgressiveformulationThe third challenge is to craft an improved supply chain strategy. These are the steps toperformaprogressiveformulation:
• Identifyastartingpoint:arevisedoverallstrategy• Identifyareasofdecisionoractivityandinterest,addordropareasaccordingly• Identifysequenceofeventsthatyouwanttofollow• Useevaluationcriteriaoneachareaofdecision• Repeatthisprocessineachlevelofabstraction
LearningObjectives
• Learnbasicconceptsofbusinessandsupplychainstrategy• Identifythemostcommonbusinessstrategyframeworks
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• Understandthatthereisnotasinglebestsupplychainforeveryfirm• Outlineaprocesstodevelopandimproveasupplychainstrategy• Learnhowtotackletheproblemofsupplychain“strategizing”• Identifythemaincriteriaforevaluatingasupplychainstrategy
References• Porter,M.(1996).“WhatisStrategy.”HarvardBusinessReview,4,11-12.• Andrews,K.R.(1987).TheConceptofCorporateStrategy,Irwin,Homewood,IL.• Fisher,MarshallL."WhatIstheRightSupplyChainforYourProduct?“HarvardBusiness
Review(1997).• Lee,HauL."Aligningsupplychainstrategieswithproductuncertainties."California
ManagementReview44.3(2002):105-119.• Mintzberg,H.,1978.Patternsinstrategyformation.ManagementScience24(9),934-
948.• Perez-Franco,R.(2016)Rethinkingyoursupplychainsstrategy.Abriefguide.MITSupply
ChainStrategyLab• Shapiro,R.D.,&Heskett,J.L.(1985).LogisticsStrategy:casesandconcepts:West
PublishingCompanySt.Paul,Minnesota.• Stevens,G.C.(1989).Integratingthesupplychain.InternationalJournalofPhysical
Distribution&MaterialsManagement,19(8),3-8.• Additionalreferencescanbefoundhere:strategy.mit.edu
Week1
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GlobalSupplyChainManagement
SummaryThisreviewcoversglobalsupplychainmanagementconceptsandexplainthechallengesandopportunitiesoftradingbetweencountries.Sincemostsupplychainsareglobal,itisimportanttoconsiderthemanyfactorsthatwillinfluenceyoursupplychain.Itisalsoimportanttonotethatwhileguidanceisprovidedhereonhowtoworkinglobalsupplychains,someoftherulesanddatachangesallthetime.
GlobalSupplyChainManagementConceptsFrom1950tonow,globalpopulationhasincreasedby2.8xandWorldtradehasincreased20x.
WorldTradeOrganization(WTO)TheWorldTradeOrganization(WTO)wasfoundedin1995topromotefairtrade.Itsprincipalsinclude trade without discrimination, freer trade, predictable, more competitive and morebeneficialforlessdevelopedcountries.ProblemswiththeWTOincludeTradebarriershaveshiftedandLDCabuseofrules.
DutydeterminationDutyistheamountoftaxpaidonanimportedgood.Theamountofdutythatanimporterhastopayisdeterminedbythreefactors:
• Thetypeofgoods(theirclassification)o HarmonizedTariffSchedule(HTS)isa10-digitcodeusedtodescribeallgoodsin
tradeforduty,quota,etc.Thefirst6digitsarestandardizedinternationally;thelast4digitsarecountryspecific.
o Whichcodetousebasedoncodes,dutyratesdiffer,everyonetriestotwistthedefinitionstotheirownadvantage
• Thevalueofthegoods(theirvaluation)• Thecountryfromwhichthegoodsoriginated(therulesoforigin)
DutyDrawbacksTherearethreetypesofdutydrawbacks:
• Sameconditiondrawback:whenyouimportanitemandthenre-exportthisiteminthesamecondition
• Differentconditiondrawback:orsometimesalsocalledmanufacturingdrawback,whenyouuseanimporteditemintheassemblyofanotherproduct
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• Domesticgoodsreturnedindifferentcondition:whenanitemthatwaspreviouslyexportedcomesbackaspartofanassemblyofanotherproduct
• BelowshowshowDutyDrawbackswork:
SalesTaxesonImports:VAT,GST,HST• BesideschargingDutyonimports,manycountrieschargeaSalesTaxalso:• VAT–valueaddedtax-usedinEurope,taxbasedona%ofthe(dutiablevalue+duty)• GST–goodsandservicestax–usedinCanada,Australia,NZealandandmanyothers…
definedthesameasVATbutmayapplytocostofinlandtransportalso• HST–harmonizedsalestax–usedinCanadatorepresentacombinedfederalGSTplusa
localprovincialsalestax
ValuationValuationisimportantbecausemostofthedutiesarecollectedasapercentageofthevalueofgoods,thisiscalledadvalorem.ForCustoms’purposes,valuationisgenerallytheamountbilledby the exporter and shown on the invoice. However, there are situations were the amountshown in the invoicemay not represent an “arms-length transaction.” This occurswhen theexporterandimporterare“relatedparties”suchasaparentcompanyanditssubsidiary.TherearefouralternativemethodsusedbyCustomsauthoritiesworldwidetodeterminethevalueofgoods:
• Comparativemethod:usethevalueofsimilargoods• Deductivemethod:workbackwardsfromprice• Computedorreconstructivemethod:buildupfrommanufacturingcost
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• Methodoflastresort:makeaneducatedguess
DutiableValue:FOBvsCIF• Countriescalculate“DutiableValue”basedoneithertheFOBvalueortheCIFvalue.• FOBvalue–“FreeonBoard”
o Pricepaidforthegoodsplusthecostofassists,extrapacking,commissions,royalties,transportation,loading,unloading,handling,andinsurancetodeliverthegoodsfromtheSellerontotheshipatthePortofExport
• CIFvalue–“Cost,Insurance,&Freight”o EqualsFOBplusmarineinsuranceandinternational(ocean)freight
RulesofOriginRules of origin are important because duties may differ by origin countries. There are twomethodsusedtofigureouttherulesoforigin:
• Substantialtransformation:lastcountrywheretheproductunderwentasubstantialtransformation
o Lotsofopportunitiesformultinationalstorearrangewheretheymakethingsandrouteshipmentstotakeadvantageofdifferingdutyrates.
• ChangeinHarmonizedSystemCode:lastcountrywheretheharmonizedsystemcodeoftheproductchanged
o ThismethodistheonecurrentlyfollowedbytheUnitedStatesfortextileproducts.
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GeneralizedSystemofPreferencesDeveloped countries usually provide opportunities to developing countries to grow theireconomies by designating them as Generalized System of Preference (GSP). CountriesdesignatedasGSPbenefitfromreduceddutyratesandquotasfortheirgoods.
• US:GeneralizedSystemofPreferenceso Promoteseconomicdevelopmentbyeliminatingdutiesonupto5,000typesof
productswhenimportedfromoneof122designatedbeneficiarycountriesandterritories.
• Europe:GeneralizedSchemeofPreferences:o StandardLevel--about30countries,reduceddutieso GSP+Level–about14countries,nodutieso EBALevel–about49countries,nodutiesorquotas(EverythingbutArms)
• MostFavoredNationTradingStatuso Designationfornormaltradingpartner
FreeTradeZoneandBondedWarehouses
FreeTradeZone BondedWarehousesMainpurpose:duty-freeaccesstolowcostlabor
Mainpurposeistodelaythepayingofduties
Nodutypaidifre-exported Nodutypaidifre-exportedDutydelayedifimported DutydelayedifimportedWorkcanbeperformedonthegoods Little/noworkcanbeperformed
onthegoodsGreatforprocessinggoodsinlowcostlaborcountries
Greatfordelayingdutyonimported$$$goods
Greatforshowingoffproductstointernationalbuyers
Table:FreeTradeZonesandBondedWarehouses
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TradingBlocs
DumpingDumping is a form of predatory pricing where producers charge a high price in the homemarketbutaverylowpriceinanothermarkettogainmarketshare.Ininternationaltradetherearetwotypesofpenalties:
• Anti-dumpingDuty:importdutytobringthepriceuptothepricechargedatthehomemarket
• CountervailingDuty:oranti-subsidyduty,importdutytoproductsthathavesubsidiesathome
LandedCostAnalysisLandedcostusuallymeansallthecostsleadinguptothepointwhereyouarereadytotakethegoodsoutoftheportofimport.ThecalculationsmustbedoneinTHISORDER:
1. CalculatetheFOBvalue2. CalculatetheCIFvalue(=FOB+oceanfreight+marineins.)3. Whatisdutiablevaluefortheimportingcountry(FOBorCIF)?4. CalculatetheDuty(=dutyratexdutiablevalue)5. CalculatetheVATtaxablevalue(=CIF+duty)6. CalculatetheVATtax(=VATratextaxablevalue)7. CalculatetheLandedCost(=CIF+duty+VAT)
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InternationalTransportationInternationaltransportationdifferssignificantlyfromdomestictransportation.ThemainwaysarereviewedincludingINCOterms,transportationoptions,andports.
INCOtermsINCOstandsforInternationalChamberofCommerce.Thesetermsdefinewhichresponsibilitiesbelong to the buyer and which responsibilities belong to the seller during an internationalshipment.Theyalsodefinewhopaysforfreightcost,insurance,duties,costofgoods,andothervariousfees.TherearefourmaingroupsofINCOterms:E,F,C,andDwhicharegroupsbasedonresponsibilitytransfersbetweenparties.
Figure:FourmaingroupsofINCOterms
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AirFreightvs.OceanFreightAttribute AirFreight OceanFreight
On-timereliability Veryreliable,1-2daydeliverywindow
Notreliable,1-2weekdeliverywindow
FreightCost(ignoringinventory)
Expensive5to10+timesOcean
Cheaper
BasisofFreightcost
Weightismostimportant Volumeismostimportantfactor
Transittime 1-3daysto(almost)anywhere 5to40daysPollution Veryhigh Muchlower
Table:AirFreightvsOceanFreight
TypeofshipsThemostcommontypesofshipsarepresentedbelow.
Typeofship TypeofCargoRoll-On/Roll-OfforRo-Ro
shipWheeledcargo
Break-BulkShip GeneralcargoOiltanker Oilinbulk
ChemicalCarrier ChemicalsinbulkDry-BulkCarrier Unpackagedbulkcargo
LNGshiporGasCarrier Liquefiednaturalgas(LNG)
ContainerShip Non-bulkcargoTable:TypesofShips
OceanShipmentOverview
Figure:Legsofanoceanshipment
• Dray:localhaultotheport• Demurrage:penaltyforextradaysthatcontainersstayatadock• Cabotage:whenaforeign-flaggedvesselpicksupanddropsoffinthesamecountry• TEU:twenty-footequivalentunit
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• Weeklyservice:stringofshipsfollowingeachother
TheSteamshipIndustryThesteamship industry isavolatile industry inwhichfewcarriershandlemostof thefreight.Carriers collaborate and cooperate among each other, there are known as alliances. Thisindustryischaracterizedbyhavingverydifferentfreightratesdependingonthedirectionofthetrip. Because of volume discount pricing, this industry attracts consolidators andNon-VesselOperating Common Carrier (NVOCC). Historically the steamship industry has faced the Bull-Whipeffect,whichisthetimelagincarrierresponsetothedemandcurve.TopOceanCarriers
• Thereare50-75oceancarriersofsignificance.• Topfewcarriershandlethevastmajorityofshipments.• They form “Conferences” to collude on rates and manage capacity to set rates.
(outlawedinEurope)• They form “Alliances” to cooperate on capacity by lane – same stringwill have ships
fromdifferentcarriers.VolumeDiscountPricing–themoreyoubuy,thecheaperperunit.
• ThispricingschemeisripeforConsolidators• Intransportation:
• TruckloadBroker(CHRobinson,CoyoteLogistics)• AirFreightForwarder(Damco)• NVOCC (non-vessel operating common carrier) (Expeditors Intl, UTi, APEX,
Damco)
Figure:Bull-Whipeffectinthesteamshipindustry
InternationalSurfaceTransportInternationalSurfacetransportsarerailroadsandtrucksthatcrossinternationalborders.
• Biggestchallengeso Trucktransportation:safetystandards,protectinglocaljobs
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o Railroadtransportation:differentsafetyrequirements,workrulesandinteroperability(differentwidthsbetweentracks)
PortsandTerminalsAportisageneraltermreferringtoabigcommunityofplayers,whichinclude:
• PortAuthority• TerminalOperators• WarehouseOperators• Consolidators/De-consolidators• CustomsOfficials• Railroads• DrayOperators• FreightForwarders• CustomsBrokers
Aterminalisthelocationwithinaportwhereshipsload&unload,ithas:• Quay,shiptoshorecranes,RTGcranes• Containerstorageyard• Administrationbuildings
MAJORRAILROADGAUGESINTHEWORLD
Gauge NameInstallation
(km)Installation(miles)
Percentoftrackinworld
Whereused:
1,000mm(3ft33⁄8in) Metregauge 95,000 59,000 7%
SEAsia,India,Argentina,Brazil,Bolivia,northernChile,
Switzerland,EastAfrica
1,067mm(3ft6in)
Threefootsixinchgauge 112,000 70,000 9%
SouthernandCentralAfrica,Indonesia,Japan,Taiwan,Philippines,NewZealand,QueenslandAustralia,WesternAustralia
1,435mm(4ft81⁄2in)
Standardgauge 720,000 450,000 55%
Europe,Argentina,UnitedStates,Canada,China,Korea
(South),Korea(North),Australia,India,Indonesia,MiddleEast,NorthAfrica,Mexico,Cuba,Panama,
Thailand,Venezuela,Peru,Uruguay,Philippines,Japan,
TaiwanandSpain.1,520mm
(4ft1127⁄32in)
Russiangauge 220,000 140,000 17%Russia,Finland,Estonia,Georgia,Latvia,Lithuania,
Mongolia,Ukraine1,524mm(5ft) Finnishgauge 5,865 3,644 small Finland
1,600mm(5ft3in)
Irishgauge 9,800 6,100 small Ireland,Australia,Brazil
1,668mm(5ft521⁄32in)
Iberiangauge 15,394 9,565 small Portugal,Spain
1,676mm(5ft6in) Indiangauge 134,008 83,269 11%
India,Pakistan,Argentina,Chile,SriLanka,Bangladesh,
UnitedStates
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CurrencyIssuesandFinancingInglobalsupplychainsitisessentialtounderstandcurrencyissuesandfinancing.Tounderstandthiswereviewseveralimportantconceptsincluding:exchangeraterisk,transferspricing,andprofitrepatriationanditseffectsoncorporateincometaxes.Wealsobrieflyreviewdescriptionoftradefinanceandinternationaltradepaymentmethods.
ExchangeRateRisksTherearetwofactorsthatwilltriggerexchangerateriskwhentogether:
• Twodifferentcurrencies(i.e.,buyinonecurrencybutgetpaidinanother)• Timedelaybetweenbeginningandendoftransaction
CurrencyFuturesContract:Acontracttoexchangeonecurrencyforanotheratsomefuturepointintimeatapre-specifiedexchangerate.Normallythereisafeetodothis.
Themostcommonwaystoprotectagainstexchangerateriskare:• Useonlyonecurrency• Useabanktohedgethetransaction-payafeetothebanktoguaranteethepriceyou
willgetpaid• Hedgeyourself:
o CurrencyFuturesContract:acontracttoexchangeonecurrencyforanotheratsomefuturepointintimeatapre-specifiedexchangerate(thisusuallyrequiresafee)
o Foreigncurrencyhedging:isariskreducingstrategywheretwooffsetting,oppositepositions,aretakenintwodifferentparallelmarkets.Thepositionsaresuch,thattheirendresultsoffseteachother.
Internalwaystohedgeforeigncurrencieswithinyourowncompany:• LeadingExpenditure:topayinadvanceifcurrencyisexpectedtorise• LaggingExpenditure:topaylateifcurrencyisexpectedtofall• NettingReceiptsandPayments:tohedgethenetexposure
Externalwaystohedgecurrencies:• ForwardContracts:acontractwhereabuyerandselleragreeonanexchangeratein
advance• CurrencySwaps:twopartieswithtwodifferentcurrenciestakeanequivalentloanin
theirhomecurrencyandtradethecash• ForeignCurrencyOptions:payafeetohavetheoptionalrighttobuyorsellaspecific
amountofaspecificcurrencyataspecificpriceataspecificfuturetime• SpotContracts:contractsthatarecompletedin1-3daystoavoidhighfluctuations
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CorporateIncomeTaxesCompaniescanbechargedtaxesbyanygovernmentforcorporateprofitbutalsoinventoryvalue,valueofpropertyplantandequipment.
1. Taxesineachcountryarechargedbasedonhowmuchprofitwasmadeineachcountry.2. Taxratesvarysignificantlyfromcountrytocountry.3. Profitabilitycanvarysignificantlyfromproducttoproduct.4. Marginscanvarysignificantlyfromregiontoregion(e.g.sameproductpriceddifferently
indifferentmarkets).5. Transferpricingisusedtoestablishintracompanysellingprices(andthusestablishesthe
profitmarginineachcountry).InternationalIncomeTaxesTaxesineachcountryarechargedbasedonhowmuchprofitwasmadeinthatcountry.Thetaxrate varies significantly from country to country. Profitability varies significantly by type ofproductandprofitmarginscanvarysignificantlyfromregiontoregion.TaxHavenATaxHaven is a countrywith a low corporate income tax rate such as Ireland, Switzerland,Singapore,orPuertoRico.PermanentEstablishmentA Permanent Establishment (PE) is a fixed place of business that generates income or valueaddedtaxliabilityinaparticularjurisdiction.ThetaxsystemsinsomecivillawcountriesimposeincomeandvalueaddedtaxesonlywhereanenterprisemaintainsaPEinthecountry.ThesearethethingsthatmaygetabusinesslabeledashavingaPEinacountry:
• Abranch• Awarehouse• Afactory• Amineoroilorgaswell• Amanagementoffice• Owninginventoryinacountry• Buyingorsellinginthecountry• Beingtheimporterofrecord,beingtheexporterofrecord• Owningpropertyinthecountry• Havingemployeesinthecountry
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TaxesonForeignEarnings
TypesofTaxReliefForeignTaxCredit(FTC):whencountriesallowcompaniestodeducttheamountoftaxpaidinanothercountry.ParticipationExemption(PEX):apartialtofullexemptionoftaxesforcompaniesthataresubsidiariesofcompanieswithacertainlevelofownershipinaspecificcountry.Doubletaxationagreement(DTA):treatiesbetweenapairofcountriestoprovidepartialorfulltaxexemption.
TransferPriceA transferprice isa “marketprice” for intracompany transferofgoods. It isneededbecausedutiesarechargedbasedonthevalueofthegoodsbeingimported.Thismeansthattheinvoiceamount between related parties is not always a good indication of the value of the good.Transferpriceisalsoawaytoshiftprofitfromonecountrytoanother,giventhatincometaxratesmightbeverydifferent.
• WhataretheimplicationsofaHIGHtransferprice?o Moreprofitisrealizedintheexportingcountry,lessprofitisrealizedinthe
importingcountryo Moreimportdutyispaidifthegoodsmoveintotheimportingcountry.
• WhataretheimplicationsofaLOWtransferprice?
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o Lessprofitisrealizedintheexportingcountry,moreprofitisrealizedintheimportingcountry
o Lessimportdutyispaidifthegoodsmoveintotheimportingcountry.• WhatdoestheexportingcountrywantyoutodowithregardtoTransferPrice?
o Setitveryhigh--sotheygetmoreTAXESfromyou.• WhatdoestheimportingcountrywantyoutodowithregardtoTransferPrice?
o Mixedeffect–ifsethighmightgetmoreduty,butlessincometax.Ifsetlowgetlessdutybutmoreincometax.
ProfitRepatriationProfit repatriation is bringing profits earned in a foreign country back to the home country.UsuallypaidasdividendstotheparentcompanyBarrierstoRepatriation:
• Governmentlimits• Reportingrequirements• Withholdingtaxesondividends,royalties,interestpayments• DoubleTaxation
MechanicsofProfitRepatriation:
• TransferPricing(avoidtheneedtorepatriate):Havetransferprices“rigged”soalotofprofitoccursinthehomecountry.Limitations:governmentsreviewfor“anarms-lengthtransaction.”
• RoyaltyPayments:chargeafeetoforeign-subsidiaryfortheuseoftheparentcompany’snameandbrand
• LeadingandLaggingPayments:usecurrencyfluctuationstofavorthehomecountry• HighInterestLoantoSubsidiary:loanmoneytotheforeign-subsidiarywithhighinterest• ParallelInter-CompanyLoans:partnerwithanothercompanytointerchangeloanswith
foreignsubsidiariesoftheothercompanyintheparentcompany’shomecountry• Re-InvoicingCenters(RIC):useaTaxHaventoroutebuy-selltransactions• CounterorBarterTrade:exchangegoodsinsteadofmoneybetweenparentandforeign-
subsidiary
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ManagingWorkingCapital
Figure1-1.ExampleofaCashFlowModel
Cash-to-CashCycleTime
CTC=IDS+DSO-DPOWhere,CTCisCashtoCycleTimeIDSisInventoryDaysofSupplyDSOisDaysofSalesOutstanding(AccountsReceivable)DPOisDaysofPayablesOutstanding(AccountsPayable)WaystoFreeUpWorkingCapitalThesearewaystofreeupworkingcapital.Althoughtheireffectistodecreaseworkingcapital,athoroughanalysisofthesideeffectsofeachoneoftheseshouldbeperformed.Mostcommonwaysused:
• Lowertransittime• Returnexcesstosuppliers• Lowerinventorytargets,increasedeliveriesandruns• Improvemanufacturingcycletime• Usesmallerlots• Selloffexcessandobsolete• Useshorterpaymenttermswithcustomers• Havevigorouscollectionofpastduepayments• Askforlongerpaymenttermstosuppliers(notusuallyrecommended)• Delaypaymentstosuppliers(notusuallyrecommended)
InnovativeWays
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• Billonreceipt• Usevendor-ownedadjustedtimeinventory• ImplementLeanManufacturingtechniques• Buildtoorder• Offerearlypaymentdiscount• Offerapaybycreditcardoption• Askaboutpaymentspriortoduedate• ElectronicsFundsTransfer(EFT)
TradeFinancingActions• EarlyPaymentProgram:
o OfferedbyOEM:OEMpaysSupplierearlybutchargestheSupplieratadiscountedrate
o UsingaFunder:Funderpayssupplierimmediately,andchargesapercentagetosupplier,theOEMalsogetsadiscountforusingtheFunder
• A/RFinancing-SellingReceivables:SuppliersellsitsreceivablestoaFunderwhopaystheSupplierimmediatelybutgetsadiscount,thismethodisverysimilartotheEarlyPaymentProgramUsingaFunderbuttheOEMisnotinvolvedinthisscheme
• RevolvingLineofCredit:o Suppliergoesalone:SupplierborrowscashfromaFunder,whichchargesan
interestrate(basedonthesupplier’sfinancialhealth)andtakessupplier’sinvoicesascollateralfortheloan
o OEMhelpssupplier:OEMpublishesalistof“approvedinvoices”toshowthatitiscommittedtopay.Therefore,whenthesupplierborrowscashfromtheFundertheinterestrateislowerastheinterestrateisbasedontheOEM’sfinancialhealth
• EarlyPaymentProgramtoExtendDPO:FunderisusedtopaytotheSupplierimmediatelyandtoextendthepaymenttermstotheOEM,theFunderchargestobothSupplierandOEM
MethodsofPaymentinInternationalTrade• Cash-in-Advance:meansthatthebuyerpaysbeforereceivingthegoods;thismethodis
usedinhigh-risktraderelationshipsorexportmarkets.• LettersofCredit:isadocumentissuedbythebuyer’sbankcommittingtopaytothe
sellerevenifthebuyerfailstopaytothebank;thismethodisusedinneworless-establishedtraderelationships.
• DocumentaryCollections:occurswhentheSeller’sbankcollectsalltheexportdocuments(BOL,CommercialInvoice,etc.)ofthegoodsshippedbythebuyer,theSeller’sbanksendsthesedocumentstotheBuyer’sbankdemandingpayment.The
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Buyer’sbankwillholdthesedocumentsuntilthepaymentismade,thismethodisusedinestablishedtraderelationships.
• OpenAccount:iswhengoodsareshippedbeforepaymentalongwithalltheexportdocuments.Thisarisesinsecuretradingrelationshipsormarketsorincompetitivemarketstowincustomers.
SourcingandShoringInaglobalworld,thetopicsofsourcingandshoringarehotlydebated.Tobreakapartthesetopics,weidentifythemotivationsandthechallengestomovemanufacturingabroad.Beyondtheinitialdecisiontomoveabroad,thereareadditionalkeyelementsonsocialresponsibilitythatcompanieslosegraspofwhenworkmovesfartherawaysuchasslaveryorconflictminerals.Finally,weprovideexamplesofdifferentglobalsupplychainstrategies.
ApproachesforManufacturingInternationally• ContractManufacturing:acompanyhiresanothercompanytomanufacturegoods,
usuallyinaforeigncountry• Licensing:acompanyallowsanotherfirmtouseitsintellectualpropertytomake
productsinexchangeforaroyalty• Franchising:acompanygivesanotherfirma“bundle”ofintellectualpropertyitemsand
allowthefirmtoreproduceitsentirebusinessmodelinexchangeforroyalties• JointVenture:twoormorecompaniesjointosetupanewcompanytoenteranew
marketplace• Subsidiary:awhollyownedforeigncompanythatisindependentfromtheparent
companyandgivestotalcontroltotheforeigncompany
MotivationsandchallengesofoffshoringHerearesomeofthereasonsthatexplainswhymanufacturingmovedtoAsia&China:
• Verylowlaborcost,hugelaborpool
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• Veryfewrestrictionsonpollution,workingconditions,quality,andexports• Newfactories,newequipment• Newinfrastructure• Herdmentality• Supplybasedmoved-self-fulfillingtrend.• Corporateprofitmotive&competitivepressureoutweighedloyaltytocommunity• Consumersavingsoutweighedloyaltytocommunity
Someofthechallengesrelatedtothepreviousdecisionare:• Verylongleadtimes• Longsupplylines---longdistanceoceantransportation• Timezonechallenges• Communicationchallenges---languagedifferences• Needforhigherinventorylevels• Intellectualpropertytheft,counterfeitingofproducts• Extracargosecurity• Emergencyairshipmentsarenowaverylongway
Changesinthelast20years:Chinaismoreprosperous;laborcostshaveskyrocketed;laborshortageincoastalcities;ChineseCurrencyappreciation;restrictionsonquality,workingconditions,environmentandsafety;hugecoastalfactorieshavegottenbadreputation;greenmovementfavorslocalsourcing;contaminationscares;politicalbacklash;U.S.Energypriceshavefallen.IndustryResponsetoChanges
Industry Response
Automotive Parts Growth inMexico
Aerospace Parts GrowthinMexico
Appliances Growth inUSA,Mexico
Apparel ChinastilldominantbutGrowthinBangladesh,Vietnam,otherSEAsia
Footwear GrowthinVietnam
ConsumerElectronics StayinginChina
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WhereisManufacturingMovingto:
GlobalSupplyChainDesignStrategiesVerticalintegrationThefollowingmetricsarehelpfultoanalyzingtheeffectofverticalintegration:
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦𝑇𝑢𝑟𝑛 =𝐴𝑛𝑛𝑢𝑎𝑙𝑆𝑎𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐶𝑜𝑚𝑏𝑖𝑛𝑒𝑑𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦𝑇𝑢𝑟𝑛 =11
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦𝑇𝑢𝑟𝑛BBCDE
wherenisthenumberofplantsverticallyintegratedOutsourcing
• TypicalSituationo CompaniesimportwithTransferPricefromsubsidiarytoparentortoanother
subsidiaryo TheyhaveaPERMANENTESTABLISHMENT(PE)ineachcountryo Theypaytaxesineachcountry
• Taxavoidingstrategy:o Designanetworkthatcomplieswithexportrestrictions,minimizestaxes,and
providestheflexibilitytoshipfromandtoanywhereo AvoidPEinallbutonecountry(headquarterslocation)o Usesubcontractorsformanufacturingandexporting,usedistributorsfor
importinganddistributing
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o OEMbuysfrommanufacturersandsellstodistributorsonlyininternationalairspaceorinternationalwaters
Howtoavoidpermanentestablishment-DonotManufactureinacountry:UseContractManufacturers(CM)instead-DonotbetheExporterofRecord:CMtobetheexporterofrecord-DonotbetheImporterofRecord:CustomerorDistributoristheimporterofrecord.-Donotowninventoryinacountry:InventoryisownedbyCM,Distributors,Suppliers,Customers.-Donotsellgoodsinsideacountry:Allsalesofgoodsoccurinint’lspace
LearningObjectives• Understandmostcommonpracticesusedinglobalsupplychainmanagement• Introduceinternationaltradeconceptsandunderstandchallengesandopportunities• Understandthebasicsofinternationaltransportation• IdentifythemainchallengesfacedinAirFreight,OceanFreightandSurfacetransport• Understandcurrencyissuesandhowtoprepareagainstexchangeraterisks• Overviewconceptsrelatedtocorporateincometaxes,transferpricingandprofit
repatriation• Understandtradefinancingandhowcompaniescanhelpeachother• Identifyfourmethodsofinternationaltradepaymentandlettersofcredit• Understanddifferentwaysformanufacturinginternationally• Identifysocialissues,slaveryandconflictminerals
ReferencesForAll
• David,P.(2013),“InternationalLogistics”,Cicerobooks,4thEd.ForInternationalTransportation
• InternationalChamberofCommercehttp://www.iccwbo.org/products-and-services/trade-facilitation/incoterms-2010/the-incoterms-rules/
ForCurrencyIssuesandFinancing
• SayaliBedekarPatil,Buzzle.com,http://www.buzzle.com/articles/ForeignCurrencyHedging
• SayaliBedekarPatil,Buzzle.com,http://www.buzzle.com/articles/profit-repatriation-the-foreign-direct-investment-incentive.html
• US.Gov.TradeFinanceGuide2007pp3-28
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ForSourcingandShoring
• Markingprogressagainstchildlabour-Globalestimatesandtrends2000-2012/InternationalLabourOffice,Int’lProgrammeontheEliminationofChildLabour(IPEC)-Geneva:ILO,2013.
• TraffickinginPersonsReport,USDeptofState,July2015
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EnterpriseResilience
SummaryCompaniesarereliantontheirsupplychains,asaresultofthis,theyarevulnerabletodisruptionswhichposearisktotheirbusiness.Whileallbusinessesareatrisk,therearesomemoreresilientthanothers,meaningthattheyrecoverquickly.Tounderstandthesetwoconcepts,wefocusonhowtoestimaterisks,howtodealwiththemintermsofprioritizingandhowtopreparecompaniesfordisruptions.Finally,weanalyzehowtorespondandmitigatetheproblemsonceadisruptionoccurs.Therearetwodifferentwaystolookatdisruptions,i)thinkingaboutcausesandii)thinkingabouteffectsormodesoffailures.Causethinkinghelpsestimatelikelihoods,whileeffectsthinkinghelpsestimateimpactsandconsequences.
KeyConcepts
RisksandDisruptions
CausesofDisruptionsThesearedifferenttypesofrisksorcausesofdisruptions:
• RandomPhenomena:weatherphenomenaornaturaldisasters• Accidents:anyundesirableevent,suchasexplosions• Governments&Politics:tradebarriers,tradeembargo,militarycoups,political
instability,changesinregulations• Non-Compliance:non-complianceofstandardssuchasairpollution,water
contamination,safety,etc.• Competition:technologicalinnovation,processinnovation• Economy:macroeconomicshocksthatleadtoeconomiccontractionssuchasfinancial
economicrecessionsanddepressions• Socialdisconnect:companiesnotconnectingwithcustomers’willanddesire• Intentionaldisruptions:whenthereisasmartattackerontheotherside,whowill
attackintheworsttimeandworstplace,includingterroristattacks,strikes,cyberattacks
ModesoffailureThesearewayshowsupplychainscanfailand/oreffectsofdisruptions:
• Inabilitytoacquiresupplies• Inabilitytoship/lossofshipment• Inabilitytocommunicate• Inabilitytoconvert• Lossofpersonnel
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• Unavailablecredit• Brand/Trustdiminution
Figure:CausesandEffectsofDisruptions
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Bow-TieRiskAnalysisFrameworkOne of the classical frameworks for thinking about risk and disruption is the Bow-Tie RiskAnalysisFramework:
Figure:Bow-TieRiskAnalysisFramework
DisruptionProfile
Figure:DisruptionProfile
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ClassificationofRisksThe traditional classification used to prioritize risk, includes two dimensions: probability ofdisruption and consequences. Usually supply chain managers focus on the severeconsequences-high probability quadrant (upper right). However, themost dangerous eventsarethoseinthesevereconsequences-lowprobabilityquadrantbecausecompaniesaretypicallynotpreparedanddonotknowhowtopreparefortheseevents.
Figure:Twodimensionalclassification:DisruptionProbabilityvsConsequences
In addition to disruption probability and consequences, a three dimensional classificationincludesdetectability.Dependabilityisdefinedashowlongittakesfromthetimeweknowthataneventisgoingtohappenuntilithappens.
• Probability:investigatethecausesandestimatetheirlikelihoods• Consequences:identifyimpact,prepareoptions,drills,mitigateoptionsandwaysto
“bounceback”• Detection:developdetectionabilityanddefinedecisionrules
PowerLaw:LikelihoodandImpactLikelihoodandimpactofmanydisruptionsobeythepowerlaw,whichcanbeusedtoestimatetherelationshipbetweenthefrequencyanddamageofevents.
𝑓(𝑥) = 𝑥IJ
DetectabilityandPreparationThereisathirddimensiontocharacterizedisruptions:detectability.Thewarningsignstoidentifysuppliersarepresented.thethreetypesofelementstopreparefordisruptionarediscussed:redundancy,flexibilityandpreparation.
WarningLagThewarninglagisthetimebetweenalarmandevent.Itcanoccur:
• Aftertheattack:inthiscasethetimeofdetectionisnegative,youdiscoverthatsomethinghappenedonlyaftertheeventoccurred
• Immediate:thetimebetweenthealarmandtheeventiszero,yourealizethattheeventishappeningwhenitsoccurring
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• Shortterm:thereissometimebetweenthealarmandtheeventbutnotmuchtoprepare
• Mediumterm:thereistimebetweenthealarmandtheevent,allowingthecompanytoprepare
• Longterm:thetimebetweenthealarmandtheeventislongsothereisopportunity,enoughtimetoprepareandtakeactions
WarningSignsofSupplierFailureThese might be signals that will allow you to sense that something is happening with thesupplier:
• Financial:failuretopreparetimelyfinancialreports,multipleadjustmentstoannualreports,frequentnegotiationsofbankingcovenants,deterioratingworkingcapitalratios,lengtheningaccountspayable
• Operational:highemployeeturnoverinkeypositions,failedprojects/failedacquisitions,operatingloss,lackofcapitalinvestment,late/misseddeliveries,qualityissues,billingandinvoicingerrors,carrierselectionerrors
ResilienceFundamentalsCompaniesshouldweighthebenefitsofuncertainfuturecostagainstcertaincurrentcosts.Currentcostsarederivedfromthethreewaystopreparefordisruption:
• Redundancy:iscreating/havingsomeextracapacity,inventory,suppliers• Flexibility:meansinterchangeability,isbeingabletochangeprocessesfast,cross-
trainingpeopletobeabletoperformmorethanonetask,usingpostponementandstandardization
• Readiness/preparation:ishavingrealoptionsorthetoolstorespond
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Safetymanagement
Figure:SafetyPyramid
DuPontBradleyCurve
Figure:DuPontBradlyCurve
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Waystodealwithlimitedsupply• Allocation:usesomecriteriatoallocatewhatisavailable• Auctions:givetheproducttothecustomerwhowantsitmost• Dilution• Substitution• Demandshaping
LearningObjectives• Understandtheconceptofwarninglag• Learnresiliencefundamentals• Understandhowtopreparefordisruptions• Learnhowtothinktoprioritizeandtoprepareforrisks• Distinguishbetweendifferentcausesofdisruptionsandeffects
ReferencesSheffi,Y.(2015)ThePowerofResilience:HowtheBestCompaniesManagetheUnexpected(MITPress)
Sheffi,Y.(2005)ResilientEnterprise:OvercomingVulnerabilityforCompetitiveAdvantage
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ExogenousFactorsExogenousFactorsareexternalfactorsbeingforcedonthesupplychainthatbusinesshaslittlecontrolover.Theymaybeexpectedorunexpectedbutcanoftenshapethewaythatsupplychainsoperateandmayforcedifferentresponses.Inthislessonwewillwalkthroughexogenousfactors,theirsources,examples,andhowcompaniesrespond.
SourcesofExogenousFactors(STEEPFramework)OnewaytoorganizethevariousfactorsimpactingthesupplychainistheSTEEPFrameworkwhichconsistsofsocial,technological,economic,environmental,andpoliticalimpacts.
• Socialfactorsincludedemographics,religion,lifestylesandvalueso ex:agingpopulation,crowdsourcing
• Technologicalfactorsincludeinnovations,communication,R&D,andpatentso Ex:machinelearning,apps
• Economicsfactorsincludeinterestrates,globaltrade,taxes/fees/finesandinflationo Ex:tradebetweencountries,financials
• Environmentalfactorsincludeavailabilityofresources,air&quality,foodsafety,pollution
o Ex:drought,emissions,waterpollution,productdisclosure,laborconditions• Politicalfactorsincluderegulatorystance,Governmentstability,taxpolicies,andtrade
unionso ex:disclosure,absoluterequirements
RegulationsRegulation:aruleordirectivemadeandmaintainedbyanauthority,typicallygovernments.Economistsviewofregulationsarethattheyarebasicallyeconomicorsocial.Economicregulationssetwhocansellandwhattochargesuchasmarketentry/exit,pricecontrols.Whilesocialregulationspreventmarketfailuresbycorrectingfornegativeexternalitieslikepollution,safetyasallweinformationdisclosuretoconsumers.
Typesofregulationbymechanism:Regulationscanbeappliedincertainways–asyoucanseeinthefollowingexamples.
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Theobjectiveofregulationsistoimpactbehaviorwhetherthatbediscouragingabehaviorbybanningorencouragingabehaviorbyrequiringit.Therearemanychallengeswithregulationsincluding:
• Theyaffectalmosteveryeconomicactivitytosomedegree,• Theyareconstantlychanging–deregulationorincreaseinregulation,• Theyareofteninconsistent(andsometimeopposing)acrossregionsandcountries,and• Firmsareresponsibleforknowingandcomplyingwithallexistingregulationsandlaws.
ImpactsontheSupplyChainImpactsonthesupplychaincanberefinedtogovernment,society,naturalresources,andcustomers.Thesefactorsareactivelyinfluencinghowsupplychainsaredesignedandoperate.Firmandsupplychainbehaviorcanbeinfluencedbyboth“hard”(Government&NaturalResources)and“soft”(Society&Customers)factors.Forinstance,howcananeventorexogenousfactorsimpactfreightflows.Itcanhaveanimpactonsourcingpatterns,flowdestination,routing,flowvolume,andvaluedensity.
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Therearemanytypesofregulationsthatareimpactingthesupplychain,somewewillcoverincludefactorsrelatedtoproductsandprocesses.
• Productso Directcontent(testable)o Lifecycleorpedigree(credence)
• Processeso Endoflifeactivitieso Transportation,logistics,packagingo Sourcingpractices
RegulationsonProductContentAsfarasconsumersgo,thereisanincreasingamountofattentionandconcernbasedonwhetheraproductisingested(foodandpharmaceuticals),wornorinimmediateproximity(clothes,cellphones),orinthegeneralenvironment(metalsinelectronicgoods,carbon).VariousRegulationsacrosstheglobefocusedonhazardouscontent:Europe:regulationsfocusedonchemicalsandrawmaterialsinelectronicsandrecycling
• RoHS(RestrictionofHazardousSubstancesDirective)• WEEE(WasteElectricalandElectronicEquipmentDirective)• REACH(Registration,Evaluation,AuthorisationandRestrictionofChemicals)
China:OrderNo.39FinalMeasuresfortheAdministrationoftheControlandElectronicInformationProducts(sometimescalledthe“ChinaRoHS”)SouthKorea:ActforResourceRecyclingofElectricalandElectronicEquipmentandVehiclesCalifornia:ElectronicWasteRecyclingActof2003(EWRA).
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MonitoringCredenceAttributesCredenceattributesarethosethatarenottestablebyadownstreamcompanyortheconsumer.Therearedifferentattributesthatmakeupaproduct.Somearetestableandsomearenot.Typesthataretestablebyadownstreamconsumermightincludethecolorortextureortheexperienceofaproductlikethesweetnessorconsistency.CredenceattributesareNOTtestable.Thoseareattributesthatarepracticesinthesupplychainbutarenottestablesuchascarbonfootprint,childlabor,orfoodsafetyadherence.Howtohandleaproblemlikecredence:
• Weneedtomeasure,monitor,track,andtrace• Forenvironmentalevaluation,requiresLifeCycleAnalysis(LCA)
o Product-centric,cradle-to-graveanalysiso Boundaries(breadth,depth,precision)
• MostCommonMethodtohandlecredence:Labels§ StandardSetting:Needagreedupontargets,terminology&definitions
o Testing–objectivemeasure§ Fortestableattributes–describemethodforassessment§ Forcredenceattributes-needtoTrackandTracetopreservethe
“identity”oftheproduct(thusneedforLCA!)o CertificationProcess
§ Self-certificationversus3rdpartycertification§ Certificationoftheexternalcertifiers!
o EnforcementofStandards§ Legalversussocialversusmarket...
DisclosureRegulationsOneofthemostobviousregulatoryimpactonsupplychainsaredisclosureregulations.Thesearethatrequirecompaniestodisclosecertaininformationaboutpracticesandprocessesinthesupplychain.ExamplesincludetheCaliforniaTransparencyinSupplyChainActandUK’sModernSlaveryAct.Forinstance,companiesofacertainsizemustdisclosewhethertheyhaveforcedlaborintheirsupplychain.Forceslaborisallworkorservicewhichisexactedfromanypersonunderthethreatofapenaltyandforwhichthepersonhasnotofferedhimselforherselfvoluntarily(ILO).MostCommonFormsinSupplyChains
• Bondedlabor-workingtopayoffaneverendingdebt• Forcedlabor-forcedtowork,cannotescape• Migrantworkers-noalternativestosurvive• Domesticworkers-cannotleavethehouse
CommonIndustries:
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• Agriculture• Manufacturing• Textile&Garments• Mining• Fishing• Warehousing
Childreninemployment–allchildrenengagedinanyeconomicactivityfor≥1hour/week,forpayornot,parttimeorfulltime,insideoroutsidethefamilysetting.Childreninchildlabor–subsetofabove–workersbelowtheminimumageengagedformanyhours/weeknotdoingpermitted“lightwork.”Hazardouswork–subsetofabove–childrenengagedinworkthatisharmfultotheirsafety,healthandmoraldevelopment.Includesnightwork,longhours,exposuretophysical,psychologicalorsexualabuse;workunderground,underwater,atdangerousheights,inconfinedspaces,heavyloads,dangerousmachinery,dangeroussubstances.ComparingtheDisclosureregulationsCaliforniaTransparencyinSupplyChainsAct-acompanymustdisclosetowhatextent,ifany:
• Engagesinverificationofproductsupplychainstoevaluateandaddressrisksofhumantraffickingandslavery.Thedisclosureshallspecifyiftheverificationwasnotconductedbyathirdparty.
• Conductsauditsofsupplierstoevaluatesuppliercompliancewithcompanystandardsfortraffickingandslaveryinsupplychains.Thedisclosureshallspecifyiftheverificationwasnotanindependent,unannouncedaudit.
• Requiresdirectsupplierstocertifythatmaterialsincorporatedintotheproductcomplywiththelawsregardingslaveryandhumantraffickingofthecountryorcountriesinwhichtheyaredoingbusiness.
• Maintainsinternalaccountabilitystandardsandproceduresforemployeesorcontractorsfailingtomeetcompanystandardsregardingslaveryandtrafficking.
• Providescompanyemployeesandmanagement,whohavedirectresponsibilityforsupplychainmanagement,trainingonhumantraffickingandslavery,particularlywithrespecttomitigatingriskswithinthesupplychainsofproducts.
• ModernSlaveryAct-Anorganization’sslaveryandhumantraffickingstatementmayincludeinformationabout:
• theorganization’sstructure,itsbusinessanditssupplychains;• itspoliciesinrelationtoslaveryandhumantrafficking;• itsduediligenceprocessesinrelationtoslaveryandhumantraffickinginitsbusiness
andsupplychains;• thepartsofitsbusinessandsupplychainswherethereisariskofslaveryandhuman
traffickingtakingplace,andthestepsithastakentoassessandmanagethatrisk;
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• itseffectivenessinensuringthatslaveryandhumantraffickingisnottakingplaceinitsbusinessorsupplychains,measuredagainstsuchperformanceindicatorsasitconsidersappropriate;
• thetrainingaboutslaveryandhumantraffickingavailabletoitsstaff.Takeawaysforsupplychainmanagers:
• Requiresmappingofsupplychains• Addedvendor/suppliercompliancevetting–inclusionofa“SupplierCodeofConduct”• Riskassessmentincludesnotonlylegalcompliance,butforreputationandmarketrisks• Contractinganduseof3rdpartyauditingfirms/organizations• Butlaborisjustoneattributeofmanythatarebecomingscrutinized• Shouldfirmstreatthemallequallyordifferourresponsebasedonotherfactors?
UnintendedConsequences–AcautionaryTaleAsregulationsarewellmeaningandaredesignedtoimproveconditionsbycontrolling,practicesandprocesses,theycansometimeshaveunintendedconsequences.Forinstance,theDodd-FrankWallStreetReformandConsumerProtectionActof2010:“AnActtopromotethefinancialstabilityoftheUnitedStatesbyimprovingaccountabilityandtransparencyinthefinancialsystem,toend"toobigtofail",toprotecttheAmericantaxpayerbyendingbailouts,toprotectconsumersfromabusivefinancialservicespractices,andforotherpurposes.”InSection1502–itrequiredthedisclosureoftheuseofconflictminerals.Thecountryoforiginisessentiallyacredenceattributefortheseminerals.SupplyChainresponseforDodd-Frank
• Wherearethechallenges?o Manufactureditemscancontainhundredstothousandsofparts/components
andsuppliers/vendorso MineralcontentisusuallynotcontainedinBOMorERPo Sourcingofmaterialsisglobalandsuppliersfromothercountriesarenot
requiredtoassisto Any3TGfoundtobefromthecoveredarearequiresmuchhigherscrutinyand
detailedreporting• Whatcouldpossiblygowrong?
o Costofcomplianceformanufacturercanbeveryhigh§ Estimated>10millionpaperworkhoursannuallyspentbyfirms§ Over$10billioninadditionalcostsannually(2016)§ In2014,Intelsent90employeestoinvestigatesmeltersglobally
o ThishasledtoaninitialdefactoembargoofmineralsfromtheDRCresultinginlossofrevenuetolegitimateminesinthearea
o Continuing(orincreased)salesofconflictmineralstofirmsincountriesnotoperatingundertheseregulations
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SimilarunintendedconsequencesinEndangeredSpeciesActof1973andComprehensiveEnvironmentalResponse,Compensation,andLiabilityActof1980(superfund).
ProductOrientedRegulations/Pressures• Safety–ensuresafeoperationsacrosssupplychain
o Examples:HoursofService(HOS)Rules,TruckSizeandWeightRestrictions,DriverLicensing,ElectronicLogbooks(ELD)
o Caninfluencedesignandoperationofnetworkso Typicallytreatedasabsolutemandatesorconstraints
• WasteReduction–promotesmoreefficientuseofresourceso Examples:Truckfuelefficiency,GHGemissionsbytrucks,Smartpackagesizing,
Efficientmodeselection(TLtoIMconversion),Zero-wastefacilitieso Happycoincidencethatreductionofwaste(miles,cardboard,fuel)improves
efficiencyandusuallyreducestotalcostso Typicallytreatedascostreductionsinmakingbettertrade-offdecisions
• End-of-Life–encouragecompaniestodesignproductsforreuse,recyclability,andmaterialsreduction
o Examples:EUdirectivesandregulationsonPackagingandpackagingwaste(1994),EndofLifeVehicles(2000),WasteElectricalandElectronicEquipment(2003),BatteriesandAccumulators(2006)etc.
o Takesmanydifferentformsinvolvinggovernments,manufacturers,andotherso Introduces(imposes)entirelynewprocessestosupplychains
ForEndofLifeProcessestherearetwomainapproaches:ProductStewardshipandExtendedProducerResponsibility(EPR).Product-centricstrategyiswhereeveryoneinvolvedinthelifespanoftheproductisresponsibleforallenvironmental,health,andotherimpacts.EPRisManufacturercentricstrategydesignedtopromotetheintegrationofenvironmentalcostsassociatedwithgoodsthroughouttheirlifecyclesintothemarketpriceoftheproducts.Inrelationtothistherearetake-backlawstopreventwaste.Theirprimarygoalistopreventwasteencouragecompaniestodesignproductsthatareeasiertoreuseorrecycle,containsafermaterials,reducetheirenvironmentalimpact,andminimizewastemanagementcosts.AswellasPromoteinnovationinrecyclingtechnology&collectionsystems
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FirmResponseandApproachAcompanyneedstosegmentitsresponsetotheseissuesforstrategy.Theymustsegmentpotentialresponsesandactionbasedonpressureandimportance.Responsesareonacontinuumfrom“Donothing”to“FocusallActivities”.Awayofidentifyingwhatisimportanttothecompanyandtothestakeholdersisamaterialityassessment,thereareothersimilarframeworksfordongthis.
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Warning!Thislessonbarelyscrapesthesurfaceofanever-changingandincreasinglyimportanttopic!Itisnotintendedtomakeyouanexpert,justprovideyouwithaframeworktothinkabouthandlingexogenousforcesinyoursupplychain.
LearningObjectives• Recognizetherearemanyexogenousfactorsbeingplacedonthesupplychainincluding
social,market,government,andnatural.• Identifytypesofregulationssupplychainsareheldresponsibleandtheirimpactonthe
supplychain.• Becomefamiliarwithdifferentproductattributeslikedirectandcredence.• Reviewsupplychainprocesseslikesafety,wastereduction,andend-of-life.• Understandthatfirmscanrespondindifferentwaysandaresegmentedbyfactor,
market,etc.
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PalmOilCaseStudyPalmOilisawidelyusedoilinalargerangeofproducts.ItiscommoninmostCPGproductsbecauseofitspropertiesaswellaspackagedfoodproductsbecauseofitsshelflifeandattributesasanon-transfat.ThereasonswespendsomuchtimefocusingonpalmoilisbecauseitbringstogethermanyoftheexogenousfactorswereviewedinLesson1andculminatesindifferentresponsesfromdifferentcompaniesbasedontheirstakeholders’demandsandbusinessinterests.Palmoiliswithyoualldaylong:
TheRiseofPalmOil• 1848–oilpalm,anativeofWestAfricawasbroughtbyDutchTraderstoSEAsia• Foundusefulinsoapandlubricantforsteamengines,grewwellinSEAsia• Grewrapidlyin1960sinSEAsia,esp.inMalaysiawheregovernmentsoughttoreduce
thecountry’sdependenceonrubberandtin.
MIT Center for Transportation & Logistics
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• DemandgrewandplantationstookoverinMalaysiaandIndonesia,today85%ofpalmoilfromthesetwocountries
TogetherMalaysiaandIndonesiamakeupover85%ofthemarket!
AtthesametimePalmoilhasgrownrapidlyindemand,sohasareasofforestcleared.Itsclearthattherearemanyreasonsforforestcleared,butthisshowssomecorrelationbetweenthetwoprocesses.Andin2010–KitKat,NestlewasattackedfortheiruseofpalmoilbyGreenpeace.Thispropelledthisissueintothepubliceye.
Indonesia45%
Malaysia43%
Thailand2%
Nigeria1%
Colombia2%
Other7%
GlobalPalmOilProduction2015
Indonesia Malaysia Thailand Nigeria Colombia Other
Summer 2017・CTL.SC3x – Supply Chain Dynamics Key Concepts・MITx MicroMasters in Supply Chain Management MIT Center for Transportation & Logistics・Cambridge, MA 02142 USA ・scm_mm@mit.edu This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
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PalmOilEndtoEnd
TheProblemwithPalmOilTherapiddemandofpalmoilhasresultedinbothpositivesandnegatives.ThepositiveimpactofpalmoilisthatitprovideseconomicgrowthtocountrieslikeMalaysiaandIndonesia,itbringlivelihoodstosomethatdidnothaveviablelivelihoodprevioustopalmoil,itismoreproductivepertreethanitsnearestcompetitor,infact10xmoreproductivemeaningittakesuplessspacetoproducethesameamountofoil,anditisalsonotatransfat.
SocialandenvironmentalImpactsHowever,therapiddemandbeginningespeciallyinthe2000shascausedrapiddeforestationthatresultsincarbonemissionsasaresultofrainforestclearing,hazefromburningofrainforest,lossofbiodiversityasaresultofrainforestclearingandmore.Therearealsoextensivesocialimplicationssuchas:
OIL PALMPLANTATIONS
INITIALMILLINGCONVERSION /
PRODUCTION
PROCESSING
TRANSPORT /TRADE /
DISTRIBUTION
MANUFACTURING
RETAIL /CONSUMPTION
CRUDE PALM &PALM KERNEL
OIL
PALMKERNEL
CAKE
REFINING /FRACTIONATION
TRADERS &EXPORTERS
FEEDPRODUCERS
LIVESTOCKINDUSTRY
FURTHERREFINING &BLENDING
OELO-CHEMICALS
BIOFUELSINDUSTRY
EDIBLE OILS
FOOD INDUSTRYCHEMICAL &PERSONAL CARE
INDUSTRIES
DAIRY ANDMEAT
BIODIESEL ANDPOWER
GENERATION
SOAPS,CANDLES,
COSMETICS,DETERGENTS,LUBRICANTS,
SOLVENTS ETC.
FATS,MARGARINES,COOKING OIL,ICE CREAMS,
SHORTENINGS ETC.
PALM OIL
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• Childandfamilylaborandinsufficientprotection• Frequentuseofforced,bondedlabor• Useoffixedshorttermcontracts• Landgrabs• Complexandopaquesupplychain
TypesofPlantationsPalmoilislargelygrownon3typesofpalmoilplantationsincludingestates,associatedorschemesmallholdersandsmallholders.Bothestatesandassociatedorschemesmallholdersaregenerallymoreorganizedandeasiertoworkwith.Estatesareoftenownedbylargercorporationswhileassociatedorschemesmallholdersarestructurallyboundbycontractorcreditagreementtoaparticularmill.Smallholdersaregenerallyselffinanced,managed,equipped,andnotboundtoanyonemill.
OrganizationforSustainabilityTherearemanydifferenttypesororganizationsworkingtowardsmoresustainablepalmoil.Theyhavedifferentobjectives,strategies,andapproachesandoftenhaveconflictoverwhatsustainablepalmoilmeans.Someareadvocatingforthecause,somearecatalystsforchange,andsomesupportbusinessintheirjourneytoachievemoresustainablepalmoil.
• NGOso TheForestTrusto WorldResourcesInstituteo WildAsiao RainforestActionNetwork
• Industryassociationso RoundtableonSustainablePalmOil(RSPO)o PalmOilInnovationGroup(POIG)
• Andmanymore…Tobegintoencouragesustainablepalmoil,therearethreemainwaystotracematerialtosourcetoverifypractcesontheground.Seebelow:
Summer 2017・CTL.SC3x – Supply Chain Dynamics Key Concepts・MITx MicroMasters in Supply Chain Management MIT Center for Transportation & Logistics・Cambridge, MA 02142 USA ・scm_mm@mit.edu This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
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CorporateResponsesBuildontheframeworkfromLesson1ExogenousFactors,thisframeworkaddssomemorespecificsonpracticesinthe“embrace”category.Onecaninsurebyputtinginextrameasurestomakesuretheyarenotcommittingillpracticesintheirsupplychain.Theymightre-designorchangesomethingintheirsupplychaintoimprovepracticesinthesupplychain.Andinthegreatestamountofefforttheymighttransformapartoralltheirsupplychaintoensuresustainablepractices.
DifferentcorporateresponsesarereviewedbetweenNestle,Unilever,P&G’sandandDr.Bronner’sdifferentapproaches.Basedontheircompanyorientation,pressurefromNGO’s,capacitytochange,andlongtermobjectives,eachcompanyhadadifferentapproach.Nestle
Avoid
Comply
Insure
Re-Design
Transform
Summer 2017・CTL.SC3x – Supply Chain Dynamics Key Concepts・MITx MicroMasters in Supply Chain Management MIT Center for Transportation & Logistics・Cambridge, MA 02142 USA ・scm_mm@mit.edu This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
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spentalotoftheireffortsongettingahighleveloftraceabilitytosources,thisisparticularlybecauseofGreenpeace’sattacksandtheirnaivetyonwheretheirmaterialwascomingfrom.P&Gspentalotoftimeresearchingtheiroptionsandessentiallyfocusedtheireffortsonsupportingsmallholdersbecauseoftheirportionofspendonsmallholders.Unilever,withtheirorientationtowardsindustrywidechange,workedheavilyondifferentorganizationsandcollaborationsthatsoughttoelevatethepracticesinthepalmoilsupplychain.ForthesmallDr.Bronner’s,theirwholecompanyorientationwasonsustainablesupplychains,sotheychosetospendconsiderabletimetransformingtheirsupplychainbyverticallyintegratingwithasubsidiary.
DifferentScenariosforPalmOil• Manydifferentscenariosaswecanimagine(ScenarioPlanning)
o Allpalmoilbecomessustainable,sustainablepalmoilbecomescostcompetitiveo Companiesmoveawayfrompalmoilasakeyoilsourceo Continueonpathwithincrementalchanges
• Thisproblemisnotisolated,similarchallengeswithothermaterials:
o Socialpressureo Finiteamountso Regulationo MarketDemand
LearningObjectives• Recognizethedifferentexogenousfactorsapparentinthepalmoilsupplychain• Becomefamiliarwiththedifferentforcesbeingplacedonthesupplychainandthenew
expectationsbysocietyandconsumers• Becomefamiliarwithcommoditysupplychainchallenges• Recognizecompanieswillrespondindifferentwaysbasedontheirorientation,capacity,
andlongtermgoals• Identifydifferentscenariosandhowtheymighthelpcompany strategy
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