Trading goods in a global context offers many incredible benefits to companies around the world. Many products that are accessible to us today would not be possible without global supply chains. One reason for this is that many resources are only available in specific geographical regions. There are some resources that could be cultivated in other parts of the world but the opportunity cost to do so would be very high. For an organization to be profitable, it is necessary to minimize costs. Maximizing profits in a multi-national environment includes sourcing from locations that offer the lowest total procurement cost, manufacturing and assembling products in least cost countries, and marketing in high potential demand centers. In other word, global supply chains allow geographical specialization so that each part of the world can do what they do best while many reap the culminated benefits.
For a resource to be cultivated in a geographical region where the opportunity cost to do so is high, the costs associated with the procurement of this resource will also be higher. This is extremely important because purchased materials have historically accounted for about half of the U.S. manufacturing costs, and many manufacturers purchase over half of their parts. The ability for a U.S. manufacturer to source supplies from a foreign economy benefits both economies. At times, it is more beneficial to allow an outside manufacturer to perform part of the raw material transformation to be further transformed in-house. This is because the cost of labor is significantly lower in other areas of the world which means that this stage of transformation would cost much more in-house. It all boils down to opportunity cost and access of resources. The ultimate goal is to supply a demand at a price consumers are willing to pay while maximizing profits for the company and shareholders.
Essentially, a supply chain is just a series of activities supported by people, processes, and technology that move products and services around the world. What we've discussed so far makes a great deal of sense, but the coordination and integration of these activities is anything but simple; especially considering the consistency required at each stage of the supply chain. Welborn and Kasten (2007) explain that “far too often, that 'people thing'— and more specifically, the knowledge and expertise they have that underlie all of the activities and are embedded in the business rules and specific technology applications used to support those activities—is ignored . . . to the peril of getting done what needs to get done." This points to severe complications with managing a global supply chain, which highlights the presence of threats that can be detrimental to the success of an organization.
In any organization, finding a good balance between profitability and efficiency can be a challenge. The supply chain begins farthest upstream at the raw materials and must be moved between processes and nations smoothly and consistently. Global supply chains face many challenges that can be easily overlooked such as the geographical differences in politics, cultures, economies, infrastructures, etc. It may seem as simple as locating a good supplier to begin trading, but one must consider economic factors such as tax rates, transfer costs, exchange rates, and more. Infrastructure limitations in less developed countries can place restrictions on logistical capabilities. Government laws and regulations can have dramatic implications that turn a mutually beneficial trade agreement into a nightmare. A well-known example of this is Google’s experience in China. These are just a few of the challenges faced by organizations that operate globally.
The threats involved with operating globally can have a huge impact on the company and their customers. Foreign procurement and outsourcing requires thorough communication. Companies must be able to fulfill their commitments to customers, and if there is a delay or problem in the supply chain it could bring operations to a halt. If deliveries are late from suppliers, a company will be forced to keep large, costly inventories to keep their own products from being late to the customers. Fluctuating costs due to factors such as those previous mentioned can cause prices to fluctuate for the consumer as well. This also has an impact on demand which causes problems for the company. So we see that there is a tradeoff when depending on foreign suppliers in a global supply chain. A company has greater control of in-house operations but often times the resources are unavailable locally or they are too costly to cultivate, extract, or process regionally. This dependency is a huge risk for the company and the customers that depend on its products.
Risks in the supply chain can be classified as quantitative or qualitative. Quantitative risks include stock-outs (lost sales), overstocking, obsolescence, customer discounts, and/or inadequate availability of components and materials in the supply chain. Qualitative risks include lack of accuracy, reliability, and precision of the components and materials in the supply chain. This further highlights the risks involved in outside dependency. Not only are there issues of reliability and costs, but we must also consider the quality of the supplies that we receive. Depending on the suppliers process controls, the company may find that there is a great deal of inconsistency in their orders. This inconsistency could make its way to thousands consumers before identified which could cause the company a loss of market share and brand equity.
Mitigating the risks associated with depending on foreign suppliers and the network of channels that move and transform the materials to in-house facilities can be an extreme challenge. Manuj and Mentzer (2008) outline a five step process for global supply chain risk management and mitigation. The first step is risk identification, which involves classifying risks into categories. The categories of risks include operations, demand, supply, and security. The second step is risk assessment and evaluation. Next the company must select appropriate risk management strategies such as postponement, avoidance, speculation, hedging, etc. The fourth step is the implementation of these strategies. Finally, we come to the mitigation of supply chain risks.
As we have discussed, operating a supply chain in a global context has many great benefits accompanied by great risks. The main benefits are related to the obtainment of resources and the mitigation of costs. Risks are related to the dependency on third parties that the company has little or no internal control over. When the benefits outweigh the risks, a company becomes multinational through foreign procurement and outsourcing. By accepting these risks, it is the company’s responsibility to identify them and implement effective measures of mitigation. This is an ongoing process of ensuring consistent quality and quantity of raw materials and outsourced goods, as well as maintaining adequate communication flow to keep the delicate integration of multiple enterprises appropriately serving each others’ needs.
References
Russell, R., & Taylor, B. (2011). Operations Management (7th ed.). Hoboken, NJ : John Wiley and Sons, Inc.
Manuj, I., & Mentzer, J. T. (2008). GLOBAL SUPPLY CHAIN RISK MANAGEMENT. Journal Of Business Logistics, 29(1), 133-155.
Welborn, R., & Kasten, V. (2007). Securing global supply chains: Seven reasons why “getting it done” is so hard. Employment Relations Today (Wiley), 33(4), 1-6. doi:10.1002/ert.20123
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