Globalisation and Supply Chains.
Just as the supply and demand requirements for an item do not change because it is month end, many of the business challenges in your supply chains will continue into the new year. Welcome to the new calendar year and the many and continuing supply chain challenges that Learn About Logistics will discuss.
Globalisation has been the catchall term for a number of factors that came together over some years to facilitate growth in international trade:
- Demand by shareholders for higher dividends influenced ‘return on invested capital’ as a strong performance measure, therefore a focus on ‘core’ business
- Increasing mobility of capital. Mutual Funds (mainly US based) provided multinational companies with finance to develop new products for international distribution
- China opened to external trade and investment, which influenced the reduction of cross-border trade restrictions by other governments
- Growth of trading blocs (e.g. EU, NAFTA). Growth of trade facilitation agreements (called Free Trade Agreements or FTAs) between countries
- Shipping Containers and larger container ships, container terminals and trucks reduced shipping time and transport unit costs. This allowed emerging market countries to compete in high-volume, low-margin products
- Freight aircraft of increasing size
- Communication satellites, undersea data cables, the Internet and social media
- Consumer willingness to buy products and services from any source
- Increased competition between businesses of developed and developing countries
At many companies in developed countries, the response to these factors was (to varying levels):
- outsource non-core functions and contract out individual activities
- send sourcing and production offshore to low cost countries (LCC) and
- offer an increased level of product differentiation, to address the needs of smaller consumer segments
In doing this, managements increased Uncertainty across three dimensions:
- Geographic: increased reliance within the supply base on a global spread of suppliers
- Breadth: increased the number of direct (tier 1) suppliers in the supply base
- Depth: increased the number of tiers (levels) of suppliers
These six factors can interact and amplify each other, which increases the likelihood of disruptions in the supply of items. It is enough of a challenge to plan, make and deliver goods and services when there is a reasonable control of business processes. But, to extend the processes across national borders and across layers of different suppliers increases Uncertainty exponentially.
Increasing Uncertainty required a response. The need was to ensure that products were ‘delivered in full, on time (with lead times acceptable to customers and without excessive inventory) and with accuracy (of the process) – that is DIFOTA. And so, taking a long and winding road, developed the theory and practice of Supply Chains and Networks.
Supply Chains and Networks
A definition for a Supply Chain is: ‘The links within an organisation and between external enterprises for the supply of items that provide value for customers and consumers at the lowest total cost’. An organisation’s multiple supply chains become its network of interdependent and IT connected suppliers and customers. The core elements of a Supply Network are:
- Nodes – each location which holds material items or money. Details of core suppliers and customers at their respective locations
- Variables – factors that can change the physical or financial values at a node
- Links – transport movements of materials and items between nodes. Consider the ownership, influence and control of critical links
- Flows – the transfer of items, money, transaction data and information between nodes and links. Contractual responsibilities with suppliers and customers. Recognise the factors of power, dependency and risk in the management of internal and external relationships.
For each Supply Chain, these elements are affected by:
- Complexity: this is both external (i.e. customs procedures) and internal (i.e. systems and procedures – ‘the way we do things’)
- Variability: the short term movements in demand and supply for items that can dis-proportionally affect the operations of your Supply Network
- Constraints: the internal and external capacity bottlenecks that affect the flow of items, money, transaction data and information through a Supply Network
These factors interact with and amplify each other to an extent that is difficult to understand and measure; but an organisation’s Supply Network can be self-correcting through the responses to events by individual organisations in the network. Supply Networks are therefore identified as Complex Adaptive Systems (CAS).
To understand the scope of Uncertainty requires a Supply Network Risk Management approach. This is to identify the likelihood of individual events occurring and the potential consequences and response if the event occurs.
While Supply Chains and Supply Networks are conceptual structures, the core operational disciplines required to implement a Supply Chain strategy are: Procurement, Operations Planning and Logistics (in addition, there can be others, such as customer service, import/export compliance, supply chains IT and supply chains finance and legal).
- Procurement: understand the organisation’s supply markets. Manage relationships, finance and contracts with current and potential suppliers
- Operations Planning: plan for the organisation to be effective and profitable in supplying customers (rather than efficient) at the lowest total cost
- Logistics: The time-related positioning of internal and external resources to provide Availability of goods and services for customers
Change in Globalisation and Supply Chains
Since the financial crisis of 2008, there has begun a change to the structure of Globalisation. International Trade is reducing in volume, protectionist sentiments are emerging in some countries and production of some items is returning to the countries of sale, enabling quicker response to consumer demands without the need for high inventories.
The earlier Globalisation of the late nineteenth and early twentieth centuries, concentrated on the cross-border exchange of tangible (manufactured) goods, which ended with the Great Depression of the early 1930’s. In contrast Globalisation 2.0 is more complex, including a high (70 percent) of global trade being components and parts; increasing trade in many intangibles (previously called non-tradable services) to support physical items and the development and implementation of new technologies.
Supply Chains and Networks will also undergo change, to an extent and at a speed that is not known. However, it will require an increasing professionalism of expertise in the disciplines, but the role of a Logistician will remain unchanged “To meet Availability objectives by reducing uncertainty and increasing strategic advantage through understanding the range of external complexity, variability and constraints affecting the organisation and reducing the internal complexities caused by the conflicting objectives of corporate functions”.
This blog contains plenty of discussion points to be addressed throughout 2018. I hope they reflect your interest and I look forward to your comments.