1. Supply Chain Management Lecture 5 – Globalization
David Sharpe

2. Lecture 5 - Learning Objectives
On completion you will be able to:
Define globalization as a phenomenon
Recognise the key drivers for change in the global economy
Explain the evolution of multinational and international logistics strategies
Recognise sources of risk from operating globally and in particular recognise the exchange rates risks that arise and identify methods to manage these risks

3. Definitions of Globalization
The growing integration of economies and societies around the world (Source: accessed 15th October 2007)
Has implications not just for trade and financial flows but for broader cultural, political and environmental dimensions (Source: accessed 15th October 2007)
Is a trend, the destination has not been reached
Is the convergence of trends in markets, products, consumer behaviour and society.
Tony Hines, “Supply Chain Strategies”, 2004, Elsevier, page 7

4. Drivers of Globalisation
Growth in world trade
greater than growth in GNP/GDP
Overcapacity in many industries
Global competition increases search for lower labour costs
Liberalization of trade via WTO
Development of global transport infrastructure
Regionalisation
Triads - North America, EU, Japan/Pacific Rim
Information technology improves global communications

5. World GDP vs. Global Exports
Source: WTO 2005

6. Drivers of Globalisation
Growth in world trade
greater than growth in GNP/GDP
Overcapacity in many industries
Global competition increases search for lower labour costs
Liberalization of trade via WTO
Development of global transport infrastructure
Regionalisation
NAFTA, EU, ASEAN etc
Information technology improves global communications

7. Implication of International Competition
High
Trading Industries
Defence hardware
Aerospace
Textiles and apparel
Shipbuilding
Global Industries
Automobiles
Consumer electronics
Petroleum
Semiconductors
International Trade (world export)
Sheltered Industries
Furniture
House building
Grocery retailing
Domestic services
Multinational Industries
Investment banking
Fast-food restaurants
Management consulting
Packaged groceries
Low
Low
International investment (foreign owned assets)
High
Source: Dr Dawei Lu, MSc SCM module, WMG

8. International Trade Statistics 2008, page 3, http://www. wto
International Trade Statistics 2008, page 3, accessed 20/10/2010

9. Scenarios in 2020 10% 65% 20% 5% Globalisation unbound
trade barriers progressively dismounted; accelerated technological progress; integrated financial markets
Controlled globalisation
further gradual trade liberalisation constrained by security concerns and protectionist pressures
Globalisation in retreat
protectionist sentiment thrives in a climate of insecurity
Globalisation sunk
global markets disrupted, stagnant consumption; technical advances dwindle; restrictions on trade, migration and investment
10%
65%
20% 5%
Source: Economist Intelligence Unit (2006) Foresight 2020: Economic, industry and corporate trends

10. Stages in Global Supply Management
Stage one: International purchasing
Stage two: Global sourcing
Stage three: Global supply management
Burt, D. (2010) Global Supply Management. In: Burt, D. et al. Supply management. 8th ed., London : McGraw-Hill, Ch.12, pp.276

11. Evolution of Logistics Strategies
Activities in home country
Activities in
Europe
Sourcing
Manufacturing
Inventory
Distribution
Sales
Stage 1 – Direct export
Sourcing
Manufacturing
Inventory
Distribution
Sales
Stage 2 – National warehouses

12. Evolution of Logistics Strategies
Activities in home country
Activities in Europe
Sourcing
Manufacturing
Inventory,
Distribution
Sales
Stage 3 – Logistics centralisation
Sourcing and primary
manufacturing
Inventory,
Distribution
Sales
Stage 4 – Postponed manufacturing
Harrison A. and van Hoek R. “Logistics Management and Strategy”, Pearson, 2nd edition 2005, p. 115

13. Company’s Reasons for Global Sourcing
To benefit from:
Superior quality
Better timeliness
Lower total cost
More advanced technology
Broader choice of suppliers
Expanded customer base
Burt, D. (2010) Global Supply Management. In: Burt, D. et al. Supply management. 8th ed., London : McGraw-Hill, Ch.12, pp

14. Problems faced by Company’s from Global Sourcing
Cultural issues
Long lead times
Additional inventories
Lower quality
Social and labour problems
Higher cots of doing business
Higher opacity
Burt, D. (2010) Global Supply Management. In: Burt, D. et al. Supply management. 8th ed., London : McGraw-Hill, Ch.12, pp

15. Global Pipeline – Transport Variability
From point of origin to port
Freight forwarding/ consolidation
Arrive in country of destination
Customs clearance
Transit to point of use
Total elapsed time
Maximum 5 7 15 37
Average 4 3 14 2 32
Minimum 1 12 17
Christopher M., Logistics & Supply Chain Management, Pearson, 3rd edition, 2005, p. 217

16. Broader Risks from Global SCM
Geopolitical threats
SARS, Iraq war, terrorist attacks like 9/11/2001
Transportation breakdowns
Strikes, UK postal strike, baggage handlers at airports
Economic risks
Problems outside of your industry, market & country affect demand
i.e. problems in US sub-prime mortgage market
Currency risk
Hedge in the Forward Exchange Rate market.
Hedge in the Money Market
Hedge in the Options Market

17. Illustrative Case — Dayton Manufacturing’s Transaction Exposure
Scout Finch is the chief financial officer of Dayton, a US -based manufacturer of gas turbine equipment. She has just concluded negotiations for the sale of a turbine generator to Crown, a British firm, for £1,000,000. This single sale is quite large in relation to Dayton’s present business. Dayton has no other current foreign customers, so the currency risk of this sale is of particular concern. The sale is made in March with payment due three months later in June. Scout has collected the following financial and marketing information for the analysis of her currency exposure problem.
See lecture handout

18. Lecture 5, Key Points
Globalization is defined here as the convergence of trends in markets, products, consumer behaviour and society.
Many factors have encouraged the growth in globalization and of particular relevance to manufacturing supply chain strategies are the lowering of some trade barriers, convergence of consumer tastes, potential to exploit mass customisation & postponement strategies to meet local tastes, availability of low cost production and need to utilise over capacity.
This has created phases in internationalisation of operations, normally starting from the firm’s home country for truly global industries such as cars. However, some sheltered industries remain relatively unaffected because of the need for local supply, such as house building. Trading industries concentrate design and manufacturing in relatively few locations due to limited economies of scale (aerospace) or need to access low cost production (apparel) but trade globally. Finally multinational industries, such as banking, locate in many global locations but only trade with local customers in that location.

19. Lecture 5, Key Points
Global supply chain management and logistics requires a rationalisation of sourcing, production and distribution and offers potential improvements via low labour costs, economies of scale and centralisation of inventories. However, it has to cope with extended supply lead times, extended & unreliable transit times, multiple consolidation & break points, multiple freight modes & cost options and multiple possible locations. It also needs to balance local needs against the benefits of global rationalisation.
Being global is not without risks. Primary sources of risk include geopolitical uncertainty in both supply and market locations and transportation breakdowns in the longer global pipeline. Economic risk increases as the interdependency of markets grows as shown by the US problems in the sub prime mortgage market in Trading globally creates currency risk and managing this risk creates added cost.

20. For the next lecture Read the case study currency risk, M&S and Nike
Possible oral presentation questions
Are inventories centralized in global regions in this supply chain or firm?
How does the supply chain meet local tastes and preferences whilst organizing globally?
Does (or how could) the supply chain use postponement strategies to cope with global markets?
Will the supply chain become more or less global in the next 10 years?
What risks arise from the global operations of this supply chain or firm?