11 – Supply Chain Logistics Design

Introduction

There has been a significant shift in how businesses performed in the 1980s and how they operate today. Previously, substantial multinational corporations focused on developing new businesses by implementing leaner manufacturing processes, comprehensive quality controls, and new offices in critical areas. Their logistics functions were handled in-house or by several third-party logistics providers in-country.

However, as the new global economy has emerged, previously restricted or protected world marketplaces, typically with better regional trading infrastructures, have begun to open. With the increased expansion of mid-sized, high-tech firms, economies are beginning to flourish. Senior executives of successful multinational corporations have started to doubt the necessity of reproducing every aspect of their organisation in each location.

As a result, multinational corporations are increasingly focusing on manufacturing and marketing while outsourcing warehousing, distribution, and other logistics services to expert third-party logistics providers (3PLs) capable of developing logistics networks to reduce the cost of entry into global markets.

As organisations expand their supply chains globally, logistics challenges increase, and solutions become increasingly difficult to implement.

11.1 Supply Chain Design

Customer expectations for various items vary significantly from one market segment to the next. As a result, it is not viable to service everyone with everything through a single, all-encompassing supply chain approach. Most businesses require some combination of the two methods when designing their supply chain.

This is especially true for multi-product and consumer-oriented businesses. In general, they must contend with the dilemma of not agreeing on a single competitive approach. Because of the competition, they are forced to pursue cost leadership for one product line while pursuing a focus strategy for another inside the same business unit. This necessitates using various supply chain procedures within the same business unit.

This is likely to be a significant limitation in designing a supply chain with the best strategic fit, and all of the benefits of a solid strategic fit, such as cost reduction, enhanced efficiency, better responsiveness, and knowledge and talent transfer, may not be realised. One solution to this problem is to make the supply chain design process and model cross-functional.

In general, the supply chain model and design process involve inputs (estimations, absolute values, and empirical values based on experience) from marketing, engineering, finance, manufacturing, and supply chain teams to obtain reliable estimates of supply chain performance. Treating supply chain design as a cross-functional issue can help solve these problems.

Without a concrete example, it is difficult to grasp the principles of “strategic fit” and how they apply to supply chain design. As a result, let us test the concepts with a simple example.

Example: You’ve been tasked with creating a supply chain for Style and Grace in Connaught Place. Style and Grace is a menswear retailer. It sells textiles and ready-to-wear menswear from well-known brands. It also offers a tailoring section that produces custom-made menswear, primarily suits, for customers. The store caters to people with high and high-middle incomes. It would be best if you ascertained its competitive strategy. It would be best to consider where and why you would place the demand on the implied uncertainty spectrum. You must express your thoughts when developing the supply chain based on them.

Style and Grace’s customer base consists of high-end and upper-middle-income individuals. Customers for prefabricated menswear are typically women, whereas customers for tailor-made suits generally are males, as suit measuring and fitment necessitate their presence.

Customers with this socioeconomic profile are less price-sensitive and more concerned about brand and quality. They are also acutely aware of time utility, particularly men, as they work. They will value good service, particularly if it is individualised.

Connaught Place is home to Style and Grace. It is a prominent shopping district and the commercial centre of Delhi. Its geographical characteristics provide it with a particular competitive advantage. A customer might quickly leave his office for a short period for measurements or fitment.

This industry’s supply chain includes branded product suppliers, some of whom are market leaders. Established players typically offer 30 to 60 days’ credit for merchandise delivered to retailers. Unestablished suppliers of branded products may provide their goods on a ‘consignment’ basis, meaning that the goods are paid for when sold and unsold goods are returned to the maker.

For custom-made items, such shops typically employ a few skilled tailors who take the customers’ measurements and supervise the fitting. Stitching is normally done by individual tailors affiliated with the organisation.

When you examine the Style and Grace product line, you will notice two unique supply chains: branded ready-made products and custom-made products.

The demand for branded products is quite unclear. You have no idea what product the buyer will purchase. The sale will be lost if the consumer cannot find his size, style, brand, or colour. We need a responsive supply chain for branded products to avoid stock-out scenarios.

The demand for tailor-made products is definite since the consumer will come and order the product, and then manufacture will begin. We need an effective supply chain for these products to supply the product to the consumer with the proper quality and speed, i.e., at the right time.

The entire approach requires the collaboration of two distinct supply chains. The functional spectrum shows two supply chains moving in opposite directions.

An excellent idea would be to exploit the assured demand for tailor-made products to supplement the uncertain demand for branded shirts and accessories.

For instance, if a customer walks in for a suit, we could cross-sell him on the matching shirt, tie, belt, etc.

They could have catalogued that the tailor would market while measuring or fitting the customer. It should also be noted that men are generally less price-conscious than women. The supply chain for the branded products should be responsive enough to ensure that the items are available on the date the suit is scheduled to be delivered. This suggests that the concept of cross-functional teams would benefit Style and Grace.

The design necessitates a careful alignment of the two supply chains. Each functional strategy must assist the other functional strategy for Style and Grace to gain a competitive advantage by functioning in unison. We must first understand supply chain capabilities and demand uncertainties to execute the supply chain strategy successfully. Second, we must simplify the three processes to make them efficient enough to reduce the time required to complete the cycle.

Style and Grace needs a collaborative partnership with its suppliers for prefabricated products. These interactions should be based on cost considerations. Customer service must be significantly individualised and responsive. Customer relationship management becomes critical. Suppose Style and Grace can build strong client loyalty. In that case, they can take advantage of more profitable discounts offered by less established brands and better financing facilities from established firms.

All customer information must be gathered and updated regularly. This is especially significant because its consumers’ demand patterns may be unique.

Managing demand uncertainty cost-effectively can result in major benefits for a firm, ranging from lower supply chain costs to higher levels of customer service. More importantly, this can potentially be a significant competitive differentiation between Style and Grace. The demand flow strategy determines the item order, the ratio of sizes that must be ordered, the minimum base quantities, and the establishment of reorder points.

The relationship with the suppliers and the speed of processing and delivery are critical for tailor-made items. Style and Grace must maintain a collaborative or alliance with their suppliers.

Proper supplier relationship management is essential. It must assist its suppliers in building the potential to offer high-quality items. In addition, speed must be prioritised. The outfit should be delivered within a week of being fitted and should not take more than three days. The quality of service is crucial. If there are any errors, the garment should be rectified as soon as possible and delivered to the customer’s location within 24 hours.

This example highlights the concept of strategic fit and the problems in creating a supply chain. It also tackles the distinct supply chain procedures within the same business unit.

The extent to which the activities of companies operating together complement one another in such a way that they contribute to competitive advantage is determined by strategic fit. When there are mismatches between strategy and demand uncertainty, which need to be corrected, several generic techniques – namely, integrated supply chain, lead-time compression, waste elimination, inventory and capacity buffers, process flexibility, level scheduling, and process redesign – can be used. Always remember that a successful supply chain design is one whose plan is connected with the firm’s competitive strategy.

11.2  Globally Strategic Positioning

Global supply chain management is becoming an increasingly relevant issue for many firms as globalisation and offshore sourcing become more prevalent. Like traditional supply chain management, the underlying drivers driving the movement include lowering procurement costs and the risks associated with purchasing activities. The main distinction is that global supply chain management incorporates a company’s international interests and suppliers rather than a local or national focus.

Because global supply chain management typically encompasses many countries, it also brings many new challenges that must be addressed effectively. One factor that businesses must consider is overall costs. While local labour costs may be much lower, businesses must also consider the costs of space, tariffs, and other expenses associated with conducting business internationally. Companies must also account for the currency rate. Companies must research and consider these factors in their global supply management strategy.

Another major issue that must be addressed when dealing with global supply chain management is time. The productivity of overseas staff and the extended shipping delays can either positively or negatively affect the company’s lead time. Still, these times must be factored into the overall procurement plan. Other factors may be at play in this case.

For example, weather conditions on one side of the world can differ significantly from those on the other, dramatically impacting manufacturing and transportation.

Customs clearance time and other governmental red tape can also cause delays that must be planned for and factored into the whole picture.

Aside from these concerns, a company aiming to manage its global supply chain must consider several other critical difficulties. First, the organisation must decide on its overall outsourcing strategy. For various reasons, businesses may wish to keep some supply chain components closer to home. However, when other countries improve technologically, these arguments become less significant.

For example, several sections of India have become hubs for high-tech outsourced services formerly done in-house solely out of necessity.

Not only are these services offered to businesses by highly qualified overseas workers, but they are also provided at a fraction of the cost that could be provided in the United States or any other Western country.

Supplier selection is another issue that must be addressed in a global supply chain management strategy. Comparing vendor bids from within the company’s parent nation is difficult enough, but comparing bids from a diverse range of worldwide suppliers can be even more difficult. One of the first considerations businesses must make is how to make these selections, which should be firmly based on research. Too often, companies focus on the lowest price rather than taking the time to consider all other factors, especially those linked to money and time. In addition, businesses must make decisions regarding how many suppliers to use. Fewer supplies may be easier to manage but may also cause issues if one vendor cannot produce on time or attempts to leverage its supply power to achieve price concessions.

Organizations that decide to move their manufacturing operations to another country may face various difficulties. For instance, determining the number of plants required and the placement of those plants can pose logistical challenges. Considering these factors within the broader context of the global supply chain is often helpful despite these challenges.

For example, if a company employs several suppliers in and around Bangalore, India, it may make sense to locate the manufacturing unit that uses those supplies in or near Bangalore as well. This will not only result in cheaper staff costs but also lower overall shipping and tariff costs, which will save the corporation money.

11.2.1 Factors Driving Global Supply Chain Management 

Most businesses understand the importance of responding to shorter product lifecycles, higher customer expectations, variable inventory levels, and shifting costs. However, only a tiny number of firms comprehend the impact of that approach on their supply chain and the changes that will be required to go from simply being efficient to becoming truly responsive.

In today’s dynamic climate, the fast-moving consumer goods, electronics, and petroleum industries pondered the problems of developing and optimising a supply chain. The difficulties and how they have evolved—leaders from a variety of companies throughout the world are debating these topics. While they did not always organise their selection criteria in the same format, most regional and global executives agreed with the broad shift and are convinced of the move’s nature, importance, and implications.

Globalization has largely influenced the change and its ramifications for today’s logistics and supply chain. The priority or importance of the elements driving supply chain design has shifted. The following are the primary decision-making factors for global supply chain management:

1. Demand Location: This refers to the market’s geographic location and shipment profile (relative volume, size, and characteristics). If all other factors were equal, firms would prefer to place production and/or distribution centres near consumer markets. The fact that demand in Asia, India, South America, and Eastern Europe is expanding at double-digit rates encourages global corporations to relocate supply chain activity to those regions.

2. Labour Cost: The relative cost of production and distribution tasks such as manufacturing and handling. This factor drives many enterprises’ shift to low-cost production, such as in China, India, and Eastern Europe. The labour cost includes both the direct labour rate and the assigned overhead cost.

3. Material Cost: This is the overall cost of raw materials and labour, including direct and indirect costs. The direct cost includes the material’s exact purchase price, tariffs, and packaging.

4. Transportation Cost: This includes getting raw materials, transporting materials between plants and distribution facilities, and delivering goods to clients and consumers.

Tax structures and rates have always been concerning, especially when deciding between locations within a local geography. These tax breaks have usually taken the form of property tax exemptions or holidays. While similar tax breaks have been utilised to draw facilities to specific municipalities within a region, it was unusual for them to affect the area significantly. However, tax breaks have recently been expanded to include exemptions from value-added, income, and duty payment terms. As a result, regional and national tax strategies are increasingly influencing the location of manufacturing and additional value-added sites.

For example, Ireland’s use of lower value-added tax rates on electronic and pharmaceutical production has helped bring industry and employment back to the Emerald Isle.

Similarly, Singapore has introduced tax breaks for commodities with value-added operations done in the country. Physical manufacturing processes and inventory risk management are examples of value-added activities. Major Chinese towns use a similar method to recruit enterprises or industries to their industrial parks, and its success has been replicated in other countries such as Vietnam and Cambodia. Even in the United States, interest has increased in “Free Trade Zones” or “Tax Free Zones” as an inducement to attract jobs.

There has been a shift in supply chain design goals. While proximity to market demand remains the most significant element (“Location, Location, Location”), the following four criteria are ranked in order of importance (most to least important): tax policy, transportation cost, manufacturing cost, and raw material cost. In many cases, the impact of tax policy is more significant than the impact of output or labour rates.

First and foremost, supply chain managers must grasp the many aspects of municipal, state, and federal tax legislation and how they may affect supply chain design. The use of incentives for property, income, value-added, and corporation taxes, as well as their relative impact on various supply chain activities, must be carefully considered while designing a supply chain.

Second, adopting tax policy as a major consideration in supply chain architecture raises a variety of logistics and supply chain management challenges. Concerns about infrastructure, tax policy dynamics, and action integration are among them. Concerns about infrastructure pertain to the logistics and transportation infrastructure in place to support supply chain activity.

For example, while Ireland and China employed tax breaks to entice supply chain value-added industries to their respective countries, the transportation infrastructure was incapable of handling the necessary expertise. While Irish infrastructure is catching up, it will be some time before Chinese infrastructure can accommodate the increased traffic. Supply chain and logistics managers must grasp the ramifications of these infrastructure issues and be able to explain them to the planners who are evaluating the design strategy.

The term “tax policy dynamics” alludes to the fact that such tax incentives can change quickly, necessitating the need to alter supply chain design. Specifically, judgments based on tax incentives are fundamentally long-term, but tax advantages may expire after a specified time or vary due to changes in the political environment. The combination of places within the supply chain where distinct value-added activities occur is called activity integration.

For example, a tax incentive may drive production or other value-added operations or reduce inventory risk.

For example, some companies manage global or regional inventory from Singapore by having a Singaporean entity purchase products from a worldwide manufacturing operation at the customary production cost and resell them to international markets, resulting in profits generated in a tax-favoured environment. While a firm’s ability to manage the placement of worldwide earnings is limited, such measures can have a significant impact.

Third, because tax breaks and transportation costs are becoming increasingly crucial in supply chain architecture, logistics and supply chain managers must thoroughly understand their dynamics and relationships. What is the relative impact of value-added, property, and income taxes on specific supply chain activities? Similarly, altering transportation costs due to capacity bottlenecks, lane imbalances, and mode shifts caused by global activity might be an impetus for a change in supply chain network design.

These challenges necessitate an improvement in transportation cost dynamics and the incorporation of tax policy implications into supply chain academic and management education. Few supply chain managers are familiar with these topics today. Individuals involved in supply chain design require a thorough awareness of the relative impact of transportation and tax incentives and the dynamics of these incentives regarding policy, fuel volatility, congestion, and capacity. Supply chain and logistics managers must have this understanding to analyse, compare, and explain the relative trade-offs accurately.

11.3 Global Supply Chain Integration 

Material suppliers, logistics networks, industrial capacity, and markets are progressively intertwining global economies. It is natural for this connection to manifest itself in the form of regional partnerships that capitalise on physical proximity and scale economies. The three primary developing regions are North America, Europe, and the Pacific Rim. Eastern Europe is likely to join the countries of Western Europe, while South America will eventually join North America. Although much speculation exists, the ultimate conclusion involving former Soviet Union republics and African countries remains unclear. Regional alliances evolve via four stages of integration as they form. This section introduces these stages and examines the development status of each region.

11.3.1 Stages of Regional Integration 

Economic integration is divided into four stages: free trade agreement, customs union, common market, and monetary union. A free trade agreement, the first stage, reduces tariffs on trade between countries in an area. A free trade agreement is explicitly defined as follows: Each participant in the free-trade area expects to gain by specialising in the production of goods and services in which it has comparative advantages and importing from other countries in the group products and services in which it has comparative disadvantages. As a result, commerce should be established among member countries, providing them with less expensive access to a broader range of commodities.

A free trade agreement can increase or decrease interregional trade. Such agreements may also limit firms’ access to more efficient producers or markets outside their region.

The second stage of a customs union reduces tariffs between member nations and develops a standard external tariff system with other regions and non-member countries. Members must offer the group some authority over economic policy in this and the following two stages. The benefit of a customs union is that no member country may position itself to acquire a tariff advantage at the expense of other countries.

The final step of integration, a common market, has the same tariff strategy as the customs union. Furthermore, a common market allows production resources such as labour and capital and goods and people to travel freely between member countries as determined by market conditions.

Economic union is the fourth and most advanced stage of development since it entails economic policy harmonisation beyond a shared market. Economic union harmonises monetary and fiscal policies among members. While not strictly necessary, a financial union will almost certainly contain a unified currency and harmonised tax regimes. Economic unification indicates that all commodities and production factors can flow freely according to market conditions and that there would be no significant variations in monetary exchange and interest rates.

11.3.2  Integration Status

This section provides an overview of the current status of major regions around the world and a summary of existing and potential trade agreements. It also discusses the logistical consequences of each trade legislation and the strategies recommended by businesses to adapt to and take advantage of regional developments.

11.4 SC Security

Securing the global supply chain while running smoothly is critical to national security and economic prosperity. This crucial system delivers the items that fuel our critical domestic infrastructures and support our way of life. Other countries worldwide rely on the goods transported via the global supply chain system, making it a genuinely global asset that all stakeholders must work together to strengthen.

Several recent incidents have demonstrated that the global supply chain is dynamic, expanding in size and complexity, and vulnerable to various threats and hazards, including natural catastrophes, accidents, and even deliberate attacks. A unified approach is required to encompass the multiple stakeholders with supply chain roles and responsibilities.

The Strategy, which focuses on the global network of transportation, postal, and shipping routes, assets, and infrastructures (including communications and information infrastructures), is a significant step forward. It gives strategic direction to departments and agencies within the United States Government and identifies our priorities to stakeholders with whom we intend to cooperate in the future.

11.4.1 The Strategy

The Strategy specifies two objectives. The first is to encourage efficient and safe product movement, and the second is to create a global supply chain system that is prepared for and can endure evolving threats and hazards and quickly recover from disruptions. As we work to achieve our goals, two overarching concepts from the strategy will guide us. First, we will seek to energise and unify activities within the US government and with other critical stakeholders. Second, we will maintain and improve our risk management activities. The Strategy also outlines several priority areas on which we will concentrate our immediate implementation efforts. We welcome innovative and creative ideas to improve policies and activities related to these priorities or other places of interest.

11.5 International Sourcing 

Sourcing is how businesses choose suppliers, decide how many they will work with, and specify the contractual arrangements. This frequently entails establishing parameters for supplier pre-qualification, as well as supplier analysis and evaluation. The establishment of an effective supply chain is dependent on sourcing.

Procurement Object and Sourcing

Sourcing decisions must be compatible with the firm’s supply chain strategy.

The analysis is divided into two parts:

1. Internal / External Analysis:

Details about the company’s internal capabilities, as well as the capabilities of external suppliers, are gathered. This is the most important part of the review. Some responses are necessary to complete the analysis:

• What competence factors should be considered while analysing the firm and evaluating suppliers (for example, adaptability, knowing the company’s business, and technological leadership)?
• Who possesses the technological know-how to offer the good or service?
• Who can provide a high-quality product?
• Who is capable of making on-time deliveries?
• What are the costs involved with each alternative?

2. Generate / Evaluate Options:

Purchasing must determine the number of suppliers the company will use based on the information gathered. The corporation can choose from three sourcing choices or combinations of these three: Multiple Sourcing, Single Sourcing, and Network Sourcing.

It must also determine who is qualified to manufacture the product or component required by the firm and the type of relationship it will build with the supplier.

Global sourcing is a strategic approach that expands the procurement process’s scope to include companies operating in other countries. Strategic sourcing is an internal corporate process that manages the bidding and vendor selection processes.

Global sourcing has been the driving force behind the global economy’s development and progress. Involving suppliers worldwide in the bidding process for large projects lowers prices while increasing competition. Establishing this type of infrastructure enables companies to establish satellite offices worldwide. This method suits three industries: manufacturing, skilled services, and telephone contact centres.

Manufacturing costs vary worldwide due to currency translation and living costs in various nations. Labour and material expenses are lower in emerging countries than in North America, resulting in significant wage and benefit expense savings.

A developing global sourcing sector is skilled services such as purchasing, engineering, information technology specialists, and consultants. These professionals’ level of competence and knowledge enables them to give high-quality services to their companies. Because of the lower cost of living in other countries, many companies are establishing professional services departments outside North America.

In India and other nations where English is the primary language, telephone call centres have expanded tremendously. These facilities have much lower staffing, equipment, and building expenses than those in North America. Furthermore, there is a vast pool of potential employees interested in these types of job prospects.

Global sourcing has both advantages and disadvantages. Lower labour expenses, less government oversight, and a bigger pool of potential employees and consumers are all advantages of sourcing for the employer. Employees will benefit from a more significant income, better working conditions, and the opportunity to gain transferable skills. Higher costs owing to cultural and linguistic challenges are among the dangers.

Diversifying firm activities across multiple nations raises the need for business travel and local management.

Logistics and transportation are significant considerations in sourcing selections. Any company considering overseas suppliers must establish a network of staging and storage facilities in these countries. Contracts with shipping and transportation firms increase the expenses of global sourcing for manufacturing plants.

REVIEW QUESTIONS:

1. Explore the significance of aligning supply chain design with customer requirements, emphasizing the impact on customer satisfaction, competitive advantage, and overall business performance.
2. Elaborate on the coordination between two distinct supply chains within an organization’s overall strategy, highlighting the challenges and benefits of integrating different supply chain processes.
3. Discuss the importance of effective supplier relationship management in ensuring supply chain efficiency, risk mitigation, cost reduction, and innovation enhancement.
4. Define Strategic fit and its relevance in supply chain management, focusing on aligning organizational strategies, resources, capabilities, and market demands.
5. Identify and discuss the key issues and challenges associated with Global Strategic Positioning in supply chain management, such as cultural differences, regulatory complexities, geopolitical risks, and market volatility.
6. Analyze the factors driving global supply chain management, including market globalization, technological advancements, trade liberalization, outsourcing trends, and digitization.
7. Examine the evolving priorities in supply chain design, considering sustainability, resilience, agility, responsiveness, and customer-centricity.
8. Define Tax policy and its implications for supply chain operations, including tax regulations, tariffs, duties, incentives, and compliance requirements.
9. Explain the stages of Regional Integration in supply chain management, highlighting the processes of fostering economic cooperation, trade agreements, and regulatory harmonization among neighbouring countries or regions.
10. Provide a brief overview of Supply Chain Security, addressing measures, protocols, and technologies to safeguard supply chain assets, infrastructure, and operations against threats such as theft, fraud, terrorism, and natural disasters.
11. Discuss procurement object and sourcing strategies, emphasizing the objectives, methods, and best practices in supplier selection, negotiation, and relationship management.