‘Supply chain management is the last unexplored frontier of management.’<bold>- Peter Drucker</bold>Globalisation has seen supply chain management (SCM) emerge as a new management paradigm and as a source of competitive advantage. It is essential for firms to develop an understanding of SCM issues as well as opportunities and problems in a global context to find out better solutions.This paper is aimed at providing managers an insight into the policies and issues relevant to understanding SCM and its significance in gaining competitive advantage.This paper also examines the importance of a global supply chain by examining the drivers of globalisation. It then dwells on the following steps involved in the creation and management of a global supply chain. <list list-type="simple"><list-item><label>1)</label><italic>Strategic approach for a global supply chain</italic>: Development of processes, structures, organisational networks, as well as strategic alliances and partnerships.</list-item><list-item><label>2)</label><italic>Global supply chain network</italic>: Global procurement, facility decisions, logistics planning, customer service levels and inventory management.</list-item><list-item><label>3)</label><italic>Global supply chain</italic>: Management and integration of flows of material, finance and information across the chain.</list-item><list-item><label>4)</label><italic>Maintaining and monitoring</italic>: Setting performance goals and parameters, financial controls.</list-item></list>This paper discusses some of the complexities that are unique to managing a global supply chain and how dealing with these complexities effectively can prove to be a competitive edge for companies. This paper concludes by discussing some of the risks inherent in operating a global supply chain and how these risks can be overcome.<sec id="s1-1"><title>Supply Chain Management (SCM)

A ‘supply chain’ is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, as well as distribution of these finished products to customers. Supply chains exist in both service and manufacturing organisations, although the complexity of the chain may vary greatly from industry to industry and from firm to firm.

Global SCM

Global SCM is the process of planning, implementing and controlling efficient and effective flow and storage of goods, services and related information from the point of origin to the point of consumption in order to meet customers’ requirements on a world-wide scale.

In other words, global SCM is the process of understanding and integrating the existing business activities along the value chain, with a view to improving them, while extracting efficiencies from different functional and geographic areas in order to create value for the end customer.

Drivers of Globalisation

To understand the importance of global supply chains, Professor, School of Management Studies, Vignan University, Vadlamudi, Guntur, Andhra Pradesh, India there is a need to understand some of the drivers of globalisation and their effects on the enabling of efficient global supply chains. The drivers of globalisation and their effects on global supply chains are described below.

Market Drivers

The effects of globalisation at international levels have seen the globalisation of products and services. There has been a growth of global market segments, which are receptive to, and demand branded goods and services offered by global companies such as Nike and Sony. Companies can also reduce risks incurred by dependence on limited geographic markets and saturated markets in developed countries by catering to customers across the world.

Competitive Drivers

An efficient global supply chain can offer companies cost advantages through efficient operations, and can serve as a source of differentiation by assuring timely delivery and customer service. Typically, companies, which are global competitors, have substantial cost advantages over local competitors.

Since customers have world-wide operations and require services across different locations, a company with global operations is better suited to serve their needs. It is also being observed that globalisation provides opportunities for companies to cross-subsidise across markets in order to pursue growth strategies.

Cost Drivers

Cost is one of the main reasons why companies shift production and sourcing to overseas locations, so that they can take advantage of location-specific advantages, such as skilled labour, low wages, lower cost of raw materials and lower overheads.

Moreover, when a company goes global, it gets the opportunities to exploit economies of scale and scope. Modernisation of transportation methods and the number of options available to transport goods have greatly decreased costs and reduced lead times. This means that it has become competitive for companies to locate their operations in locations, which offer greatest efficiency, lowest total costs and serve world markets from these locations.

Technology Drivers

In the era of information technology, development in communication and information technology such as proliferation of the Internet and modernisation of telecommunication networks worldwide have reduced the time required to communicate information across the globe. The conveying of real-time information, the use of electronic data interchange and other technologies have increased visibility across the supply chain and facilitates the management of information. This has meant that it is possible for companies to coordinate global operations effectively using technology.

Political Drivers

Many governments across the world are beginning to recognise the benefits of globalisation, and are increasingly allowing their previously closed economies to be open to global trade. This along with the emergence of organisations such as the WTO has contributed to the decrease in tariffs and regulations worldwide.

Developing a Structure

While developing a structure, various functional activities to be performed need to be examined. These activities are separated on the basis of characteristics, such as delivery time, service characteristics, labour intensity and percentage of outsourcing.

The location of plants and other infrastructures in proximity to suppliers and customers forms a vital part of the strategy.

Developing a Process

Developing a process refers to planning the sequence of operations through the supply chain. These include production planning, scheduling, inventory control and transportation, all of which have a bearing on the chain or proceeding/subsequent processes. Optimising the entire process is far more important than optimising each link.

Development of Organisational Networks

Companies need to identify their core competencies and look to outsource non-value-added tasks. This outsourcing leads to the search for outside parties that are capable of meeting these functional needs at favourable terms. Another aspect of an organisational network is the prevalence of information technology that helps manage business activities along the supply chain with its external partners.

Partnerships and Alliances

Global companies have partnerships and alliances that stretch across the globe and encompass various business activities. It is important for these associations to be mutually beneficial and compatible in terms of work ethos and objectives.

Global Supply Chain IssuesGlobal Sourcing

Sourcing from low-cost countries is the obsession of the day at multinationals around the world. Pushed by maturing markets and price competition from competitors in those low-cost locations, companies in all industries are aggressively assessing new locations for sourcing components and manufacturing goods.

Global sourcing is the process of identifying, evaluating, negotiating and configuring supply across multiple geographies to reduce costs, maximise performance and mitigate risks.

Global sourcing differs from international purchasing in scope and complexity. International purchasing merely refers to a commercial transaction between buyers and sellers located in different countries.

However, global sourcing for most organisations is a progression from international purchasing, which is illustrated in the diagram given below:

Figure 1:Global Sourcing and International Purchasing LevelsSource: Minahan, Tim, ‘Global Sourcing - What You Need to Know to Make it Work’, www.searchcio.com, November 2003.

Critical Success Factors for Global Sourcing

The critical success factors that determine the success of a global sourcing strategy are defined below:

Personnel with required knowledge, skills and abilities

Availability of required information

Awareness of potential global suppliers

Time for personnel to develop global strategies

Availability of suppliers with global capabilities

Ability to identify common requirements across buying units

Operations and manufacturing support of the global sourcing process

Internal customer buy-in to global sourcing strategy

Direct site visits to suppliers

Issues in Global ProcurementQuality

Suppliers overseas might not have the same stringent quality controls that are required by a firm. Low cost must not be the chief driver in the global sourcing strategy, since it often brings with it poor quality. Service-level agreements are used to enforce quality standards upon suppliers based on requirement specifications, number of rejects and delays.

Just-in-Time Sourcing

A large number of apparent incompatibilities exist between the pursuits of just-in-time (JIT) policies on one hand, and the achievement of global sourcing efficiencies, on the other. JIT calls for single/limited sourcing, establishment of closer buyer–seller relationships, frequent and small lot-size deliveries, enhanced supplier reaction time and supplier flexibility.

Establishing an optimal global sourcing strategy renders it impossible to satisfy JIT requirements. However, many companies have synthesised the two strategies with a high degree of planning in logistics and collaboration between buyers to combine lot shipments.

Facility Decisions

Facility decisions are important to exploit location cost advantages, minimise transportation costs and increase responsiveness. The basic rule of SCM is to be close to either the suppliers or the market. This is especially important when a company has a global supplier and customer base.

The parameters based on which facility location decisions are made are typically as follows:

Demand patterns

Volume patterns

Location of suppliers

Location of customers

Transportation

Logistics

Logistics is that part of the supply chain process, which plans, implements and controls efficient and effective forward and reverses flows as well as storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers’ requirements⁴.

With companies competing on a global basic, logistics and its proper strategic planning have become especially critical when considering the complex interplay of locations, plants, warehouses, vendors and customers situated in different parts of the world.

The development of a sound global logistics strategy requires a solid understanding of basic logistics, industry business dynamics, current and emerging technologies and initiatives, and most importantly, an understanding of the firm's current and future goals within the marketplace. In addition, component areas of the supply chain and operations must be analysed and incorporated where appropriate, to harness the greatest potential for cost benefits, competitive advantage and customer service.

Transportation

One of the major challenges in logistics management is deciding the mode of transport to use for movement of goods. Below is a table with the list of parameters, which are normally used to select the transportation mode.

Figure 2:

The Comparison of Modes of Transport

	Rail	Road	Water	Air
Point to Point	Sometimes	Yes	Sometimes	No
Price	Low	High	Very Low	Very High
Speed	Slow	Fast	Very Slow	Very Fast
Flexibility	Low	High	Low	Very Low
Risk of Loss and Damage	High	Medium	Medium	Low
Reliability	Medium	Medium	Low	Very High
Packaging Needs	High	Medium	High	Low
Environmental Impact	Low	High	Low	Medium

Inventory

Managing inventory becomes much more complex when dealing with distances, uncertain demands and different customer service requirements of internationally dispersed markets. Issues such as lead-time uncertainty, longer forecasting periods and unreliable transportation increase the complexity in inventory management in a global supply chain.

Customer Service

The company's corporate strategy stipulates the service level, delivery periods and other customer service features that serve to differentiate the company's products and services from those of their competitors.

Too often, unrealistic goals strain the supply chain when appropriate measures such as adjusting the operating capacity, improving distribution efforts or stocking inventory are not carried out.

The main challenge for customer service in global markets is that customer service must be tailored to suit the market. Cultural factors have a profound impact on the way customer service is defined.

Enabling a Global Supply Chain

Enabling a global supply chain is essentially integration and management of the flows of materials, finance and information. It is important for the efficient operations of a supply chain that the flows in the supply chain are visible to all participants in the supply chain. It is also important to have measures in place to facilitate the creation of a global supply chain and to satisfy the three main criteria of managing flows of capital, information and materials.

Material Flow

Material flow is the main objective of supply chain. Material flow in a global supply chain is from suppliers, who provide materials and sub-assemblies, to the manufacturers, who build, assemble, convert or furnish a product or service. The finished products then pass to distributors, who transport and deliver them to the customers.

Figure 2:Information, Financial and Material Flows

Information Flow

Information flow in a supply chain is typically upstream where customers order from distributors, who then order from manufacturers and so on through the supply chain. However, downstream flows also occur in a supply chain, where suppliers and manufacturers inform each other of the status of goods being transported, inventory levels, price and so on.

Information flows that typically happen across a global supply chain corresponding to the different stages are:

Financial Flow

To facilitate the management of financial flows within the supply chain, appropriate and uniform financial measures and accounting methods should be incorporated throughout the company. There are issues that a company has to address when managing a global supply chain, as different countries follow different accounting methods; and it has been found that subsidiaries of the same company, be it in the same country or different countries, sometimes follow different accounting measures. A uniform accounting measurement and financial documentation helps increase both visibility and control, while enhancing accountability and responsibility. Activity-based costing also helps to track costs and efficiently manage them.

Stage	Information
Supplier Information	Prices of raw materials, lead times, order status, payment arrangements
Manufacturing Information	Cost of Finished goods, lead times, batch sizes, product quality
Distribution Information	Transportation status, cost of transportation, modes of transport used, inventory, lead times
Demand Information	Customer requirements, quantities required, delivery dates required

Building a Relationship between Flows

Supply chain information and physical flows can only operate efficiently and effectively if there are appropriate supply chain relationships between all supply chain parties. These relationships exist between suppliers, the firm and customers.

Technology is the chief enabler to form these relationships between suppliers, manufacturers and customers. We now look at some of the technologies available to supply chain managers to integrate physical, financial and information flows.

Enterprise Application Software

Companies are increasingly using various enterprise application software provided by companies such as SAP and i2, which help in enterprise resource planning and allocation of resources, while increasing control and visibility across the supply chain.

Radio Frequency Identification (RFID)

RFID technology is revolutionising the way material flows are handled in SCM. It helps manufacturers optimise supply chain effectiveness by increasing the visibility of material flow, collecting real-time data, improving forecasting and production processes, as well as in smoothing out the ebb and flow of supply and demand. The specific ways in which RFID technology can help is once RFID tags are inserted onto products or containers, functions such as route deviation reporting, GPS container tracking, scanning at points of receipt, intermediate points and loading points can be carried out.

Online Transactions

The Internet has made it possible to electronically transfer money across the world with ease and safety. Paper-based transactions are slowly being replaced by online transactions. ERP systems also offer tools that enable financial data to be maintained in a consistent manner across the organisation while accounting for regional differences.

Maintaining and Monitoring a Global Supply Chain

It is imperative to maintain and monitor a global supply chain from the stage of its inception in order to make adjustments and improvements, and correct any errors.

Establishing goals and performance metrics aids in determining the effectiveness of the supply chain, together with abetting improvement measures and accountability of various stakeholders.

Some of the commonly used metrics are mentioned below:

Inventory Monitoring

These metrics will monitor the inventory levels maintained in terms of order fill rates and number of back orders, etc.

Financial Controls

Bottom line results, in terms of costs reduction, revenue increase and increases in profitability, lend credence to an effective supply chain and can determine the extent of value creation. Tools such as activity-based costing and the DuPont Model are useful for financial analysis.

Managing Complexity

As the supply chain begins to acquire global dimensions, there are several elements that add to the complexity of the chain, making it difficult to manage and optimise. These complexities are not generally present in a domestic supply chain within the confines of one nation.

It is reported that those companies that are able to manage these complexities in the global supply chain become much more profitable than their counterpart global companies⁵. We now look at each of these elements in detail.

Financial Transactions

Different countries follow different accounting standards and financial documentation standards. Interaction with so many suppliers and distributors across the world can bring about inefficiencies in the financial supply chain.

Internet-based solutions and e-commerce have been gaining ground in many areas, but the financial community still remains outmoded and paper based to a large extent. Predominantly, four basic options must be considered for financial transactions:

Open account

Documentary collection

Letter of credit

Cash in advance

Each of these methods has their own drawbacks, and the most commonly used method is the letter of credit.

Financial transactions have yet to keep pace with other advances taking place in the global supply chain. Uniform accounting methods and financial measures must be incorporated throughout the company and its subsidiaries to enhance accountability and responsibility. Internet-based transactions make for easy paperless work.

Optimisation of financial processes, also known as financial supply chain, is essential if an organisation wants to compete successfully in today's global business environment.

Exchange Rates

Volatility in exchange rates makes global sourcing and fulfilment complex tasks, as the relative cost of the goods can vary in time making the supply chain inefficient.

Companies can take a number of steps to buffer themselves against the effects of a volatile currency. Some of these measures are described below:

When the company obtains its products from multinational vendors, the firm must choose its vendors and the quantity to source from each. These decisions can be adjusted dynamically at the expense of switchover costs in response to fluctuating exchange rates.

By having excess capacity or a number of suppliers spread across the world, a purchasing manager could leverage the changing exchange rates to the company's advantage by sourcing from countries with weakening currencies and limiting production in countries exhibiting strengthening currencies.

Information Systems, which have the capability to track and analyse capacity utilisation and exchange rates to adjust the flow of materials, are essential for the success of these measures.

Trade Regulation

Network designs are significantly affected by a country's policies towards trade and the restrictions and concessions that it offers to international traders.

Trade Zones

Trade zones are areas within a country that permit shippers to land, store and process goods without incurring any import duties or domestic taxes. Leveraging the use of these trade zones for operations can bring down supply chain costs.

Conclusion

In benchmarking SCM practices of hundreds of companies, we have learned that many companies actually achieve competitive advantage by leveraging the management of their supply chains.

Achieving greater profitability (greater sales with lower inventory levels) and increasing market share, not just from making a quality product, but from realising who are their key customers, what they value (retail store traffic and sales, with lower inventory levels) and treating them well – sources of SCM competitive advantage for both the vendor and the retailer at a national or global level. All these were achieved because companies know their core competencies and outsource non-core competencies to their supply chain.

Managing the Global Supply Chain: A Competitive Advantage to Firms