Chapter 6 COPY Flashcards
Impact of Globalization on supply chain Networks
Globalization offers companies opportunities to simultaneously grow revenues and decrease costs
-The opportunities from globalization are often accompanied by significant additional risk
There will be a good deal of uncertainty in demand, prices, exchange rates, and the competitive market over the lifetime of a supply chain network
Therefore, building flexibility into SC operations allows the SC to deal with uncertainty in a manner that will maximize profits
Companies have failed to gain from offshoring for two primary reasons
- focusing exclusively on unit cost rather than total cost when making the offshoring decision.
- ignoring critical risk factors.
The Offshoring Decision: Total Cost
Total cost can be identified by focusing on the complete sourcing process
Offshoring to low-cost countries is likely to be most attractive for products with:
- High labor content
- Large production volumes
- Relatively low variety
- Low transportation costs
Discounted Cash Flow (DCF) analysis
evaluates the present value of any stream of future cash flows and allows management to compare two streams of cash flows in terms of their financial value.
DCF analysis is based on the fundamental premise that (based on the time value of money) – a dollar today is worth more than a dollar tomorrow
because a dollar today may be invested and earn a return in addition to the dollar invested.
The present value of future cash flows is found by using a discount factor.
If a dollar today can be invested and earn a rate of return ‘k’ over the next period, an investment of $1 today will result in 1 + k dollars in the next period.
An investor would therefore be indifferent between obtaining $1 in the next period or $1/(1+k) in the current period.
Thus, $1 in the next period is discounted by the
Discount Factor = 1/ (1+k)
to obtain its present value.
A manager makes several decisions when designing a supply chain network. For instance:
- Should the firm sign a long-term contract for warehousing space or get space from the spot market as needed?
- What should the firm’s mix of long-term and spot market be in the portfolio of transportation capacity?
- How much capacity should various facilities have? What fraction of this capacity should be flexible?
If uncertainty is ignored, a manager will always sign long-term contracts (because they are typically cheaper) and avoid all flexible or backup capacity (because it is more expensive).
Such decisions can hurt the firm, however, if future demand or prices are not as forecast at the time of the deacon.
Bellman’s Principle
for any choice of strategy in a given state, the optimal strategy in the next period is the one that is selected if the entire analysis is assumed to begin in the next period.
This principle allows the optimal strategy to be solved in a backward fashion starting at the last period.
Expected future cash flows are discounted back and included in the decision currently under consideration.
The value of the node in period 0 gives the value of the investment, as well as the decisions make during each time period.
Uncertainty in demand and economic factors should be included in the financial evaluation of supply chain design decisions.
The inclusion of uncertainty typically decreases the value of rigidity and increases the value of flexibility.
Decisions made during the supply chain design phase regarding significant investments in the supply chain, such as the number and size of plants to build, the number of trucks to purchase or lease, and whether to build or lease warehouse space,
cannot be altered in the short term.
Decisions made during the supply chain design phase regarding significant investments in the supply chain, such as the number and size of plants to build, the number of trucks to purchase or lease, and whether to build or lease warehouse space,
often remain in place for several years.
Decisions made during the supply chain design phase regarding significant investments in the supply chain, such as the number and size of plants to build, the number of trucks to purchase or lease, and whether to build or lease warehouse space,
define the boundaries within which the supply chain must compete.
Long-term contracts for both warehousing and transportation requirements will be more effective if
the demand and price of warehousing do not change in the future.
and
the price of warehousing goes up in the future.
Short-term contracts for both warehousing and transportation requirements will be more effective
if either demand or the price of warehousing drops in the future.
The degree of demand and price uncertainty has
a significant influence on the appropriate portfolio of long- and short-term warehousing space that a firm should carry.
Uncertainty of demand and price
drives the value of building flexible production capacity at a plant.
If price and demand do vary over time in a global network,
flexible production capacity can be reconfigured to maximize profits in the new environment.
A firm may choose to build a flexible global supply chain even in the presence of little demand or supply uncertainty if
uncertainty exists in exchange rates or prices.
The present value of a future stream of cash flows is what that stream
is worth in today’s dollars.
The process of evaluating the present value of any stream of future cash flows so that management can compare two streams of cash flows in terms of their financial value is
discounted cash flow (DCF) analysis.
The present value of future cash flow is found by
using a discount factor.
The discount factor used to obtain the present value of money in the next period where k represents the rate of return is
1/(1+k)
The rate of return k is also referred to as the
discount rate, hurdle rate, and opportunity cost of capital.
The net present value (NPV) of a stream of cash flows is equal to
the sum of all cash flows for all periods being considered discounted by the rate of return for each period.
A negative NPV (net present value) for an option indicates that the option will
lose money for the supply chain.
The decision with the highest NPV (net present value) will provide a supply chain with
the highest financial return.
In reality, demand and prices are
highly uncertain and likely to fluctuate during the life of any supply chain decision.
For a global supply chain, exchange rates and inflation are
likely to vary over time in different locations.
The binomial representation of uncertainty is based on the assumption that when moving from one period to the next, the value of the underlying factor (such as demand or price)
has only two possible outcomes - up or down.
in the commonly used multiplicative binomial, it is assumed that the underlying factor
moves up by a factor u > 1 with probability p.
or
moves down by a factor d < 1 with probability 1 - p.
The multiplicative binomial can be used for factors like demand, price, and exchange rates that cannot become negative because it
cannot take on negative values.
A logical objection to both the multiplicative and additive binomial is the fact that the underlying factor
takes on only one of two possible values at the end of each period.
A decision tree is
a graphic device used to evaluate decisions under uncertainty.
Decision tree analysis is based on Bellman’s principle, which states that for any choice of strategy in a given state,
the optimal strategy in the next period is the one that is selected if the entire analysis is assumed to begin in the next period.
The first step in decision tree analysis methodology is to
identify the duration of each period (month, quarter, etc.) and the number of periods T over which the decision is to be evaluated.
The last step in decision tree analysis methodology is to
start at period T, work back to Period 0, identifying the optimal decision and the expected cash flows at each step. Expected cash flows at each step in a given period should be discounted back when included in the previous period.
Uncertainty in demand and economic factors should be included in the financial evaluation of supply chain design decisions, because
the inclusion of uncertainty may have a significant impact on this evaluation.
Flexibility should be valued by taking into account uncertainty in demand and economic factors. In general, flexibility will tend to
increase in value with an increase in uncertainty.
A major factor that makes the decision tree methodology quite powerful is
the choice of discount rate.
The appropriate discount rate used in decision tree methodology
should be risk-adjusted and risk may vary by period and decision node.
Firms should use simulation for evaluating decisions when
Underlying decision trees are very complex and explicit solutions for the underlying decision tree are difficult to obtain.
In a complex decision tree there are
thousands of possible paths that may result from the first period to the last.
Simulation models
require a higher setup cost to start and operate compared to decision tree tools.
Strategic planning and financial planning
should be combined during supply chain network design.
The evaluation of supply chain networks
should use multiple metrics.
Financial analysis should be used as
an input to decision making, not as the decision-making process.
One of the best ways to speed up the process of financial analysis and arrive at a good decision is to
use estimates backed up by sensitivity analysis when it appears that finding a very accurate input would take an inordinate amount of time.
The tailored strategy “Focus on low-cost, decentralized capacity for predictable demand” follows which risk mitigation strategy?
Increase capacity
A labor dispute is a risk driver to be considered during network design. What category does a “labor dispute” belong?
Disruptions
Simulation methods are very good at evaluating decisions when
there are different forms of uncertainty.
The textbook mentions that decision makers should design global supply chain networks considering a portfolio of strategic options including
the option to wait, build excess capacity, build flexible capacity.
