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.