Imagine that Peerless Products, Inc., a well-known manufacturer of consumer electronics, decides to expand its manufacturing in China. ἀ e CEO assigns the task to the vice president of manufacturing, and within two years, the company has a plant up and running in Guangdong.
Unfortunately, however, Peerless has no overall end-to-end supply chain capability to account for the fact that its lead times have increased by four weeks. ἀ is, in turn, has an impact on how the company sells its products, takes orders, plans distribution, sizes warehousing, and manages inbound and outbound logistics throughout the global markets being served by the Chinese plant. In short, although the company has lowered its product costs, it has increased its supply chain risk and possibly raised its total cost of ownership—taking into account the impact on lost sales. According to Accenture, Inc., risk in the context of global operations may be placed into three buckets: uncontrollable (such as geopolitical instability or natural disasters), somewhat controllable (e.g., the volatility of fuel prices), and controllable (for instance, forecasting accuracy or the performance of supply chain partners). Based on a study of 300 companies, however, Accenture found that the more controllable factors constitute the greatest sources of disruption. Up to 35 per cent of respondents reported being impacted by natural disasters and 20 per cent by geopolitical turmoil. But 38 per cent indicated they felt the effects of their supply chain partners’ poor performance, and 33 per cent had been hurt by logistics complexity, for instance. ἀ e consequences of failing to manage those risks are costly indeed, as negative impacts may be experienced in metrics such as sales, return on sales, operating income, return on assets, and inventories. Although few companies have mastered the management of risk in global operations, many are trying.
For example, more than 60 per cent of the executives who participated in the study of the global operation conducted by Accenture indicated that their organizations were manufacturing locally and globally and that they are using contingent suppliers and/or logistics providers. Half said they are intentionally establishing a geographically distributed supply base, and more than half cited increases in inventories and safety stock. Furthermore, 49 per cent claimed to have a formal supply chain risk management program in place already. CASE QUESTIONS: Assume you are the CEO of Peerless Products and that you are aware of your company’s lack of overall end-to-end supply chain capability. What are some of the high-level, adverse impacts on your business that may occur? What steps would you recommend be taken to help avoid the types of adverse impacts identified above? As CEO, what would be your expectations of the company’s vice president of the supply chain with respect to the potential problems at hand? How would you compare and contrast expectations of the vice president of the supply chain with those of the vice president of manufacturing? Source: Adapted from Jaume Ferrer, Johan Karlbert, and Jamie Hintlian, “Integration: The Key to Global Success,” Supply Chain Management Review (March 2007): 26–27. Copyright © 2007 Reed Business Information, a division of Reed Elsevier. Reproduced by permission.
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