The Impact of Globalization on Supply Chain Networks

Globalization offers companies opportunities to simultaneously increase revenues and decrease costs. In its 2008 annual report, P&G reported that more than a third of the company’s sales growth was from developing markets with a profit margin that was comparable to developed mar­ket margins. By 2010, sales for the company in developing markets represented almost 34 percent of global sales. Most of Samsung’s sales were outside its home country of Korea. In 2012, over­seas revenue represented 86 percent of sales for Samsung. While maintaining a dominant position in developed markets like the United States, it had also penetrated effectively into emerging mar­kets such as China and India. By 2012, Samsung was the leading vendor of smartphones in both markets. Clearly, globalization has offered both P&G and Samsung a significant revenue enhance­ment opportunity.

Apparel and consumer electronics are two industries for which globalization has offered significant cost reduction opportunities. Consumer electronics focuses on small, lightweight, high-value items that are relatively easy and inexpensive to ship. Companies have exploited large economies of scale by consolidating production of standardized electronics components in a single location for use in multiple products across the globe. Contract manufacturers such as Foxconn and Flextronics have become giants with facilities in low-cost countries. Apparel manu­facture has high labor content, and the product is relatively lightweight and cost effective to transport. Companies have exploited globalization by shifting much apparel manufacturing to low-labor-cost countries, especially China. In the first half of 2009, about 33 percent of U.S. apparel imports were from China. The net result is that both industries have benefited tremen­dously from cost reduction as a result of globalization.

One must keep in mind, however, that the opportunities from globalization are often accom­panied by significant additional risk. In a survey conducted by the consulting company Accenture in 2006, more than 50 percent of the executives surveyed believed that supply chain risk had increased as a result of their global operations strategy. For example, in 2005, hurricane damage to 40,000 acres of plantations decreased Dole’s global banana production by about 25 percent. Com­ponent shortage when Sony introduced the PlayStation 3 game console hurt revenues and Sony’s stock price. The ability to incorporate suitable risk mitigation into supply chain design has often been the difference between global supply chains that have succeeded and those that have not.

The Accenture survey categorized risk in global supply chains, as shown in Table 6-1, and asked respondents to indicate the factors that affected them. More than a third of the respondents were affected by natural disasters, volatility of fuel prices, and the performance of supply chain partners.

Crude oil spot price and exchange rate fluctuations in 2008 illustrate the extreme volatility that global supply chains must deal with. Crude started 2008 at about $90 per barrel, peaked in July at more than $140 per barrel, and plummeted to below $40 per barrel in December. The euro started 2008 at about $1.47, peaked in July at almost $1.60, dropped to about $1.25 at the end of October, and then rose back to $1.46 toward the end of December. One can only imagine the havoc such fluctuation played on supply chain performance in 2008! Similar fluctuations in exchange rates and crude prices have continued since then.

The only constant in global supply chain management seems to be uncertainty. Over the life of a supply chain network, a company experiences fluctuations in demand, prices, exchange rates, and the competitive environment. A decision that looks good under the current environ­ment may be quite poor if the situation changes. Between 2000 and 2008, the euro fluctuated from a low of $0.84 to a high of almost $1.60. Clearly, supply chains optimized to $0.84 per euro would have difficulty performing well when the euro reached $1.60.

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. Between 2007 and 2008, auto sales in the United States dropped by more than 30 percent. Whereas all vehicle categories were affected, the drop in SUV sales was much more significant than the drop in sales of small cars and hybrids. SUV sales dropped by almost 35 percent, but small car sales actually increased by about 1 percent. Honda dealt with this fluctuation more effectively than its competitors because its plants were flexible enough to produce both vehicle types. This flexibility to produce both SUVs and cars in the same facility kept Honda plants operating at reasonably high levels of utilization. In contrast, companies with plants dedicated to SUV production had no option but to leave a lot of idle capacity. In the late 1990s, Toyota made its global assembly plants more flex­ible so each plant could supply multiple markets. One of the main benefits of this flexibility is that it allowed Toyota to react to fluctuations in demand, exchange rates, and local prices by altering production to maximize profits. Thus, supply, demand, and financial uncertainty must be considered when making global network design decisions.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.