Introduction
A global supply chain is composed of processes, interrelated entities, and resources that make and deliver products and services to customers across many countries (Drake, 2012). Due to globalization and increase in international trade, companies are operating and sourcing products and services in many countries. There has been a rise in multinational companies with plants or stores in different countries. This underscores the need for global supply chains to enhance the operations of these companies. Some companies use global supply chains to source for products.
Benefits of global supply chains
Global supply chains enable a company to compete all over the world. A company with a global supply chain can serve customers in any country (Drake, 2012). They also enable a company to expand its business and exploit new markets. When a company is sourcing products in different countries, it is easier to expand into those countries or other countries.
Global supply chains also reduce costs for businesses involved. Firms involved in the global supply chain share costs hence the cost to each firm is reduced. This further reduces the operation costs of a company hence enhancing its competitiveness in the market. Besides, companies can access products at lower costs in the global supply chain.
Global supply chains also reduce inventory costs by reducing the amount of inventory a company has to maintain to meet the needs of its customers. When a business has sufficient suppliers throughout the world, it does not need to hold a large amount of inventory (Skjott-Larsen, 2007). Furthermore, it is easier for a company to deliver products to customers in any part of the world if it is within global supply chains. For instance, if a company has a client in Japan, it does not need to supply goods from the USA if there is a supplier in Japan who can deliver the materials. This also reduces the time taken to process customers’ orders.
Global supply chains are more flexible than local supply chains. Therefore, they enhance the company’s ability to meet the dynamic needs of customers across the globe. They enhance operational flexibility thus improving the performance of companies involved.
Global supply chains also guarantee the availability of products since companies have more options than in the case of local supply chains. This also spreads the risk of shortages in products (Drake, 2012). For instance, if the production of a raw material in the US is affected by occurrences in the country, a US company can easily access the materials from other countries where production is not disrupted. Global supply chains help companies by providing valuable knowledge and experience. Through global supply chains, companies can learn from each other. A US company can learn about doing business in Japan from a Japanese supplier or other members of the supply chain. Besides, the supplier can help the company to gain access to the Japanese market easily.
Threats associated with global supply chains
Global supply chains are exposed to several risks that affect businesses as well as customers. These include supply risks, security, policy, operational, macro, among other risks. Supply risks include the risk of disruptions in supply, technology uncertainty, changes in design, and quality among other risks (Manuj & Mentzer, 2008, p. 139). Adverse occurrences in the global markets can cause disruptions in the supply chain. In some cases, the global supply chain is more vulnerable to global dynamics than the local supply chains. Global supply chains also have quality issues since there are differences in quality standards across the world. Global supply chains are also exposed to technological changes and changes in design.
Global supply chains also face security risks. An efficient global supply chain requires a well-established information system to enhance coordination. Information systems face the threat of cyber-attacks that may compromise the system (Manuj & Mentzer, 2008). The last few years have seen the rise in the number of cyber-attacks. The also face security breaches by violent extremist groups. Italian authorities found a suspected al-Qaeda member in a container headed for Canada (Welborn & Kasten, 2007). Terrorist groups may use the global supply chains to transport explosive materials for conducting terror attacks.
Global supply chains also face policy risks. Not every country has liberalized its market and most countries still use means of trade restriction (Skjott-Larsen, 2007). A country may impose quotas on products and services from other countries making. A country may also impose sanctions against other countries thus preventing any trade international trade between the countries.
They also face the risk of changes in macroeconomic variables such as interest rates, exchange rates, among other variables (Skjott-Larsen, 2007). The Fed’s funds rate affects the entire global economy thus affects the global supply chain. Companies in the global supply chain are also affected by changes in exchange rates that lead to an increase in liabilities or a decline in receivables.
Operational risks include insufficient manufacturing capacity, process variations, among other factors. Some countries or companies in the global supply chains have insufficient manufacturing capacity hence may not be able to meet the demands of customers globally effectively. Variations in processes may cause quality differences and make integration difficult. Companies also face demand risks such as the introduction of new products, changes in demand, inaccurate demand forecast (Bullwhip effect), among other demand risks.
Impact of global supply chain threats on consumers and companies
Supply risks reduces companies’ access to products. Inadequate products limit the companies’ capacity to serve customers globally. When there are disruptions in supply, consumers suffer from lack of adequate products. Prices of products also increase hence reducing consumer surplus.
Policy risks such as quotas and sanctions adversely affect consumers as it reduces competition in the market (Manuj & Mentzer, 2008). Domestic firms benefit from less competition and may charge higher prices. They also affect the competitiveness of foreign firms in the country’s domestic market. Other policy risks include regulations on transfer pricing, import duties, among other policies.
Macro risks affect firms and consumers both positively and negatively depending on the nature of the changes. An increase in the exchange rate may affect the competitive of a company by making the products of the competitors either more or less expensive. Favorable movements in the exchange rate benefit consumers. Demand risks such as the threat of introduction of new products by competitors negatively affect the companies but benefit the consumers.
How to mitigate global supply chain risks
Companies involved in the global supply chains should identify and measure the risks they face and take appropriate actions to mitigate such risks. Risk management strategies are necessary to avoid losses when adverse events occur. Businesses can use the following risk management strategies:
Avoidance
In some cases, the risk is higher than the acceptable level hence the best option will be to avoid it. This involves avoiding operations in certain markets or dealing with certain suppliers and customers that present a higher than normal risk. The company has to consider implications of this on the demand and supply before making the decision to avoid the risk.
Hedging
Companies can use hedging strategies to reduce the global supply chain risks. They can use options, forward, futures and swaps contracts to mitigate interest rate and exchange rate risk as well as risks of changes in prices.
Risk transfer or sharing
Companies can transfer or share these risks through measures such as off-shoring, outsourcing and contracting. Outsourcing and off-shoring transfers the risk involved to suppliers.
Control
Companies can mitigate global supply chain risk by gaining control in the operations of supplies. This can be done through vertical integration by acquiring stakes in suppliers. This enables the companies to control pricing and reduce access of competitors to the products supplied by the acquired suppliers.
Conclusion
Global supply chains are beneficial to companies since they reduce supply chain costs and enhance the competitiveness of companies. Besides, they provide opportunities for companies to enter new markets. Companies face global supply chain risks such as policy risk as well as changes in macroeconomic factors like interest rates, exchange rates, and inflation. They also face the risk of disruption in supply, operational risks, among other risks. These risks affect both companies and consumers. Companies can mitigate such risks through measures such as avoidance, risk transfer, hedging, control, among other methods.
References
Drake, M. (2012). Global supply chain management. [New York, N.Y.] (222 East 46th
Street, New York, NY 10017): Business Expert Press.
Manuj, I. & Mentzer, J. (2008). GLOBAL SUPPLY CHAIN RISK MANAGEMENT.
Journal Of Business Logistics, 29(1), 133-155. http://dx.doi.org/10.1002/j.2158-1592.2008.tb00072.x
Skjott-Larsen, T. (2007). Managing the global supply chain. Copenhagen: Copenhagen
Business School.
Welborn, R. & Kasten, V. (2007). Securing global supply chains: Seven reasons why “getting
it done” is so hard. Employ. Relat. Today, 33(4), 1-6. http://dx.doi.org/10.1002/ert.20123
