Describe the steps you would go through in analyzing whether a memory chip currently being produced in Santa Monica, California for a computer manufacturer in the Silicone Valley should be outsourced to a location somewhere in Asia.
The following steps are performed for deciding whether the memory chip can be sourced from a manufacturer located somewhere in Asia:
Step 1: The process is defined. The first step that one has to take for a location decision making for network design is to define the process steps. A supply chain transformation team who will be responsible for all the steps in the transformation is constituted. The team will be aware of all business needs, strategies and business goals. The parameters and objectives for the design are set and the potential third party suppliers are involved in this.
Step 2: The Supply Chain audit is performed. As a result of this audit, the following information is obtained 1) Customer requirements or environmental factors, 2) The crucial goals and objectives for the supply chain, 3) Status of the current supply chain, 4) Understanding of the key activities involved, 5) Benchmarks of Key Performance Indicators for factors such as cost, 6) Gaps identification, and 7) Measurable key objectives for the network redesign.
Step 3: The alternatives for the network supply chain are examined. This is done by applying optimization, simulation, or heuristic or a combination of models to the current as well as the proposed supply chain design. The optimization model selects the best solution, simulation model replicates the functioning of the supply chain with the new location as part of it (thereby revealing any issues), and the heuristic model looks at different probable scenarios without providing an optimum solution. Each type of model has a different goal so depending on the goals, the right type of model or models are applied. The outcome of this step will be to gauge which network design (or in this case, the location) is best suited for achieving the business goals. A what-if analysis is conducted to check the robustness of the selected network design. The output of this step could be Key goals and objectives regarding the logistics, profile of the current supply chain, benchmark values for costs, Key performance measures, Identification of gaps, Key objectives for the intended network design, and other related information.
Step 4: A facility location analysis is conducted. Quantitative and qualitative analyses are conducted to analyze the attributes of each locale. A location analysis team is constituted, which will look deeply into the location attributes. If required, this team may utilize the services of a consulting company to assist them in this effort. While the quantitative analysis is already done in step 3 so the qualitative factors such as the labor climate, taxes, incentives for industries, cost of land and utilities and so on are analyzed.
Step 5: The decision regarding the network design and location is made. The outcome of step 3 and 4 is the supply chain design that suits the best, if the decision to shift to the supplier for memory chips from Asia has been found to be beneficial. If the previous steps show that it is not beneficial to shift to the new supplier from Asia, then it will be business as usual and the plan to redesign the supply chain will be discarded.
Step 6: If the previous steps decide that it is beneficial to do a supply chain redesign, then an implementation plan is developed. A roadmap for implementing the restructuring of the supply chain network is prepared. Firm resources are committed and the restructuring implemented.
What factors would you consider in this analysis? Be thorough in considering all of the potential factors that might affect the outcome of your decision.
The supply chain design has become very complex due to the globalization of the businesses spanning several international borders. Amongst those decisions, one of the more complex problems is the selection of the supplier location for the business. The following table shows one way to aid in the selection process. It uses the PERC model of Hierarchical Structuring. The following factors (indicative) were considered in the Hierarchical Structuring using PERC Model. Each factor is again given weights based on the business necessity to help arrive at the right decision.
Source:
Describe the effect on your supply chain if the decision was made to offshore the sourcing of this component to Asia. Consider transportation, inventory, management, and other costs that would be affected. Also consider the risks involved in sourcing overseas.
The effect of outsourcing the memory chip component on the supply chain is on multiple fronts. When the network design was completed and the decision for outsourcing the component is taken, then it means that the net effect of the decision on the organization is positive. The decision will have negative impact the costs of transportation as the memory chips have to be transported from Asia instead of procuring it from Santa Monica, California. Since the delivery cannot be guaranteed with the same level of confidence as earlier, more inventory has to be managed resulting in increase in inventory costs. There is a requirement for more management oversight due to the distance resulting in increase in management cost. The flexibility of the supply chain is impacted as the supplier may or may not be able to respond quickly to requests for any changes. The other parts of the supply chain have to make up for this lack of responsiveness and distance from host country and supplier. The service levels might be impacted negatively due to the distance. However, the company will be able to access world class capabilities and can accelerate reengineering process as the Asian companies have good foundry capabilities. Since they supply for many clients, they are continually upgrading their foundry technologies to stay in business and those benefits are immediately available to the clients. They are also quite capable for quick ramp up and ramp down of production capabilities and it is a benefit. Due to the growing awareness and legislations, it is important to conduct regular supplier audits to ensure that they are not violating any U. S. legal laws such as using child labor, prohibited raw material, or similar violating the supplier code of conduct. Due to the distance, it becomes difficult to do these audits.
The risks due to offshoring can be supply related risks, which result in rate disruptions and delays. Political risks in the supplier country could be a risk resulting in disruptions. There is a possibility that a competitor may acquire the supplier and potentially lock-out supplies. Acts of god like volcano eruption, earthquake and acts of man such as war and terrorism and other similar situations are possible, disrupting supplies. Misapplied investment due to wrong planning of capacity can be a risk. IP laws in Asia are not as strict as those in the U.S., which is an issue. Single sourcing helps reduce the costs due to economies of scale but could hurt the company in case there are any disruptions. Supplier delays can cause delays in material flow, production quality issues or yield issues could affect the schedules due to which inventories might have to be maintained, which hurts the financial performance. Loss of reputation due to lack of quality, risk due to cultural differences (communication may be misread and wrong action is taken), environmental risk and compliance cost, and fluctuating exchange rates. A bigger risk could be that of letting the competition build as the supplier could become the competitor tomorrow using the knowledge from the technology and processes gained from the parent company, similar to Apple and Samsung scenario.
References
Donald J. Bowersox, D. J. (2002). Supply Chain Logistics Management. New York, NY: The McGraw-Hill Companies, Inc.
John J. Coyle, C. J. (2013). Supply Chain Management: A Logistics Perspective. Mason, OH: South-Western CENGAGE Learning.
Kameshwaran, N. V. (2016). Location Selection in Global Supply Chains. Hyderabad, India: Centre for Global Logistics and Manufacturing Strategies, ISB.
Kroes, J. R. (2007). Outsourcing of supply chain processes. Atlanta, GA: Georgia Institute of Technology.
ManMohan S. Sodhi, S. L. (2007). An Analysis of Sources of Risk in the Consumer Electronics Industry. Journal of the Operational Research Society, 1-24.
