ALLW International

SUPPLY CHAIN MANAGEMENT

SECTION 3 Focal Firm Strategy and Systems 1 – COMPLEXITY OF THE BUSINESS AND ITS CHALLENGES ALAN L. WHITEBREAD

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THE COMPLEXITY CHALLENGE: RISK MANAGEMENT

• A broad view of risk management must be taken to protect the firm from risks in the following areas.

– Design [product, systems, …] – – Supply chain exposure – Manufacturability at scale – Quality standards and systems – ALLW International

THE COMPLEXITY CHALLENGE

• Most businesses are becoming increasingly complex.

• Business complexity increases the – – cost of operation; – – potential for employees not understanding the business as well as they need to for superior performance.

• The cost of complexity cannot outweigh the value of what is being delivered.

• That is why the systems approach is so valuable!

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COMPLEXITY COMES FROM

• • • Firm’s Organizational Structure Growth of, and changes to, markets and market segments, and evolving customer demands The total amount of products [SKUs] and services offered • • • • • • • ALLW International The number of customers and suppliers The logistics system Globalization Technologies employed

ORGANIZATIONAL STRUCTURE

• KEY ISSUE: STRUCTURE – Functional – Complex ALLW International

ORGANIZATIONAL STRUCTURE: COMPLEX MARKETING STRUCTURE

VP Marketing Product Management Group National Sales Manager Direct Marketing Manager Major Accounts Manager Marketing Communications Manager Direct Sales Managers Reseller Sales Managers Telesales Manager Internet Sales Manager

Advantage of this structure.

1.

Multiple levels of sales skills based on the customer type Issue of this structure.

1.

National Accounts OEM Accounts Federal Government

Disadvantage of this structure.

1.

Requires a lot of coordination

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ORGANIZATIONAL STRUCTURE

• KEY ISSUE: DECISION-MAKING AUTHORITY – • Leverages scale to reduce cost • Tends to have fewer management / approval levels for major decisions • May slow certain decisions – • Leverages local knowledge to build relationships and faster response • Tends to have fewer management / approval levels for smaller decisions.

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MARKET / CUSTOMER COMPLEXITY

• Firms want to keep customers because it is many more times expensive to get a new customer than to keep an existing one. This often gives customers greater power in supply chain relationships.

• It is important to understand both product and customer profitability to know if you are making the right decision for your business.

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MARKET / CUSTOMER COMPLEXITY

• The markets and segments you choose will affect the complexity of your business.

• The channels of distribution you select and the amount of control you have over them will affect the complexity of your business.

• Individual large customers will affect the complexity of your business.

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MARKET / CUSTOMER COMPLEXITY: VALUE-ADDED PROCESSES

add complexity because they: – involve many people from different functions with different perspectives; – – employ a variety of accessory and / or capital equipment usually with numerous staging and transfer areas; – use a wide variety of components which should drive standardization; and they – ALLW International

MARKET / CUSTOMER COMPLEXITY: OPERATING NETWORKS

• Operating networks add complexity because of the number of distinct facilities that must be coordinated.

• – It is critical for managers to understand

How many facilities do we need to achieve desired service levels?

– –

Where should each one be located?

What activities will be performed at each facility?

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MARKET / CUSTOMER COMPLEXITY:

•

PRODUCTS [SKUs] AND SERVICES OFFERING Product and service proliferation increases SCM complexity by some multiple.

– complexity from the wide range of product families requires high inventory turns and efficient operations.

– complexity from a number of product lines within the product families.

– complexity with a large number of options for the products and services which relies on customer service and differentiated products.

– will happen and it drives the needs for standardization and modularization. – Product line expansion based on a number of factors has a multiplicative effect on the total number of products offered.

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MARKET / CUSTOMER COMPLEXITY: HOW OPTIONS INCREASE COMPLEXITY

SHOES: Product Characteristic Colors Number of Options

5

Number of Options if we go from 2 styles to 4 and 3 widths to 5

5

Styles Sizes Widths Total SKUs Slow movers

2 12 3 5*2*12*3 =

360 60

4 12 5 5*4*12*5 =

1,200 440 SKUs after taking slow movers out of the line Simplified SKUs if selling only the most popular items 300 140 760 312

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MARKET / CUSTOMER COMPLEXITY

• You can manage this complexity by – keeping the product offering current; – using some type of customer classification system; – implementing Customer Relationship Management [CRM] software to segment customers [never forget the relationships!]; – developing the types of relationships you want with your customers; and, – ALLW International

FIRM’S LOGISTICS SYSTEM

• May be totally contained within the firm but is not usually done this way.

• A logistics system seeks improvements by utilizing some combination of in-house logistics plus – Implementing advanced IT solutions •

ERP, CRM, data mining, RFID, ...

– Outsourcing to 3PLs •

Transportation, international document preparation

– Insourcing [on-site 3PLs] •

Fulfillment, pick-and pack operation, …

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FIRM’S LOGISTICS SYSTEM

• Logistic systems are complex due to: – The number of transportation modes available •

Truck, ship, air, special courier, international, …

– The number of facilities and types of operations involved – Geographic dispersion of shipments – Breadth, depth, and length of the firm’s product offering – – •

Time of delivery; packaging; special requirements, …

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FIRM’S LOGISTICS SYSTEM

• To maximize profitability, it must optimize – Facility locations – •

production and warehousing

– Production schedules must be balanced with demand and forecasts – Production capacity – – ALLW International

FIRM’S LOGISTICS SYSTEM

• Managers may seek to address logistics system complexity by utilizing some combination of in house logistics plus – Implementing advanced IT solutions •

MRP or ERP, CRM, data mining, RFID, ...

– •

Transportation, international document preparation

– •

Fulfillment, pick-and pack operation, …

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SUPPLY CHAINS: RATIONALIZATION

• is the process of systematically evaluating the company’s operating network, suppliers, customers, and offerings to eliminate inefficiencies and redundancies.

• The goal is to efficiently allocate resources to a company’s ALLW International

THE SUPPLIER BASE

• American manufacturers will generally source parts from multiple suppliers to hedge against supply disruptions, create negotiating leverage, and drive down costs.

• – add complexity to the supply chain; – require certification and performance monitoring; – increase the number of purchasing operations; and, – may increase cost and effort in other areas.

• But this is usually preferable to a sole-source supplier as it significantly reduces risk in the supply chain. • Long-term agreements tend to reduce the supplier turnover and build better strategic relationships.

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Single or Multiple Suppliers?

SINGLE SUPPLIER MULTIPLE SUPPLIERS

• • • • •

Close relationship Better response Economies of scale Reduced administration …

• • •

Competition leads to

– –

Better service Better price Reduced risk

–

Supplier dependence

–

Shortages Meet local content rules

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SUPPLY CHAINS: COMPLEXITY

•

An example of a large corporate supply chain may look like the following.

–

Customers

–

Distributors 800,000 2,500

–

Manufacturing plants 20

–

1 st Tier suppliers 700

–

2 nd Tier suppliers

–

3 rd Tier suppliers 11,000 50,000

The challenge is in managing all the relationships in addition to all the systems and processes. To maximize the performance of the supply chain, everyone needs to understand their role and the roles of others. Roles may change over time.

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THE SUPPLIER BASE: ABC SUPPLIER CLASSIFICATION

“A” GROUP Maybe 10 % of the suppliers provide ~75% of the goods.

“B” GROUP The next ~15% of suppliers provide and ~15% of the goods.

“C” GROUP The remaining 75% of suppliers provide only 10% of the goods.

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SUPPLY CHAINS: ROLE SHIFTING

• increases supply chain efficiency and value added activities by participants. This enhances the value proposition.

– – Firms that are shifted out of the supply chain must always be replaced by a more capable firm. Your needs are going to grow.

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SUPPLIER CERTIFICATION PROCESS

“Dock to Stock” or “Ship to Stock” The supplier’s quality system performs the same as its customer’s system. Batch quality records are forwarded to the customer, and incoming shipments go directly into customer inventory without any inspection.

Approved supplier /Supplier audit

-expectations -documents -problem resolution

Continuous improvement program

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Monitor supplier performance

-quality -timing

Supplier earns ship-to-stock

SUPPLIER CERTIFICATION

• SUPPLIER CERTIFICATION – Initial approval for new suppliers – Continuing approval / level • Suppliers must demonstrate continual improvement based on agreed-to performance metrics – Failure to recertify • A major problem. The supplier must be replaced with a more capable firm.

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SUPPLY CHAIN MANAGEMENT

SECTION 3 Focal Firm Strategy and Systems 2 – SUPPLY CHAIN TEAMS, EMPOWERMENT, AND COST MANAGEMENT ALAN L. WHITEBREAD

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• • • • • •

SUPPLY CHAIN MANAGER FREQUENT INTERACTIONS

Product management

– forecasting; priorities; allocations

Production planning

– forecasting

Logistics planning

– shipping; inventory

Finance/Accounting

– Costs [estimated, standard, actual]

Quality control

– standards

New product development

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SUPPLY CHAIN MANAGER PROFILE

• Excellent functional skill sets to interface with all areas in the supply chain • • – • Relationship builder • Exceptional execution of programs • Drives and embraces change • Leader ALLW International

EMPLOYEE EDUCATION: Employee Capabilities and Skills

• Continuing employee education building their skill sets is critical to your long-term success.

• • You must provide employees the environment to innovate . People that want to try new things are very valuable.

• You must provide employees the experiences and growth opportunities that allow them to attain their potential.

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EMPLOYEE EDUCATION

• BASIC SKILLS –

Computer skills; process mapping; …

• MANAGEMENT EDUCATION –

Conflict resolution; team skills; compliance; …

• EXECUTIVE EDUCATION –

M&A; decision making strategies; …

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EMPLOYEE EDUCATION

• EMPLOYEES NEED TO KNOW ABOUT – The organization: its vision, mission, and culture – Its markets, channels, products, and key customers – SCM [roles and interrelationships] – Performance measurement and reward in the firm – The importance of cross-functional teams, cross-training, and job rotation ALLW International

LEADERSHIP: RESPONSIBILITIES

•

C-LEVEL & BOARD - VISION

•

EXECUTIVE GROUP - STRATEGIES

•

MANAGERS – PROGRAMS, TACTICS, and IMPLEMENTATION

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LEADERSHIP: SOME TYPES OF TEAMS

Type of Team Advisory Councils Team Objectives

Customer / reseller / supplier councils - provide feedback, expedite communication, and gain commitment for key initiatives.

Cost Reduction

Usually a multi-functional team with a specific charge. Creative approaches are encouraged.

Major Account Cycle-time Reduction New Product Development

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LEADERSHIP: TEAMS ADVANTAGES AND DISADVANTAGES

ADVANTAGES

• Fast-track • Multidisciplinary approach • Recommendations lead to quick decisions • •

DISADVANTAGES

• Can have a difficult person ALLW International

LEADERSHIP: DESIGNING A TEAM

• At a minimum, you should seek all of these.

– Be sure there are clear measurements and rewards – Have good team chemistry – – Select individuals that have specific skill sets and creative ability – – – Select a highly-skilled team leader ALLW International

LEADERSHIP: THE TEAM

• Start and work fast!

• Have specific roles for each team member and understand their team [not individual] responsibility.

• • Promote open communication and cooperation – it is about the issue, not about a person or their viewpoint!

• Make sure items are implemented correctly.

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•

LEADERSHIP: SETTING GOALS

• • Do not punish a little underachievement of the goal. Rather, use it as a learning experience.

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LEADERSHIP:

INTEGRATING PEOPLE AND TECHNOLOGY

• The organization’s needs must be matched with technology. As a general rule, the simplest technology that will meet product and process needs should be given priority. • The organization’s technology strategy should support the long-term approach to building world-class value-added processes. ALLW International

LEADERSHIP: PEOPLE AND TECHNOLOGY

• People must • People must • The organization must continually invest in technology to improve its market position.

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STRATEGIC COST MANAGEMENT: PROFIT LEVERAGE EFFECT

• • The profit impact of cost reduction may be much greater than that of increased sales.

• New products should be closely managed to a set of expectations.

– Sales, cost reduction, … ALLW International

STRATEGIC COST MANAGEMENT: Cost Reduction OR Sales Increase?

(1000 ’ s) Base Case % sales Costs Down % sales Sales Up % sales Sales

$20,000 100.0% $20,000 100.0% $21,000 100.0%

Cost of Sales Gross Margin *Operating Expense Net Profit before Tax

12,000 60.0% 11,000 55.0% 12,600 60.0% 8,000 2,000 40.0% 10.0% 9,000 2,000 45.0% 10.0% 8,400 2,000 40.0% 9.5% $6,000 30.0% $7,000 35.0% $6,400 30.5% * Assumes no change in operating expenses is required to generate additional sales or cost reduction.

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STRATEGIC COST MANAGMENT

• is about reducing costs and improving profits while supporting the value proposition. • It has three key elements.

1.Supply Chain Analysis 2.Value Proposition Analysis 3.Cost Driver Analysis ALLW International

STRATEGIC COST MANAGEMENT: SUPPLY CHAIN ANALYSIS

• is the examination of the information flow, inventory, processes, and cash flows from the most elementary supplier to the ultimate consumer disposal.

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STRATEGIC COST MANAGEMENT: VALUE PROPOSITION ANALYSIS

• Determines how an organization chooses to compete on value in its markets.

• There are three basic value propositions – – – ALLW International

STRATEGIC COST MANAGEMENT: VALUE PROPOSITION ANALYSIS

• Some recent approaches include – • If you are first in the market, you should be able to maintain a strong market share or leader position over the long term.

• Unfortunately, few companies sustain the advantage.

– Service / Solution Provider • This seeks to prevent competitors from getting even small amounts of business.

– Technology Leader • This approach contends that always providing the latest and greatest technology will put you in a market leadership position. ALLW International

STRATEGIC COST MANAGEMENT: VALUE PROPOSITION ANALYSIS

• Companies may choose a combination of value propositions.

• Different strategic business units within the same company may choose different value propositions.

• Value propositions may change over the product life cycle.

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STRATEGIC COST MANAGEMENT: COST DRIVER ANALYSIS

• • Cost drivers vary over time and among different products and services.

• Cost drivers must be analyzed in relation to their impact on the value proposition. • Typical cost driver elements include the – – – – ALLW International

STRATEGIC COST MANAGEMENT:

• •

TOOLS

COST ANALYSIS:

– standard cost versus “should-cost” analysis and analysis of supplier cost elements.

PRICE ANALYSIS:

– understanding the prices [across all volume categories] available in the marketplace. • • – analyzing the actual total cost of acquisition, use, maintenance, and disposal of a good, service, capital equipment, or process.

TARGET COSTING:

– Determine the market pricing by volume categories and work backwards to determine the desired target cost.

– Determine your lowest cost of production.

– Evaluate whether you can still make a profit.

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SUPPLIER RELATIONSHIPS

• • • If you are seeking a long-term relationship, you should make that known as soon as possible!

– What do you expect of a supplier in a long-term relationship?

Should they expect to be involved with • • • • • New product development? New service development?

Cost reduction and other teams?

New systems implementation?

… – – Do you need one or more of your people at the supplier’s site?

of supplier’s people at your site?

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STRATEGIC COST MANAGEMENT: ACTIVITY-BASED COST MANAGEMENT

• Traditional cost accounting systems use estimates and are used for internal reporting costs. Overhead is assigned based on some assumptions and a standard formula. Overhead may become very distorted if it is not revised for changes in the assumptions • Direct costing determines cost based on actual expenditures but is much more difficult to implement. Assigning overhead is much more difficult than with standard cost systems.

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STRATEGIC COST MANAGEMENT: ACTIVITY-BASED COSTING

• May provide a more accurate alternative to traditional cost accounting for certain types of operations.

• Attempts to accurately match indirect costs with products or services that generate them and allocates them to the cost drivers that create them.

• May cause the rethinking of your organization especially in – Marketing strategy – Manufacturing strategy ALLW International

STRATEGIC COST MANAGEMENT: TOTAL COST OF OWNERSHIP [TCO]

is a process for understanding the cost of ownership in total, by its individual components, the driving cost factors, and key relationships that exist.

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STRATEGIC COST MANAGEMENT: TOTAL COST OF OWNERSHIP [TCO]

• Consists of – Acquisition cost – Inventory cost – Maintenance cost – Obsolescence cost – Ownership cost – Purchase cost – Specification cost – Transportation cost ALLW International

STRATEGIC COST MANAGEMENT: TOTAL COST OF OWNERSHIP

• • Determine the desired benefits – be specific and measurable.

• Form a cross-functional and technical team from the involved areas.

• Use sensitivity analysis to gain an in-depth understanding of the drivers and relationships.

• Present the data, conclusions, and recommendations to senior management for approval and implementation.

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SCM METRICS

SOURCING ASSETS:

Raw material inventory turns

COST:

Unit price or total system cost

PRODUCTIVITY:

Purchase orders per employee

QUALITY:

Percent orders from certified suppliers

CUSTOMER SERVICE:

Average response time

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OPERATIONS

WIP Direct labor cost Changeover time Statistical process control

LOGISTICS

Finished goods inventory turns Inventory carrying cost Shipments per employee Picking / shipping accuracy

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SUPPLY CHAIN MANAGEMENT

SECTION 3 FOCAL FIRM STRATEGY AND SYSTEMS 3 – NEW PRODUCT DEVELOPMENT: PROCESSES AND EVALUATION IN THE SUPPLY CHAIN ALAN L. WHITEBREAD

MARKETING AND NPD

• The role of marketing is to understand and help shape the company’s goals, strategy, image, and competitive position.

• Marketing performs many different types of analysis to provide the information to make these decisions.

• Marketing usually spearheads NPD.

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MARKETING AND NPD

• Marketing must understand and clarify the needs of the market, or a large customer that drives NPD for them. • Market information is used in planning.

– Product •

design of goods and services

– Place • – Promotion •

effective IMC and sales techniques

– Price / Positioning •

determine the value of the need which is satisfied by the product

•

prove value and create appeal in a market [segment]

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NEW PRODUCT DEVELOPMENT [NPD]

• NPD is risky and expensive.

– More than 9 out of 10 new products fail [does not meet its net sales target] in the first year.

•

Search the Internet for some interesting statistics on success rates and expenditures.

– Even if a product survives its first year, it is likely to fail in the second year.

– Firms that have a new product development process usually have a much greater chance of success.

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•

NEW PRODUCT DEVELOPMENT [NPD]

– Marketing identifies unfilled customer needs.

– Marketing [research] specifies the type of product that is needed.

– R&D / Design engineering develops conceptual alternatives for marketing to approve .

– R&D, engineering, and production develop the product.

– Finance verifies the estimated cost and profitability.

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NPD: WHAT IS A NEW PRODUCT?

• Product improvements and modifications.

– Any different • Size • Color • Style • Specifications • Package • A new product family or product line • A new SBU • Products that require a new technology • … ALLW International

NPD: WHERE DO IDEAS COME FROM?

• • • UNDERSTANDING TRENDS / ISSUES … – Demographics – Problems – Competition – Market research – Technology ALLW International

NPD: NEW PRODUCT IDEA STRATEGIES

Product Improvements – Product Modifications – New Brand – to protect a premium brand

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NPD: METHODS OF IDEA GENERATION

• FREE ASSOCIATION – • BRAINSTORMING • CATALOG TECHNIQUE • ATTRIBUTE LISTING • THINKING OUT OF THE BOX • There are many other techniques for creative thinking.

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NPD: WHERE DO THOSE 20 IDEAS FIT?

Only a very small percentage of new product ideas are ever introduced!

C O R E C O M P E T E N C I E S N E W

HARD

19 12 8 14 6 18 16 5

VERY HARD

2 10 E X I S T I N G

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EASIEST

17

NEXT EASIEST

1 3 13 11 20 4 15 7 9 EXISTING NEW MARKETS

C E S S

NPD: FIVE TYPES OF DEVELOPMENT PROJECTS

HARDEST LARGE P R O R&D ADVANCED DEVELOPMENT PROJECTS:

GENETIC ENGINEERING

MORE PRODUCT CHANGE LESS

ALLIANCES PARTNERSHIPS PROJECTS NEW CORE PROCESS NEW CORE PRODUCT NEW FAMILY OF DRUGS NEXT GENERATION PRODUCT ADDITION TO PRODUCT FAMILY DERIVATIVES AND EXTENSIONS R&D JOINT VENTURE

C H A N G E SMALL

ALLW International NEXT GENERATION PROCESS SINGLE DEPARTMENT UPGRADE INCREMENTAL CHANGE

For more information see Creating Project Plans to Focus Product Development, Harvard Business Review, Vol. 70, No. 2, p.74.

EASIEST

MITIGATING RISK IN NPD

• Companies are faced with increasing levels of risk in today’s market. • Time – Product life cycles are shortening, this increases risk because: • • There is less time to capture development costs and generate profits.

• – You must develop and introduce products faster!

– Competitors have also speeded up their NPD cycles.

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MITIGATING RISK IN NPD

• Cost – New product development is expensive.

– A large percentage of all quality problems stem from poor design.

– – – Use Early Supplier Involvement [ESI] – especially in the design function. They are experts in their field!

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THE DESIGN FUNCTION

NPD should always remember to do the following.

– Design for Manufacturability FOR – Design for Purchasing TO – Design for Logistics FOR – Design for the Environment TO ALLW International

THE DESIGN FUNCTION

NPD should always remember to do the following.

– Design for ease of use FOR – Design for Reuse TO – Design for Infrastructure TO be sure to ALLW International

THE DESIGN FUNCTION: MODULAR DESIGN

• The modular concept allows different products to be manufactured by assembling different components and utilize standard processes.

• • Modularity is driven by the need for standardization to keep the number of component parts to a minimum. It – – ALLW International

NPD ELEMENTS

• New product development begins with the recognition of – – • NPD proceeds either in a sequential or concurrent fashion.

– Sequential [completing one step before proceeding to the next] NPD is the traditional method.

• It is time consuming and slow.

• The lack of speed to market results in either not as much of a lead over competitors or it trails them further in the market. Either way, the firm does not realize as much profit from NPD as it could.

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NPD ELEMENTS: CONCURRENT NPD

• Utilized by most large firms • are used to develop new products with targeted costs and features.

– These teams will typically include managers from marketing, R&D, engineering, production, materials management [purchasing], and key suppliers / service providers.

– Key customers are sometimes included in the team for general products. They are almost always included if the new product is specifically developed for them.

• Use target pricing and target costing.

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NPD ELEMENTS: TARGET PRICE

• Market research information • Product positioning • Competitive environment and expected response • Anticipated price elasticity • Market conditions • – If they can, they proceed. – If they can not, either more work needs to be done on the new product or the concept is dropped.

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NPD ELEMENTS: TARGET COST

• Market data and desired profitability drive the development of the new product.

• This may impact any set of aspects of the new product. –

For instance, the need for a higher rate of production may lead to changes in

•

Design

• • •

Materials Processes …

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NPD ELEMENTS: COMPONENTS OF TARGET COST

• Amount of capital required • Planned rate of production and ramp-up • Materials and / or components used • Processes involved –

You could have a product that required component manufacturing, assembly, and finishing

• • • • • • … ALLW International

NPD ELEMENTS: DETAILED TARGET COST

• Once the target cost has been determined, component level costs will be calculated based on marketing forecasts and expected production run [lot] sizes.

• Every component, operation, and process must be analyzed in detail to arrive at a target standard cost. • • You should be comfortable with –

Materials, labor, and overhead

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NPD ELEMENTS: FINANCE AND ACCOUNTING

• FINANCE – is typically charged with the overall financial health of the firm. It is concerned with capital investment, financing arrangements, supporting working capital requirements, and the overall profitability of the organization.

• ACCOUNTING – is typically charged with the detailed monetary record keeping for transactions and cost.

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NPD TOOLS: PROFIT MEASUREMENTS

• Operating profit is defined as the amount of pre-tax money a company makes from its ongoing business.

• Pre-tax profit is the sum of operating profits plus or minus gains and losses from other activities.

–

Investments, interest expense, royalties, and other financing activities

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NPD TOOLS: Profit and Loss Statement

Cost Category (000’s) Sales Cost of Goods Gross Profit G & A Operating Profit Non-operating cost (interest expense) Profit before tax Taxes Profit after tax $20,000 (12,500) 7,500 (2,500) 5,000 (1,250) 3,750 (1,250) $2,500

37.5% GM 25.0% 18.75%

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NPD TOOLS: CASH FLOW

• Cash flows into a company when it receives payment for sales or on receivables, borrows money, sells stock, issues bonds, collects royalties, collects interest, or some other revenue streams.

• • Cash flows out of a company when it acquires plant and equipment, purchases materials, produces goods, markets goods, repays investors, or repays debt, or spends money on anything.

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NPD TOOLS: Income Statement and Cash Flow Example

•

While the income statement shows a pretax profit of $160,000, the cash flow statement shows that we would not have enough cash to finance operations if it had to be justified on a fully-loaded cost basis.

• ALLW International

NPD TOOLS: FINANCIAL DECISION TOOLS

• Present Value [PV] • Future Value [FV] • Net Present Value [NPV] • Economic Value-Added [EVA] ALLW International

NPD TOOLS: Present Value

An organization will receive $500 two years from now. At an interest rate of 10 percent, what is the present value of this future payment?

Build a spreadsheet to calculate this.

PV = C i / [1 – r] T C i = cash at time period i r = interest rate T = number of time periods PV = $500 / [1 + .1] 2 FV = $413.22

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NPD TOOLS: Future Value

An organization invests $500 for 5 years at an interest rate of 15 percent. What is the future value of the original $500?

Build a spreadsheet to calculate this.

FV = C O * [1 – r] T C O = initial investment r = interest rate T = number of time periods FV = $500 * [1 - .15] 5 FV = $1,005.68

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NPD TOOLS: Net Present Value

• Time-Value-of-Money Concept – $1 today is worth more than $1 in the future • • It considers: – Forecasts of revenues and costs – Expected life cycle or products and technology – Industry Trends ALLW International

NPD TOOLS:

• •

NET PRESENT VALUE EXAMPLE

• The value of future cash flows minus the present value of the cost of the investment.

NPV = PV of future cash flows – PV future cash outflows – initial cost 1 2 Year 0 3 Initial cost -$100,000 Future cash Calculations $40,000 $40,000 $40,000 Present value 40,000 / 1.1

40,000/ 1.21

$36.363.64

$33,057.85

40,000 / 1.331

$30,052.59

NPV = -$525.92

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NPD TOOLS: ECONOMIC VALUE-ADDED [EVA]

• EVA shows how much money the company makes from operations after taxes, less the cost of capital for the money involved in making the product.

• EVA provides a longer-term perspective on whether a project is adding to or taking away from value.

• EVA provides a more in-depth understanding of a decision than Net Present Value because ALLW International

NPD TOOLS: PROJECT MANAGEMENT

• Project management is a systematic management approach to delivering a project on-time, at or under budget, and that meets all specifications.

• Project management requires understanding of interdependencies among activities, activity times, the resources necessary to complete activities, and leadership skills.

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NPD TOOLS: TOOLS AND TECHNIQUES

• Program Evaluation and Review Technique [PERT] – PERT charts [network diagrams] • Critical Path Method [CPM] • GANTT CHARTS ALLW International

NPD TOOLS: PERT

• PERT was developed by the U.S. Navy and Booz Allen Hamilton for use of the Polaris missile project in the late 1950’s.

• PERT allows the use of multiple time estimates to allow for variation in task completion.

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Start

NPD TOOLS: PERT CHART EXAMPLE

2 weeks 2 weeks Learn System 1 Learn System 2 Learn System 3 Learn System 4 Design Product Design Features Create Engineering Production Specifications 1 week Test and Approve Production System 1 week Create Technical User Manual 1 week Start Production Create Basic User Manual 1 week

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NPD TOOLS: CRITICAL PATH METHOD [CPM]

• Developed by DuPont and Remington Rand during the 1950s • Projects are divided into various activities.

– It identifies a set of dependent events that MUST be completed as indicated for the project to be finished on time.

• The precedence between activities determines their sequence for completion.

• • ALLW International

Start 2 weeks Learn System 1 Learn System 2 Learn System 3

NPD TOOLS: CPM EXAMPLE

2 weeks

The red lines are the critical paths. Every one of these items must be done on time for the project to be completed on time. [7 weeks total time].

Design Product

Notice the bottom path. It has slack time that can be used to keep other items on schedule. [5 weeks total time].

Create Engineering Production Specifications 1 week Test and Approve Production System 1 week Create Technical User Manual 1 week Design Features Start Production Learn System 4 Create Basic User Manual 1 week SLACK TIME ALLW International

NPD TOOLS: GANTT CHARTS

• Gant charts were developed by Henry L. Gantt in 1910. • A Gantt chart is a graphical depiction of a project’s activities over time.

• It always shows the task and the time period associated with the task.

• It may also show additional items like actual to budget, team [leader / responsibility] and other items and be used as a management tool.

• • The disadvantage of Gantt charts is that they do not show precedence relationships between various activities.

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NPD TOOLS:

PRINT ADVERTISING EXAMPLE

CAMPAIGN TIMELINE: SMALLER COMPANY Week Number ADVERTISING: PRINT

Create Media Plan (Print and Online) Buy Print Media Design Photography and/or illustration Production Copywriting and Review Final Negatives, Insertion Orders Ship Negatives and Orders to Publications

$ VAR MGR ADVERTISING: ONLINE

Buy Space Design Copywriting and Review Produce Send to Site

PRINTED COLLATERAL

Design Photography and/or Illustration Production Copywriting and Review Final Artwork Final Negatives Printing Distribution to Sales Force, Prospects

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 LAUNCH

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SUPPLY CHAIN MANAGEMENT

SECTION 3 FOCAL FIRM STRATEGY AND SYSTEMS 4 – SCM ORDER FULFILLMENT ALAN L. WHITEBREAD

CUSTOMER SERVICES: FULFILLING CUSTOMER ORDERS

• Order fulfillment is the process of completing the customer order with the right product, in the right quantity, at the right time, in the right place, in the right configuration [package], and in the right sequence [if it needs to go directly to production]. It requires an in-depth understanding of the order cycle.

• It always involves at least three functions – Customer service [order entry], – – – It may involve other parts of the organization.

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CUSTOMER SERVICES: ORDER CYCLE FLOWS

← Demand ← Orders → Product 2 nd Tier Suppliers 1 st Tier Suppliers Focal Firm CUSTOMER SERVICES Resellers End Users CUSTOMERS

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CUSTOMER SERVICES: ROLE

• Order entry – Enter orders and change orders – Manages transaction details • Customer assistance – Advise customer of new information – Assist sales with making it easy for the customer to do business with your firm – – Provide advice and / or product information – – Post transactions: alternations, claims, installation, parts, repairs, replacement, returns, tracking / tracing, warranty, … ALLW International

EVALUATING CUSTOMER SERVICES: HOW?

• Average response time • Ease of placing / changing orders • Order completion performance • Order cycle time • Actual to target delivery date • Customer satisfaction with service levels • Interface with manufacturing scheduling • Problem handling –

Damage, transportation, product failure, …

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CUSTOMER SERVICES: ORDER TERMINOLOGY

• – The process of entering a customer order for purchase, replacement, or samples.

• – This document specifies any change to a customer order.

• – This notifies the organization of a change in a product that engineering has approved. It usually changes something about the how the product is made, packaged, tested, and / or its bill of materials.

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•

CUSTOMER SERVICES: ORDER ENTRY: CREDIT

• Customer services is responsible for making sure a credit limit has been set or not exceeded for every customer order. ALLW International

CUSTOMER SERVICES: ORDER ENTRY: PRICE

• Customer services is responsible for the accuracy of the price and the rest of the terms and conditions of sale for each individual item for each customer.

• They must verify information from the following – List price or the volume discount price – Competitive price •

Price Deviation Form to match a competitive price. It must have approval of the appropriate marketing / sales management level.

– ALLW International

CUSTOMER SERVICES: ORDER ENTRY: ITEMS

• Customer services is responsible for the accuracy of the part number, quantity, and delivery date for every item for each customer.

– Single order – – Contract ALLW International

CUSTOMER SERVICES: ORDER ENTRY: DELIVERY DATE

• Customer services is the voice of the customer for expediting orders.

– Earlier / later delivery date requested – Urgent need

[the customer is out of stock]

– Delivery specification has changed • Customer services must be aware of ALLW International

CUSTOMER SERVICES:

ORDER ENTRY: CUSTOMER SPECIFICATIONS

• Customer services is responsible for communicating customer specifications to all involved parts of the organization.

– • • •

Performance Packaging Inspection

– The count is off – Quality issue ALLW International

CUSTOMER SERVICES: ORDER ENTRY: ADJUSTMENTS

• Customer services is responsible for entering the necessary information for any return, allowance [with appropriate approval], or adjustment [with appropriate approval].

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MATERIALS MANAGEMENT

• Materials management [purchasing] has become increasingly important to the firm because 1. Purchased inputs as a per cent of the total product are increasing [due to outsourcing]; 2. JIT emphasizes cooperative, long-term buyer-supplier relationships; and 3. Cycle time management and working capital management are becoming increasingly important.

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PURCHASING: ROLE

• Purchasing’s role is to acquire the most appropriate [approved] materials from the best [qualified] suppliers that can meet price target, delivery dates, and specifications.

• They manage – Sourcing for needs from all parts of the organization – – – ALLW International

PURCHASING: ORDER CYCLE FLOWS

← Demand ← Orders → Product 2 nd Tier Suppliers PURCHASING 1 st Tier Suppliers SUPPLIERS Focal Firm CUSTOMER SERVICES Resellers End Users CUSTOMERS

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PURCHASING: REQUISITIONS

• Purchasing policies and procedures • Purchase requisitions are used to clearly describe and communicate needs. They typically include – Item description, requisitioning department, authorizing signature, purchase quantity, delivery day, delivery location, and other necessary information.

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• • • •

PURCHASING: SUPPLIER SELECTION

Identification

– Make a list of all potential suppliers.

– Purchasing databases or directories •

Thomas Register of American Manufacturers

, which lists over 150,000 companies.

– Frequently used purchasing criteria include quality, price, delivery dependability, capacity [current and future], service responsiveness, technical expertise, managerial ability, and financial stability.

– Part of a team that identifies the suppliers eligible to receive an order.

– Use supplier scorecards to assure high levels of performance. – ALLW International

•

PURCHASING: IMPORTING INTO THE U.S.

1.

Purchasing can buy from suppliers in other countries provided the supplier has met the following conditions.

The supplier can not be on the Denied Parties List, the Specifically Designated National List, or the OFAC Sanctions List.

2.

3.

4.

The supplier can provide shipment details prior to loading.

The supplier can provide shipment detail and documentation that meets Customs and Border Patrol [CBP] requirements.

5.

6.

BE SURE TO HAVE ACCURATE HTS CLASSIFICATIONS AND AN AUDIT TRAIL SYSTEM AS PART OF YOUR IMPORT COMPLIANCE PROGRAM.

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PURCHASING: TRANSACTIONS - PRICE

• Various scenarios – Lowest unit price • Low-volume, low-value, or non-strategic items – Competitive bidding • Generally for selected items • Reverse auctions may achieve notable cost reductions – Negotiation • For high dollar value purchases, items with a lot of uncertainty, strict performance requirements, or when a long-term relationship is desired – Sole source ALLW International

PURCHASING: TRANSACTIONS - ORDERS

• Purchase orders specify the items, quantities, prices, delivery, and all other terms and conditions of the purchase agreement.

• Blanket orders specify the overall terms of agreement for a given time period and cover the entire quantity to be purchased generally with specified releases that are modified as necessary.

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PURCHASING: TRANSACTIONS - EXPEDITING

• Expediting is the effort to speed up delivery of an order due to – changing time requirements, or – a delivery date problem, or – a quality problem.

• Purchasing has great latitude to deal with these issues.

• Penalty clauses may be part of the purchase agreement.

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PURCHASING: TRANSACTIONS - INSPECTION

• Receipt and inspection matches the invoice content listing by physical count and quality inspection.

• Primary reasons for failure: – – – ALLW International

PURCHASING: TRANSACTIONS - PAYMENT

• Purchasing is responsible for efficient procedures to pay invoices and improve: – Supplier relationships – Financial performance • • Purchasing usually receives payment guidelines from the finance department.

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PURCHASING: SKILLS

• • • •

Knowledge

– commodity expertise and understanding of supplier capability

Relationships

– alliance relationships – fair relationships

Process

– continuous improvement, collaborative processes, supplier education

Technology

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• • • • • • •

PURCHASING EMPLOYEE KNOWLEDGE

Negotiating skills Cost and price analysis Material control and inventory management Purchasing law Transportation Contract and subcontract administration Standards of conduct / supplier relations

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OPERATIONS MANAGEMENT

• Operations, production, or manufacturing management – creates value by transforming capital, technology, labor, and materials into more highly valued products and services and usually includes the logistics function.

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OPERATIONS MANAGMENT

• A business of details • Operational excellence is a prerequisite for corporate success • Operations managers must manage – – – ALLW International

OPERATIONS MANAGEMENT: DESIGN DECISIONS

• Facility location – affects access to factor inputs and customer markets • Facility layout – determine the positioning of equipment, the flow and handling of materials for maximum efficiency • Product design – impact the ability to profitably capture future market share • Process design – involves technology selection and work area design ALLW International

OPERATIONS MANAGEMENT: CONTROL DECISIONS

• Forecasting – estimate of what needs to be produced and when • Inventory control – determines how much product is needed at various times of the year • Scheduling – two types: – – • Quality control – designing, building, and inspecting quality into both the process and product ALLW International

OPERATIONS MANAGEMENT: PRODUCTION DECISIONS

• BATCH PROCESSING – The most common type of production – – Many different products can be made on the same equipment – – Products are run in a logical sequence to optimize the process • Minimize changeover or set-up time • Allow routinely planned preventative maintenance – Lead time includes waiting time in the production queue and the time to produce the desired quantity ALLW International

OPERATIONS MANAGEMENT: PRODUCTION DECISIONS

• FLOW PROCESSING – Single product production – Equipment usually runs at a fixed rate – Lead time is short as product is available all the time except for major maintenance problems and unusually high demand periods – Capacity is extensive, expensive, and increases in significant step increments ALLW International

•

OPERATIONS MANAGEMENT: MTBF AND MAINTENANCE

is the average time for a failure to occur. If a device runs past this time it is likely to fail and cause an unscheduled line shut down.

• Maintenance is the key to operations excellence. There are many types of maintenance.

– Corrective: unscheduled, for repair – Preventative: scheduled to keep equipment in optimum running condition and minimize line shut downs.

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OPERATIONS MANAGEMENT: SKILLS

• Operational excellence is a prerequisite for success! However, competition is now between chains not just companies. Therefore, managers must understand and develop skills in dealing with: – Outsourcing – Supplier Integrated Manufacturing – ALLW International

OPERATIONS MANAGEMENT: IMPACT OF 9/11

• Increased the cost of shipping and fees by up to 5%.

• • Increased screening.

– Ports, free trade zones, points of entry/exit • New U.S. government programs – that strengthens supply chains.

– that will eventually tract container security from loading to inbound port.

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LOGISTICS MANAGEMENT

• Cost-effectively getting – the right products, – to the right places, – – – – • Spend some time watching logistics videos on YouTube.

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LOGISTICS MANAGEMENT: COORDINATION

PERFORMANCE METRIC IMPACT OF LACK OF COORDINATION Manufacturing cost Inventory cost Lead time Transportation cost

Increases [becomes unbalanced – some items sit for a long time] Increases [insufficient inventory per item and manufacturing scheduling changes extend lead times] Increases [single shipment orders sometimes take multiple shipments to complete]

Total product availability Profitability

Decreases

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LOGISTICS MANAGEMENT: LEAD TIME

• The total time that elapses between an order's placement, its processing, transit, and delivery to the customer.

• Accurate lead times are critical to the overall performance of supply chains and customer satisfaction.

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LOGISTICS MANAGEMENT: CAUSES OF LONG LEAD TIMES

• • Poor forecasting • • Supplier lead times • • • [Predictable] seasonal surge in demand ALLW International

LOGISTICS MANAGEMENT: THE LOGISTICS PROCESS

• Materials management is the inbound movement and storage of raw materials, purchased components, and subassemblies entering and flowing through the conversion process.

• Physical distribution is the outbound transportation and storage of finished products [including replacement parts] from point of manufacture to where customers wish to acquire them.

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LOGISTICS MANAGEMENT: FACILITIES

• Production • Distribution • Service • Inventory storage ALLW International

LOGISTICS MANAGEMENT: BASIC ACTIVITIES

Activity Basic Roles and Responsibilities Customer Service Understand customer requirements.

Measure logistics performance against customer requirements.

Demand Forecasting Help plan other logistics activities, allocate resources, and provide high levels of service at low costs.

Documentation Inventory Management Accuracy assures order and delivery correctness. Documentation accuracy is critical in international shipments.

Product must be available to meet production requirements and customer demand. Inventory control must support high levels of customer service with minimum inventory.

Many more categories

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LOGISTICS MANAGEMENT: ORDER FULFILLMENT ACTIVITIES

Order Processing Inventory Management Warehousing

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Facility Location and Design Transportation Management

LOGISTICS MANAGEMENT: ORDER FULFILLMENT ACTIVITIES

• Leverage technologies to reduce the combined production and delivery time. • Carry the right quantity and mix of inventory. • Streamline order processing and assure order entry accuracy • Adopt technologies and innovative materials handling processes to increase flow speed through warehouses.

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LOGISTICS MANAGEMENT: WAREHOUSE ACTIVITIES

• Shipping and receiving goods and materials • Materials handling and order processing • Consolidating and distributing shipments • Transportation management, such as routing, tracing, and monitoring movements • Break-bulk product packaging and labeling • Re-packaging and mixing of products • • Preparation of in-store displays • • Scrap and disposal ALLW International

LOGISTICS MANAGEMENT: CROSS-DOCK OPERATIONS

Outbound Shipments Inbound Shipments Outbound Shipments

1. Full [mostly] and some partial truckloads arrive from suppliers.

2. Pallets are sorted and sent to the appropriate outbound area.

3.

Full truckloads leave bound for customers, distribution centers, … 4. Notice the additional areas for the office, problem shipments, and freight breakdown area.

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FORECASTING

• Forecasts are estimates of future demand.

• Forecasts are used to make decisions about purchasing, production, inventory, logistics, and capacity planning.

• Forecasts can be: – – – ALLW International

FORECASTING: BENEFITS

• • • • Increases customer satisfaction • Improves transportation management • Increases overall efficiency of the firm ALLW International

Quantity

FORECASTING: BENEFITS

Demand Forecast [as entered - chaos] Forecast [smoothed method] STABILITY CHAOS Year 2 Year 1 Time

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FORECASTING:

• Averages data for a specified number of time periods where each period has equal weight.

• The number of periods represent a trade-off between stability [a long-term trend] and responsiveness [short-term developments].

–

Fewer time periods will be more responsive but less stable.

–

More time periods will be less responsive but more stable.

–

Managers should test various forecast periods to determine which has the greatest accuracy.

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FORECASTING:

• Newer/older data may be more representative of the current environment so it is weighted more heavily.

• Any combination of weights that sums to 1.00 may be used.

• Any number of periods may be used.

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FORECASTING:

• Allows managers to balance stability and responsiveness.

• Corrects the forecast by a percentage [α] of the forecast error.

• The greater the value of α, the more responsive the forecast is to changes in the data.

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FORECASTING: Exponential Smoothing

• Allows managers to balance stability and responsiveness.

• Corrects the forecast by a percentage [α] of the forecast error.

• The greater the value of α, the more responsive the forecast is to changes in the data.

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FORECASTING: Exponential Smoothing - Example

Period Actual Demand Forecasted Demand Calculate demand in week 12 using an exponential smoothing forecast with an alpha = 0.333.

7 48 53 8 9 45 47 51 49

X 12 = [0.333*40] + [[1-0.333]*47] X 12 = 13.32 + 31.35

X 12 = 45

10 45 48 11 40 47

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FORECASTING: Linear Regression

• Least squares regression calculates a straight trend line that minimizes total forecast error.

• This trend line can be extrapolated n periods into the future.

Ŷ = b 0 + b 1 x Where: b 0 = intercept of the line b 0 = [ ∑y / n ] – b 1 *[∑x / n] b 1 = slope of the line n ∑ x*y - ∑x ∑y ---------------------- n ∑x 2 – [∑x] 2

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INVENTORY MANAGEMENT

• – – – Inventory can be either: • Inventory is one of the largest expenses for most companies.

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INVENTORY MANAGEMENT

• Key inventory management questions 1. How much inventory should be ordered?

2. When should orders be placed?

• – Basic models address these issues.

• orders the same quantity at different intervals – • orders different quantities at fixed intervals ALLW International

FIXED ORDER QUANTITY

• • Orders are placed at different intervals.

• Assumptions: – Demand rate is constant and known – Consumer demand is always satisfied [no shortages or stock outs] – Lead time or order cycle time is constant and known – Price paid for the units of inventory is constant – If demand and/or lead time is not known and constant, you must add safety stock to prevent stockouts during periods of increased demand.

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SUPPLY CHAIN MANAGEMENT

SECTION 3 Focal Firm Strategy and Systems 5 – STRATEGIC PARTNERING ARRANGEMENTS ALAN L. WHITEBREAD

MARKET ENTRY: CONCERNS

• Legal and Regulatory demands – • The ability of the judicial system to enforce the constitution and legislation – Taxes • Profits • Inventory • Other special taxes and fees • • Environmental laws ALLW International

MARKET ENTRY: ALTERNATIVES

CONTRACTUAL RELATIONSHIP

[Contract manufacturing, strategic alliance, joint venture, …]

FRANCHISING DIRECT INVESTMENT

[Acquisition, greenfield, brownfield]

LICENSING DIRECT EXPORTING

[To a reseller in another country]

INDIRECT EXPORTING

[To a reseller in your country]

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COPYRIGHT A. WHITEBREAD, 2001-2011

• •

MARKET ENTRY: INDIRECT EXPORTING

RISKS

–

LIABILITY, CONTROL; VERY ERRATIC DEMAND; FIT WITH OPERATIONS REWARDS

•

VERY LITTLE SALES EFFORT: INCREMENTAL VOLUME AND PROFIT SUPPLY CHAIN ISSUES=

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Manufacturer COPYRIGHT A. WHITEBREAD, 2001-2012 Agents / Distributors [Not in destination country - In your home country]

• •

MARKET ENTRY: DIRECT EXPORTING

RISKS

–

CONTROL OF INDEPENDENT RESELLERS; RESELLERS ACTIONS REWARDS

•

DIRECT CONTACT WITH LOCAL MARKET; PIGGYBACK MARKETING SUPPLY CHAIN ISSUES = Manufacturer

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Sales Subsidiary Resellers OEM’s COPYRIGHT A. WHITEBREAD, 2001-2012 Individual Accounts

• •

MARKET ENTRY: LICENSING

RISKS

–

CONTROL OF LICENSEES AND RESELLERS REWARDS

–

LOCAL MARKET KNOWLEDGE

– –

MINIMIZE ENTRY RISK PROFIT STREAM SUPPLY CHAIN ISSUES= Resellers Licensees Manufacturer Individual Accounts

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COPYRIGHT A. WHITEBREAD, 2001-2012

MARKET ENTRY: LICENSING

• A license is a legal agreement where one party receives something of value and agrees to certain terms of use and usually pays the original party for the right of use.

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MARKET ENTRY: LICENSING

• • Can generate a steady income with little or no capital investment.

• • May be used for special arrangements like JVs ALLW International

•

MARKET ENTRY: LICENSING

IS ADVANTAGEOUS WHEN ONE OR MORE OF THE FOLLOWING EXIST.

1.

2.

3.

4.

The marketing potential is too large to self-fund [insufficient capital and/or cash flow] the growth required investment[s]; or, You have an IP protected product, process, or brand and choose to expand utilizing other sources of capital; or, You choose to use the IP protected item to increase the cash flow for a long time to fund other projects or investment streams; or, Other more promising cash, investment, and growth situations consume your available capital.

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MARKET ENTRY: CROSS-LICENSING

• • The cross-license is structured to provide involved firms a greater advantage in the same or separate market.

• Sometimes this will lead the to formation of a joint venture.

–

Pharmaceutical research

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• •

MARKET ENTRY: FRANCHISING

RISKS

–

CONTROL OF RESELLERS REWARDS

–

LOCAL MARKET KNOWLEDGE; MINIMIZE ENTRY RISK; PROFIT STREAM SUPPLY CHAIN ISSUES= Manufacturer

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Resellers Franchisees Owned Facilities ?

Individual Accounts / Consumers COPYRIGHT A. WHITEBREAD, 2001-2012

• •

MARKET ENTRY: DIRECT INVESTMENT

[ACQUISITION, GREENFIELD, BROWNFIELD]

RISKS

– –

START-UP OPPORTUNITY COST; INVESTMENT; WORKING CAPITAL COUNTRY STABILITY; CURRENCY EXCHANGE REWARDS

–

DIRECT MARKET CONTACT, PROFIT STREAM SUPPLY CHAIN ISSUES= Manufacturer

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Subsidiary (Manufacturing) COPYRIGHT A. WHITEBREAD, 2001-2012 Resellers Individual Accounts

•

MARKET ENTRY: FDI AND FPI

• Foreign domestic investment

[FDI]

investment in real assets such as is the factories, offices, or distribution facilities.

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MARKET ENTRY: WHAT ATTRACTS FDI?

• Any combination of – – – – Acceptable and improving infrastructure – Good corporate governance – Unrestricted flows of funds – Low labor costs – Ample raw materials ALLW International

MARKET ENTRY: FIRMS INVEST IN FDI TO

• • Gain access for less expensive and/or a greater quantity of raw materials.

• • Shift production to countries where one or more of the factors of production are significantly less expensive and total cost is sufficiently less to offset the investment risk.

• Gain access to new technologies or managerial expertise • Establish operations in countries unlikely to interfere with private enterprise.

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MARKET ENTRY: TYPICAL FDI INCENTIVES

• Tax credits, exemptions, deferrals, or deductions • Land and/or building[s] • Grants for many different things – The economic development group should help you with this.

• Equipment reimbursement • R&D • Employee training • Relocation assistance / payment • Easy regulatory approvals • Subsidies • Many, many more ALLW International

MARKET ENTRY: FINANCIAL CONSOLIDATION ISSUES

• – These should consolidate easily.

• • • Rolling entities into consolidated corporate level financial statements • Special issues with goodwill, subsidies, privatizations, and other items ALLW International

MARKET ENTRY: BY ACQUISITION

• KEY ISSUES – Finding the right acquisition – Corporate philosophy – – Acceptance of their culture – Be sensitive to their management style – Read some articles on the Internet about international acquisition problems.

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MARKET ENTRY: SUBSIDIARIES

• The most extensive foreign involvement • Subsidiary choices – Creation of a new unit in the entity – – – – •

Ownership options; type of entity; charter; management

– Acquisition • Decision-making, control, approvals • Reporting obligations • Special considerations for

What are some of the supply chain issues that immediately come to mind?

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MARKET ENTRY: SUBSIDIARIES – TRANSFER PRICING

• The price a parent company charges a subsidiary for products or services from the parent company that are sold by the subsidiary in its market.

• Tests for the fairness of a transfer price.

1.

2.

3.

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MARKET ENTRY: SUBSIDIARIES – TRANSFER PRICING

• OBJECTIVE • Maximize profitability for the firm, not a part of the firm.

– What profit levels are desired?

– Where do you want to pay taxes on profits?

• Potential outcomes – – If the price is too high, it may encourage a gray market

be evading taxes in a country.

[parallel imports] which upset the market in that country. This could also

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MARKET ENTRY: CONTRACTUAL RELATIONSHIP

• •

[CONTRACT MANUFACTURING, STRATEGIC ALLIANCES, JOINT VENTURES]

RISKS

–

AUDIT & CONTROL; START-UP INVESTMENT; WC REWARDS

–

MINIMIZE ENTRY RISK; PROFIT STREAM SUPPLY CHAIN ISSUES= Manufacturer

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Contractual Agreement COPYRIGHT A. WHITEBREAD, 2001-2012 Resellers Individual Accounts

STRATEGIC ALLIANCE

Two [sometimes more] partners develop a joint long-term strategy with many of the following.

– – mutual needs – – a reciprocal relationship – – share [transferred] resources – to defend or improve their market position[s] – retain identities in new markets ALLW International

STRATEGIC ALLIANCE

• Strategic Alliance • Core Competencies and Key Success Factors • Types • • • Joint Ventures • Operational • R & D

[pharmaceutical industry]

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STRATEGIC ALLIANCE: KEY SUCCESS FACTORS

• Mission • Strategy • Governance • Cultural fit • Organization • Management chemistry • Implementation ALLW International

STRATEGIC ALLIANCE: DEMANDS

• PARTNERS MUST – – Share the benefits of the alliance – Share control – Make ongoing contributions • • Products • • Strategic areas of participation ALLW International

STRATEGIC ALLIANCE: COMPETITIVE

• • Some conflict between partners is expected, but minimized • Partners must protect their interests • Learning from the other partner[s] is critical ALLW International

STRATEGIC ALLIANCE:

CO-OPERATIVE: THE JAPANESE KEIRETSU

• • • It operates in a wide array of markets.

Keiretsu

executives sit on each other’s boards and share information.

• • Foreign competitors often view keiretsu as cartels to dominate the market and restrict competition.

Famous keiretsu are Mitsui and Mitsubishi.

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STRATEGIC ALLIANCE: JOINT VENTURE [JV]

• The JV company is run by two [rarely more] firms.

• • It combines the strengths of the individual firms.

• • JV may have better acceptance by authorities if one of the firms is local.

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LIKELY ENTRY ALTERNATIVES

SITUATION OPTION[S]

A small firm wants to export only.

A specialized machinery manufacturer wants to increase their presence in key country markets.

A firm is having difficulty supplying enough goods to a regional market.

A firm wants to aggressively increase its sales in a region Indirect or direct exporting Add and develop key resellers Contract manufacturing, DFI, or JV DFI or JV

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MARKET REENTRY

• Occasionally, a firm will exit a market [country] and want to get back in at a later date. • There are numerous challenges with this approach. They include credibility and commitment [staying power], how to reenter [alone or with what kind of partner], and the brand name to be used just to name a few.

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