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BBA-7
DEPARTMENT OF MANAGEMENT SCIENCES
With increased globalization and offshore sourcing, global supply chain management is becoming an important issue for many businesses. Like traditional, supply chain management, global supply chain management also faces a number of risks that pose serious threats to its performance. The big difference between the risks of the two is that global supply chain management involves a company's worldwide interests and suppliers rather than simply a local or national orientation.
DEMAND RISK
Demand risk is defined as the risk for a company that demand for a product will either exceed their expectations and ability to meet the demand OR fall short of their expectations or leave them with product they cannot sell. Demand risk is classified as external global supply chain risk caused by unpredictable or misunderstood customer or end-customer demand. Demand risk mainly arises due to: Increase in the prices of product or service as a result of increase in the prices of raw materials or other costs associated with the supply chain. Customers may shift to available competitors in the market offering slightly low rates thus reducing the demand of product/service. The income level of the targeted market may have shifted, thus changing their priorities and needs and thereby affecting their buying pattern.
The general trends in customers taste may also disturb the forecasted demand of supply chain. New competitors arriving in the market and introduction of substitute product/service can also lead global supply chain to face demand risk. The inaccuracy on part of supply chain in determining the appropriate quantity of goods and services to be produced may cause a shortfall or excess of inventory hence increasing the global supply chain cost.
EXAMPLE To satisfy certain country-specific requirements such as power supply and language driver, Hewlett-Packard (HP) has to develop multiple versions for each model of their DeskJet printers. Each version serves a particular geographical region (Asia-Pacific, Europe, or Americas). Due to uncertain demand in each region, HP faced the problem of overstocking certain printers in one region and under-stocking certain printers in other regions.
PRICE RISK
The risk arising due to uncertainty in the total global supply chain cost, which may be contributed by one or more of the components of supply chain or due to earnings volatility, unexpected financial performance, pricing changes, and bad management. Costs are incurred from the start of planning for each global supply chain throughout its execution and, therefore, are incurred along the entire end-to-end chain, from the suppliers supplier to the customers customer. A trade-off between global supply chain benefits and its price is to be determined so as to estimate the total cost of global supply chain. Although offshoring and other means of expanding global chain among different countries can reduce costs associated with labour, raw materials, IT proficiencies, technology and other similar costs but it also increases communication cost, transportation cost, capacity cost, facility cost, information cost, delays in receiving cashflows, operating cost, legalities cost and other hidden cost which are often overlooked by the company that opts for global supply chain. These small yet necessary costs keep piling up thus taking the total cost to a higher level and exposing the supply chain to price risk as they have been neglected in the past or due to other environmental factors. Consequently, the total global supply chain cost exceeds the estimated cost and company faces problems in managing the cost. The most important factor that gives air to this risk is the rise in fuel prices. It is the backbone of price risk as it affects all the components of global supply chain starting from rise in the prices of raw materials to transportation cost. And transportation cost is associated with each level of global supply chain. The cost of global supply chain then demands an increase in the price of
commodity that the company deals in thus forcing the cost on customer. Customers especially those who are price sensitive look for substitute or competitors product and this causes a decrease in sales volume.
BMW took a two-pronged approach to managing its foreign exchange exposure. One strategy was to use a natural hedge meaning it would develop ways to spend money in the same currency as where sales were taking place, meaning revenues would also be in the local currency.
However, not all exposure could be offset in this way, so BMW decided it would also use formal financial hedges. To achieve this, BMW set up regional treasury centers in the US, the UK and Singapore.
demand risk arising due to inflexibility on part of ordering, Canon agreed to allow HP to adjust their order quantity upward or downward by no more than a few percent. In this case, the upward/downward adjustment limits capture the flexibility level of this supply contract. MULTIPLE SUPPLIERS OR DITRIBUTORS
Having multiple sources of supply for a raw material reduces the impact of one source failing to deliver materials. Specifically when demand rate risk is involved, firms can protect their global supply chains by associating with more than one supplier. FLEXIBLE CAPACITY
A global supply chain that has flexible capacity can reduce price, demand and exchange rate risk as multiple products are now being stored at the same place which makes coordination and communication much easier. Price reduces as one capacity provides room for many products thereby reducing the price associated with each products capacity. The nature of installed capacity and its ability to respond to demand and price risk can be improved by using flexible manufacturing strategies include short yet fixed cycling horizons. INVENTORY TIME CYCLES
The positioning of inventory in the global supply chain to buffer against demand risk, price and exchange rate risk is very critical. With extended lead times associated with long distance supply chain, more inventory piles up in the chain. Therefore TQM and JIT concepts can play an important role in preventing such risks. GENERIC MATERIAL INVENTORY
Using this strategy, firms intend to add only those products or unfinished items that can be converted to a number of products or disposed at a fair price thereby provide shielding effect against price, demand and exchange rate risks. POSTPONEMENT
Global supply chain should be so designed that the major assembling or manufacturing plant is established in one of the main hubs of target markets. This helps better forecast the demand and also saves the firm from adverse affects of exchange rate risk.