CASE STUDY CONCEPT: Challenges of Managing and Coordinating a Global Supply Chain.
Fantastic Corporation designs and makes a fantastic new home entertainment center with widescreen HD TV and surround sound. It performs to demanding specifications and delivers impressive results. Customer demand is growing steadily, and if Fantastic does not keep up with demand, customers will go elsewhere and competitors will start taking market share. There have been some supply chain problems as Fantastic ramps up production. There are points in the supply chain where products are either running out or building up too much. And now the company has also decided to expand from its North American market into Europe.
You are head of supply chain operations at Fantastic and you already run a supply chain that extends from China to New York and points in between as shown in the screenshot below. Now you are going to extend that supply chain to Paris and Berlin. You need to design and execute a plan to improve operations of the existing supply chain and then expand it to support the new operations in Europe.
Your CEO has already described the company’s growth strategy. The company intends to open stores in London, Paris, Amsterdam and Berlin. The CEO wants to enter the most promising European markets quickly, and then be ready to expand into further cities in Europe if prospects look good. Everyone is looking to you to deliver the products those new stores will need.
Your existing supply chain has grown up to support Fantastic Company operations and sales in North America and that is the base you will build on to support the company’s move into Europe. Factories of suppliers in Japan, China, Vietnam and Singapore manufacture component parts that Fantastic needs to build its home entertainment centers. These parts are shipped (using ocean freight and air freight) across the Pacific Ocean to facilities in Seattle and Los Angeles. The screenshot below shows the facility in Hong Kong where containers are loaded onto ships bound for Long Beach Harbor in Los Angeles.
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Screenshots below show the Long Beach Harbor facility and the location of the new Los Angeles factory where final assembly of home entertainment systems happens. Some sub-assembly of components is also done in Seattle, and then sent by railroad to the factory in Los Angeles.
NOTE: This is an advanced case. Work through the three challenges of the beginning case, “Cincinnati Seasonings” before taking on the challenges in this case.
As you work on expanding this supply chain you will get to practice setting up and managing a supply chain that is truly global in scope. As the supply chain grows, product lead times can be much longer than is the case in local or regional supply chains. And when transportation suddenly becomes significantly more expensive or time consuming, it creates a new set of conditions different from those encountered during expansion of a company within a single country.
You will need to look into ways to increase the speed and volume of products flowing through the supply chain, while at the same time keeping an eye on costs and managing them so they don’t eat up all the profit. You also need to look at managing supply chain lead times by using higher levels of safety stock inventory to ensue that facilities don’t run out of inventory. You will see how inventory can easily build up to levels that are beyond what is needed for safety stock and become a significant expense to maintain.
FIRST CHALLENGE
Get the existing supply chain and assembly operations to run for 30 days (one month)
Fantastic Corp uses a monthly S&OP (sales and operations planning) cycle to manage supply chain operations from one month to the next. At the start of each month you get a demand plan from the sales and marketing people showing forecasted demand for home entertainment centers (HECs) at stores in the following month. Then you figure out how to make and deliver enough HECs to meet that demand. That is how you create the supply plan people will use for operating the supply chain in the following month. You have to make sure enough component parts are purchased and delivered to your factories in Seattle and Los Angeles so those factories can produce the number of HECs required to meet overall demand. You also have to make changes to delivery schedules and amounts to the stores to meet store demand.
To get started with this challenge, view the online library and import the supply chain model called “Fantastic Corp Global SC v4f“. Customer demand at the stores as forecasted by sales and marketing is already shown in the model. Now you need to make changes to the model in order to supply products to meet this demand. Problems will arise as you run simulations of this supply chain. There are a lot of facilities and product delivery schedules to coordinate. Start by doing whatever you think is needed to respond to problems as they arise in the simulations. See what happens; notice how a change in one place can cause another problem to occur in some other part of the supply chain. Try different ideas to solve problems; the simulations will show what works best.
When you get a simulation to run for 30+ days that means you have created a supply plan that meets product demand for that period of time. Once you get your simulation to run for 30 or more days you can download the simulation data to a reporting template and produce monthly Profit & Loss reports plus key performance indicators (KPIs). These reports will help you spot areas for improvement in your supply chain. And they serve as an objective measure to compare the effectiveness of different supply chain designs. See more about using simulation data to produce monthly P&L Reports in “Analyzing Simulation Data” – scroll down to “Exporting Simulation Data“.
You can use the default values that come with this model, or you can do some research to get more current numbers (ask your instructor). Use commercial real estate brokers websites to find current rental costs in different countries and cities. Look at websites for shipping and trucking companies to find current costs for shipping products. And do some market research on similar products to help with forecasting demand for the Fantastic Home Entertainment Center product in different stores.
You can also think about the impact of new technologies such as robots, drones, driverless vehicles, 3D printing and artificial intelligence. These technologies can change facility operating costs and product production rates. They can change costs and speeds of vehicles, and decrease the delay between departure for vehicles which increases delivery frequencies on routes. To model the effect of using these new technologies select the facilities, vehicles and routes in the supply chain where you want to apply this technology. Edit the attributes of those entities to reflect the performance improvements expected from the new technology: increased production rates; reduced operating costs of facilities and vehicles; shorter delays between departure for vehicles; etc.
Ideas for how you could use new supply chain technologies to improve the flow of products through this supply chain can be found in the SCM Globe blog article titled “Five New Supply Chain Technologies and How to Use Them”
If you do research to update the default values that come with this model focus your effort and set a limit on the amount of time you spend on the research. Do web searches on key words and phrases. Precise numbers are hard to find and in times of rapid change like now, it is more important to find good estimates rather than exact answers (because exact answers keep changing as technology changes). Base your estimates on the data you find in your research and identify the data sources you used.
REPORTING TEMPLATE for use with this case study: Import your simulation data into the template and create monthly profit & loss reports as well as generate key performance indicators. The reporting template is set up for the S&J Trading Company, but look at how the reports read the simulation data and you will see how to change the spreadsheet to add more products and facilities to accommodate this case study – Download copy of Multi-Product P&L Reporting Template here
[If you are using SCM Globe Professional version, these reports can be generated automatically by clicking on the “Generate P&L Report” button on the Simulate Screen]
** CASE CORRECTION CREDIT: An error in the original supply chain model was discovered in the spring of 2020 by a student team working on this case. In the original supply chain model demand for components at the Seattle and Long Beach factories indicated that it took 100 units of each component to create only 1 home entertainment center. This is not impossible but it is not plausible; no company would make a product like that. To correct this error, they scaled everything by 10. Factory demand numbers were divided by 10 and production numbers were multiplied by 10. Store demand numbers were also multiplied by 10.
This correction was made by MBA students Nicole Cline and Martin Zuniga in their International Operations and Supply Chain course. The correction was reviewed by their course instructor Dr. Barbara Hoopes, Academic Director and Associate Professor – Business Information Technology, Virginia Tech MBA Programs. Their corrected supply chain model now replaces the older model and is available in the online library – Fantastic Corp Global SC v4f.
SAVE BACKUP COPIES of your supply chain model from time to time as you make changes. There is no “undo”, but if a change doesn’t work out, you can restore from a saved copy. And sometimes supply chain model files (json files) become damaged and no longer work, so you want backup copies of your supply chain to restore from when that happens.
SECOND CHALLENGE
Keep the existing supply chain running for 30 days AND Expand the supply chain to support new stores in Europe
How will you prepare for the move into Europe? What steps will you take to support the opening of the initial four European stores? Those four new stores in Europe are shown in the screenshot below. There is a big ocean between your existing supply chain and those new stores. How will you move products across that ocean?
You’ll need to create a European distribution center and stock it with enough initial on-hand inventory to support sales at the four stores for at least the length of time it will take to ship more inventory from the United States. Assume sales demand at the four stores to be the same as for the New York store. To ship products from the United States to Europe you have two choices: 1) use air freight; 2) use ocean shipping. You need to evaluate these two options and explain why you chose one or the other.
There is a lot going on here. This is where you get to demonstrate you understand the relevant supply chain and logistics principles, and show you know how to apply them to solve problems in this realistic simulation. To meet this second challenge it will help to consider issues such as:
- The location of the new European DC. Which mode of shipping from America to Europe will you choose? If you choose air freight you probably want to locate the European DC near an airport. If you choose ocean shipping then you probably want to choose a location near a port. How much storage capacity do you need at the new DC and why?
- Should the European DC be near the port or airport where products are shipped from America or nearer to the stores it serves?
- You also want to consider how best to maintain inventory in the new DC. To do this you need to ramp up production of home entertainment centers in your LA factory, and this means increasing transportation activity and costs to bring in more component parts for assembly and move finished products from LA to the new DC.
- Can you use existing facilities in North America to support business expansion or do you need to open a new facility from which to ship products to Europe?
- Do you want to maintain existing product assembly activities on the west coast or do you want to open a new assembly facility on the east coast or in Europe?
- What would be the effects of applying combinations of new technologies such as robots, drones and 3D printing?
Fantastic Corporation does not run all of the facilities in this supply chain (such as the factories of suppliers and the stores or retailers) but there are operating estimates entered for those facilities so you can get an idea of how profitable your business is for those suppliers and retailers. You are responsible for making sure the suppliers deliver enough component parts to your factories to meet factory production rates. And you need to make sure the supply chain is delivering enough products to the stores to meet customer demands.
For ideas on how to expand this supply chain see SCM Globe online user guide section “Tips for Building Supply Chain Models“. In particular, scroll down to the “Vehicles” section and read the techniques for modeling deliveries made by ocean shipping or air freight. Those techniques are used in this model when you import it from the library. The speed of ocean vehicles is increased to model weekly shipments and deliveries and the cost per kilometer of ocean and air freight is cut in half to model the use of one-way shipping containers.
REPORTING TEMPLATE for use with this case study: Import your simulation data into the template and create monthly profit & loss reports as well as generate key performance indicators. The reporting template is set up for the S&J Trading Company, but look at how the reports read the simulation data and you will see how to change the spreadsheet to add more products and facilities to accommodate this case study – Download copy of Multi-Product P&L Reporting Template here
[If you are using SCM Globe Professional version, these reports can be generated automatically by clicking on the “Generate P&L Report” button on the Simulate Screen]
NOTE: Default rent costs at facilities are set higher than what they would normally be in the real world. If you want to change rent costs, use a commercial real-estate website such as CityFeet (www.cityfeet.com) to research current rental rates in different cities in North America, and for cities in other parts of the world start with www.knightfrank.com.
THIRD CHALLENGE
Improve your supply chain design to lower inventory and operating costs
You are starting to get an idea of what is involved in running a global supply chain. Products are being moved over great distances so transportation costs are high. Think about how you can lower transportation costs. And inventory can build up quickly so think about how to keep the supply chain running while also reducing the overall amount of inventory at different facilities. Here are some ideas to keep in mind:
- Read the online guide section “Cutting Inventory and Operating Costs” for useful ideas such as applying the economic order quantity (EOQ) equation to determine delivery amounts and frequencies
- Consider consolidating the product assembly facilities in the United States. If you did this the combined facility would need storage capacity equal to the separate storage capacities of the two current facilities
- The workforce of a combined facility could be consolidated somewhat so daily operating costs of the combined facility would be 10 percent less than the combined operating costs of the two current facilities
- If you did consolidate product assembly into one facility, where would you locate that facility? Do some research on the websites of commercial real estate brokers to find possible locations. Use the satellite view and zoom in to see actual facilities. Make sure they are big enough and make sure they are in convenient places near major transportation arteries
- Consider opening a new assembly facility in Europe. You could then move component parts from China and Japan by high speed rail using rail lines that go between China and Europe. The screenshot below shows ocean freight routes and one of the high speed rail lines now connecting China and Europe. Satellite photo inserts show several of the massive freight handling facilities that enable this rail line to handle enormous volumes of freight.
- In 2013 the Chinese government launched the largest infrastructure project in the world to build a modern Silk Road to connect China with markets in Central Asia, Europe, Africa and the Middle East. This article from the World Bank is a good introduction – Belt and Road Initiative. And this article from the Council on Foreign Relations provides more in-depth information – China’s Massive Belt and Road Initiative (BRI).
- The vision for the BRI is to build a network of high speed and high volume supply chains lowering the time and cost of moving products between cities it connects thus generating more commercial activity and growing the economies of the connected countries. This is explored in a video – The New Silk Road: Ambition and Opportunity | CNBC. The map in the screenshot below shows high speed rail lines connecting inland cities from China to Europe. It also show a maritime supply chain connecting port cities in China with other ports in Asia, Africa and Europe.
You can take a look at these infrastructure projects being built by China and see more development in other countries involved in the BRI. Go to the Edit screen and use the search location box in the upper left corner of the screen. Do searches on relevant place names such as:
- “Lanzhou west railway station, China”
- “Urumqi north railway station, China”
- “Khorgos gateway dryport”
- Find other place names by doing research on the Belt and Road Initiative
As you type in these location names you will go to those places on the map. Switch to satellite view and zoom out until you can see the railway station or other facility you are looking for in the screen. Then zoom in again and examine the facility and the surrounding territory and transportation infrastructure (rail lines, harbors, highways and airports). As you do this you build your understanding of what is available and what is possible.
What are the pros and cons of using the BRI as part of Fantastic Corporation’s supply chain to support its expansion into Europe? Consider both economic and political perspectives.
To share your changes and improvements to this model (json file) with other SCM Globe users see “Download and Share Supply Chain Models”
NOTE: An earlier bug that displayed some routes times and distances as ONE-WAY has been fixed. All routes now show ROUND-TRIP times and distances. Simulations use ROUND-TRIP times and distances.
This case study continues with a second case that explores supply chain risk management and business continuity. This second case is titled “Fantastic Corporation – Unexpected Events“.
Register on SCM Globe to gain access to this and all other case studies. Click the blue “Register” button on the Log In page (app.scmglobe.com) and buy a subscription (if you haven’t already) using a credit card or PayPal account. Then go to the SCM Globe library and click the “Import” button next to this case study. Scan the “Getting Started” section (if you haven’t already), and you are ready to go. To share your changes and improvements to this model with other SCM Globe users see “Download and Share Supply Chain Models“