Supply Chain Frontiers Issue #27. Read all articles in this issue
Global distribution networks are always a work in progress, constantly adjusting to changes such as shifts in exchange rates and labor costs. The problem for supply chain managers is how to keep track of these various factors and develop a keen sense of which ones are critical to the integrity of their network. Researchers in the MIT-Zaragoza program at the Zaragoza Logistics Center (ZLC) in Spain are developing a solution that combines innovative scenario planning methods with established network optimization tools.
“You can design scenarios that can effectively test the robustness of your network,” said Dr. Jarrod Goentzel, MIT-Zaragoza’s Executive Director. For instance, simulating a hike in fuel prices will indicate the relative sensitivity of different parts of the network to this parameter. But that is only half the story. By applying optimization tools as well, “supply chain managers can develop a clearer picture of how the network should be reconfigured to maintain optimal performance,” explained Goentzel.
The approach can also help managers to make investment decisions. Modeling different network configurations helps to determine which combinations are the most robust and in line with the company’s strategic goals. In addition, “managers get a better idea of which factors need to be closely monitored,” Goentzel said.
Potential applications are explored in two Masters of Engineering in Logistics & Supply Chain Management (ZLOG) theses, completed this year as part of the MIT-Zaragoza program.
A thesis authored by ZLOG student Reinaldo Fioravanti, who joined the program with years of experience at Hewlett Packard, considers the distribution networks for two HP printers, a basic model and a high-end machine. HP sells around eight million ink jet printers annually worldwide, and sources mainly in Asia (93%) with some capacity in Latin America (7%). It maintains postponement centers for the machines in Europe, Latin America and North America, as well as “low touch” operations where finished product is shipped direct from factories to distribution centers.
Fioravanti evaluated the network on the basis of various scenarios such as:
- an increase in labor cost in Asian countries;
- an increase in oil prices and transportation costs;
- exchange rate appreciations for countries in Asia and Latin America; and
- lead times are constrained to be shorter.
The exercise yielded some important insights. For example, China loses part of its production to Thailand as a result of higher costs, but remains competitive in a number of scenarios owing to its strong domestic market. A marked increase in transportation costs indicated that opening factories in Mexico and Brazil is a viable strategy; but in order for a Mexico factory to become a global sourcing center for other regions, transportation costs would have to increase by as much as 500%. The location of a postponement center in Germany is robust across many scenarios; and Germany becomes an attractive location for factories when duties are increased, labor costs rise in Asia, or lead time is constrained.
A 2008 thesis written by ZLOG student Mary Margaret York looks at how changing macro economic factors affect the supply chain network design for an apparel company. York simulated a number of changes such as labor rates doubling in China, fuel prices increasing, world duty rates doubling or disappearing altogether, and an increase in the price of cotton in all areas except for China, USA, and Africa. Again, the work provides some notable lessons. For example, when import duties are removed, China’s market share increases from 29% to 49%, Thailand and Bangladesh are no longer competitive as sourcing locations, and Romania increases its market share from zero to four percent.
ZLC is planning further research on the methodology said Goentzel. An area that offers much potential is managing global distribution networks in the same manner that financial portfolios are managed. Just as investors hedge against future market uncertainties, it might be possible for supply chain managers to hedge against upheavals that could impact the performance of their networks. The approach could also help managers plan investments in the network and balance the risks in different parts of the world.
Perhaps the most important benefit of these new approaches is that supply chain managers can become more adept at sensing developments that have the potential to disrupt their supply networks. “The whole purpose of optimization and running scenarios is to build intuition,” said Goentzel.
For more information on the research or ZLOG theses described in this article contact Jarrod Goentzel.