LBSIM

Managing global
supplier, production
and distribution
networks (GSPDN)
Operation Management
Abhishek Gupta
12/28/2007

Submitted to: Prof. P. K. Bansal

Managing global supplier, production and distribution
networks (GSPDN)
Operation Management
Abhishek Gupta

Executive Summary

The increasing internationalization has moved the focus from national to international logistics systems.
On the supply side local or domestic suppliers have been replaced by a complicated pattern of
international sourcing. The organization and management of production processes have changed to more
flexible and specialized forms. New inter-organizational relationships between firms in vertical systems
are emerging. On the demand side, international markets have become more important, and many
companies are reconfiguring their international logistics systems. The international competition has forced
the companies to be both market and customer oriented and cost effective at the same time. Mass
customization, flexibility and time compression are keywords in this development. Over the past decade,
there has been a major power shift in favor of global customers, which have gained substantial influence
over their suppliers. These demanding customers increasingly require globally consistent products and
services regardless of where they operate, and their purchasing is often based on close relationships with
a reduced set of preferred suppliers. Thus, many suppliers are targeting these key customers by shifting
resources from regional and function-based operations to global account management. Global account
management programs feature dedicated cross functional teams, specialized coordinating activities for
specific accounts, and formalized structures and processes (Homburg, Workman, and Jensen 2002). The
growing significance of GSPDN calls for research on the processes that drive the success of such
programs. The current study addresses this gap. Intensive interviews with leading supplier companies
reveal fundamental GSPDN processes based on these supplier’s best practices. Field research and case
studies also reveal propositions that link the processes that entail GSPDN capability to favorable
outcomes. The objective is to formulate a framework that provides testable propositions and directions for
further research. We define GSPDN capability as complex bundles of skills and accumulated knowledge
that are exercised through organizational processes that enable suppliers to address rapidly changing
global customer needs and environmental changes. An appropriate framework for understanding how an
organization develops such a capability is the dynamic capability theory. In response to the increasingly
demanding requirements of global competition, three interrelated transformations have occurred in the
organization of international economic transactions. First, global production networks (GPN) have
proliferated as a major organizational innovation in global operations. Second, these networks have acted
as a catalyst for international knowledge diffusion, providing new opportunities for capability formation in
lower-cost locations outside the industrial heartlands of North America, Western Europe and Japan.
Third, a long-term process of “digital convergence” enabling the same infrastructure to accommodate
manipulation and transmission of voice, video, and data, has created new opportunities for organizational
learning and knowledge exchange across organizational and national boundaries, hence magnifying the
first two transformations (Ernst, 2002c).The combination of these three transformations has changed
dramatically the international geography of production and innovation. We focus on the first two of these
transformations. The first transformation signals a new divide in industrial organization: a transition is
under way from “multinational corporations”, with their focus on stand-alone overseas investment
projects, to “global network flagships” that integrate their dispersed supply, knowledge and customer
bases into global (and regional) production networks .There is a growing acceptance in the literature that,
to capture the impact of globalization on industrial organization and knowledge diffusion, the focus of
research needs to move from the industry and the individual firm to the international dimension of
business networks. Our understanding of these networks is limited. Most studies have focused too
narrowly on the perspective of the network flagship. We need research that explores as well implications
for network suppliers, especially lower-tier suppliers from developing countries.
Managing global supplier, production and distribution
networks (GSPDN)
Operation Management
Abhishek Gupta

Introduction

Multinational corporations (MNCs) have been around for a long time (e.g. Wilkins, 1970). Until recently,
their international production has focused on the penetration of protected markets through tariff-hopping
investments, and on the use of assets developed at home to exploit international factor cost differentials,
primarily for labor (e.g. Dunning, 1981). This has given rise to a peculiar pattern of international
production: offshore production sites in low-cost locations re linked through triangular trade ∗
Corresponding author. A progressive liberalization and deregulation of international trade and investment,
and the rapid development and diffusion of information and communication technology (IT) have
fundamentally changed the global competitive dynamics, in which MNCs operate. While both market
access and cost reductions remain important, it became clear that they have to be reconciled with a
number of equally important requirements that encompass: the exploitation of uncertainty through
improved operational flexibility a compression of speed-to-market through reduced product development
and product life cycles learning and the acquisition of specialized external capabilities and a shift of
market penetration strategies from established to new and unknown markets (e.g. Christensen, 1997). In
response to the increasingly demanding requirements of global competition, three interrelated
transformations have occurred in the organization of international economic transactions. First, global
production networks (GPN) have proliferated as a major organizational innovation in global operations
(e.g. Borrus et al., 2000). Second, these networks have acted as a catalyst for international knowledge
diffusion, providing new opportunities for local capability formation in lower-cost locations outside the
industrial heartlands of North America, Western Europe and Japan. Third, a long-term process of “digital
convergence” (e.g. Chandler and Cortada, 2000), enabling the same infrastructure to accommodate
manipulation and transmission of voice, video, and data, has created new opportunities for organizational
learning and knowledge exchange across organizational and national boundaries, hence magnifying the
first two transformations (Ernst, 2002c). The combination of these three transformations has changed
dramatically the international geography of production and innovation. We focus on the first two of these
transformations. The first transformation signals a new divide in industrial organization: a transition is
under way from “multinational corporations”, with their focus on stand-alone overseas investment
projects, to “global network flagships” that integrate their dispersed supply, knowledge and customer
bases into global (and regional) production networks (Ernst, 1997, 2002a). There is a growing
acceptance in the literature that, to capture the impact of globalization on industrial organization and
knowledge diffusion, the focus of research needs to move from the industry and the individual firm to the
international dimension of business networks (e.g. Ghoshal and Bartlett, 1990; Rugman and D’Cruz,
2000). Our understanding of these networks is limited. Most studies have focused too narrowly on the
perspective of the network flagship (“flagship bias”). We need research that explores as well implications
for network suppliers, especially lower-tier suppliers from developing countries. Equally important is the
second transformation:
GPN in their operations reportedly disseminate important knowledge to local suppliers
in low-cost locations, which could catalyze local capability formation. Knowledge transfer, however, is not
automatic. It requires a significant level of absorptive capacity on the part of local suppliers and a
complex process to internalize disseminated knowledge. Our understanding of knowledge transfer and
local capability formation is limited. International knowledge transfer has been extensively studied, but
research has primarily focused on such formal mechanisms as foreign direct investment (FDI) and foreign
licensing (FL) (Reddy and Zhao, 1990). These formal mechanisms, however, are only the tip of the
iceberg. A larger amount of knowledge is transferred through various informal mechanisms (Westphal et
al., 1985; Kim, 1991; Ernst, 2000a). Research on informal knowledge transfer is scarce. The importance
of local capabilities in assimilating, adapting, and improving imported technology has long been
Managing global supplier, production and distribution
networks (GSPDN)
Operation Management
Abhishek Gupta

recognized, but few studies exist on the complex process of local capability formation in developing
countries (e.g. Kim, 1997).

GPN transform the production and use of knowledge, with far-reaching implications for
an evolutionary theory of economic change. There is a fundamental trend towards an increasing mobility
of knowledge, yet little do we know about drivers and implications. A major constraint is a lack of
communication between research on GPN, research on international knowledge diffusion, and research
on local capability formation. While all three are highly relevant strands of research, their lack of
interaction obstructs our understanding of how global networks affect knowledge diffusion and the
formation of local capabilities. There is a need to bridge this gap through “appreciative theories”, as
defined in Nelson’s (1995) thought-provoking review of economic growth theory. This paper develops a
conceptual framework that links together the above three areas of research, as a first step towards an
appreciative theory. We argue that globalization has culminated in an important organizational innovation:
the spread of GPN. These networks combine concentrated dispersion of the value chain across firm and
national boundaries, with a parallel process of integration of hierarchical layers of network participants.
This has created new opportunities for international knowledge diffusion that lower-tier network suppliers
should strive to exploit. To substantiate this argument, we proceed as follows. Section 2 analyzes the
three dynamic forces that drive the rapid development of GPN and highlights the characteristics of the
flagship model of GPN. Section 3 explores the categories of knowledge, and the mechanisms of
knowledge transfer from flagship companies to local network suppliers. And in Section 4, we discuss how
GPN can act as mediators of local capability formation.

How do organizations globally optimize this part of the supply systems?

• Multinationals constantly reconfigure their supply chains for many reasons. Some examples include:
to integrate acquisitions, to realize working capital and cost efficiencies, and to respond to the
changing ways of doing business with both customers and suppliers.
• Companies in the European life sciences industry could save significant sums of money, up to 5 per
cent of turnover in some cases, by considering tax implications in their supply chain strategy
• Tax Effective Supply Chain Management (TESCM): TESCM is a business model that considers tax
when designing a supply chain strategy. The profitability of a supply chain can be significantly
enhanced by aligning the respective tax structure with the current and future supply chain structure
and strategy.
o This is achieved through the creation of more centrally coordinated strategic and tactical supply
chain management processes; managing the tax impact resulting from the operational changes
in the supply chain (e.g., flow of goods, location of (in) tangible assets and organizational
structures); and reducing the effective corporate tax rate and optimizing indirect taxes, such as
value-added tax (VAT) and custom duties.
o The principle underlying this model is the centralization of the higher value-add functions, major
risks and intangible assets into a separate legal entity, called a Principal company or a Supply
Chain Management Company. This SCMC is usually conveniently located in a favorable tax
jurisdiction, like Switzerland.
o Despite the benefits, a lot of firms are not implementing TESCM yet, as they feel a social
responsibility for the region in which they are located. Often, the location is where the company
has its roots and the place where the people who have contributed largely to its growth live,
according to the firm. But US-based competitors have limited social responsibility in Europe and
they are quickly reaping the benefits of TESCM models.
Managing global supplier, production and distribution
networks (GSPDN)
Operation Management
Abhishek Gupta

• Some foreign companies like UPS advocate the use of six-sigma along with RFID to achieve the
maximum efficiency in the supply chain solutions. These process changes can act as opportunities to
enhance the business practices, source internal benefits, improve operations and recognize new cost
savings.

• How Wal-Mart manage its Distribution:

o The company procured goods directly from manufacturers, bypassing all intermediaries.
o Wal-Mart is a tough negotiator on prices and finalized a purchase deal only when it was fully
confident that the products being bought are not available elsewhere at a lower price.
o They pick the goods from the supplier’s warehouse by themselves.
o Wal-Mart spent a significant amount of time meeting vendors and understanding their cost
structure.
o Once satisfied, they believe in establishing a long-term relationship with the vendor.
o Wal-Mart’s own warehouses directly supplied 85 percent of the inventory, as compared to the 50-
65 percent for the competitors.
o The distribution centers are serviced by more than 3,500 company owned trucks.

Production and Distribution

Reorganization in production and distribution is not taken into account. Although this may be fine
for the upcoming forecast, in the long run, this will have to change with the addition of changes to
production to better improve competitiveness.

Reorganization in production and distribution is necessary for Pioneer to stay competitive in this
growing market. The seed market in North America has been growing at 3% while elsewhere this
number has been 5%. Moreover, Pioneer’s market share in foreign countries has been increasing
above 22.5%, while foreign plantings accounted for only 11%. Further, 59% of production of world
commercial corn occurred outside the United States. To capitalize on this growing trend and to
establish Pioneer as a world leader, reorganization is inevitable and increased foreign capacity
highly recommended now before other companies claim their stakes. In depth analysis should be
done on the demographics of potential sites before any locations are selected.

New facilities need to be strategically located in different areas around the world. An approach to
location decisions would be based on market share. Placing facilities closer to demand provides
a hand over the competition and will lead to cost reductions in distribution. Another factor to be
considered is the locations’ infrastructure, culture, and social and political environment. Several
methods of evaluating location alternatives exist such as the factor-rating method and locational
break-even analysis.

Also, although it may cost 25% more to operate foreign facilities, I think an analysis is necessary
to fully understand these costs. An accurate breakdown could reveal costs that can easily be
reduced or eliminated simply by understanding them better. Further, more evaluation methods
exist to try and minimize costs associated with transportation such as the center-of-gravity
method and the transportation model. These methods should be used in addition to seek cost
savings.
Managing global supplier, production and distribution
networks (GSPDN)
Operation Management
Abhishek Gupta

To address the issues of protection of patents and other proprietary assets, Pioneer needs to act
local and think global. The first consideration is of course the social and political environment of a
region. However some locations may be strategically necessary despite being notorious for not
respecting such things (i.e. China). To counter these problems of guanxi (connections and
cronyism) to steal customers and ideas, Pioneer needs to show a local face. Hiring and training
locals for production as well as hiring natives that possess the skills lacking to make real
contributions to the company will not only address issues related to protectionism but may prove
quite fruitful in terms of production and distribution by adding fresh, relevant talent with the local
knowledge needed for longevity and success. Further, this can improve marketability in the host
country with consumers as well as governments.

Yield Rates and Carryover:

According to historical data, yield rates can highly vary from year to year, as much as 20% from the mean
and thus a 33% carryover rate has been used for years as a buffer stock against such highly
unpredictable fluctuations. The 33% carryover rate is highly questionable and currently, yield in excess of
forecast is not taken into account.

• Yield Rates

The current forecast method for yield rates is to use the 4 year moving average and adding 0.5 to
account for biotech advances and provide worst-case scenarios at 80 and 90%. However, yields
in excess of these forecasts are not taken into account because they would not produce a
shortage. Because of this, I believe that the forecasting methods are flawed. The actual yield,
excess or not, needs to be accounted for to produce more accurate information for planning as
well as for the issue of carryover.

• Carryover

The current carryover rate of 33% is rather high and has been used for the past 70 years.
However, as pointed out in the case, the industry has changed remarkably in the last 4 years
than over the last 20. This is quite a statement indicating the market environment, and thus
historical practices such as this needs to be reviewed and adjusted. No doubt, carryover is
needed given so many variables, but efforts can be made to try and reduce the number and or
dependence on it and would reflect most if not all of the following:

1. Increase facilities – Counter against variables such as climate, regulations etc.

2. Account for actual yield – To more accurately forecast and provide better carryover
percentages based on that information.
3. Rollover – Carryover in excess of the previous year’s set rate should be rolled over to
current year productions and the current rate lowered based on the roll over amount.
(Example: Set rate at 10%, last year’s actual carryover: 15%, set this year’s rate to 5%)
4. Improve R&D – Currently, R&D is concentrated on biotechnology. Some of this
investment could be used towards better technological methods of production and
harvesting that could increase yield efficiency resulting in less dependence on high
carryover.

Production
Managing global supplier, production and distribution
networks (GSPDN)
Operation Management
Abhishek Gupta

The production decisions revolve around the following: where to grow and process hybrids, minimize
production costs, and increase capacity outside the US.

Recommendations:

(1) Evaluate all current production facilities outside the US. The evaluation should focus on
identifying the production facilities with the highest productivity (in terms of seed volume output) as well
as the lowest production costs. The evaluation will help identify and allow the categorization of production
facilities into the following:

• Facilities with high levels of production and low production costs. (Best)
• Facilities with high levels of production and high production costs.

• Facilities with low levels of production and low production costs.

• Facilities with low levels of production and high production costs. (Worst)

(2) Increase production capacity of facilities located outside the US. The case mentions that
59% of world commercial corn production occurs outside of the United States. When the numbers
presented on Page 5 are broken down even further, production capacity is composed of the following:

Northern Hemisphere - 85%

USA and Canada - 80.75%

Elsewhere in Northern Hemisphere - 14.25%

Southern Hemisphere - 15%

There is no question that Pioneer must increase the production capacity in areas outside the US. The
evaluation conducted above reveals that Pioneer should focus on the first two types of facilities because
they have the highest productivity and less costly to work with on improvements, expansions, etc. and
seek for ways to improve production at the third type. Production capacity can be increased by the
following two methods or in combination:

• Open new production facilities

• Expand current production facilities

An analysis should be conducted to compare which of the two alternatives is best. For example, a cost -
benefit analysis.

The higher levels of productivity show that these facilities are being utilized to their maximum potential
and are operating at full capacity. Remember, that fixed costs are incurred regardless of whether the
facility is producing anything or not. Therefore, through high levels of production, they are minimizing the
impact that fixed costs have on every unit of output produced. This will result in a lower cost per unit.
Managing global supplier, production and distribution
networks (GSPDN)
Operation Management
Abhishek Gupta

However, it is important not to overproduce and end up with a product that cannot be sold taking up
space and money, further analysis needs to be involved to take demand into great consideration.
Perhaps some facilities could serve as back ups for corn seed production but their primary functions
would be production of Pioneer's other products so that capacity is still not wasted.

(3) Lower production costs. An attempt should be made to lower variable costs. The case mentions
that one of the major variable costs is detasseling.

• Detasseling. The company should look into the possible outsourcing of this function. An
analysis should be conducted to determine whether this is a source of competitive advantage. If it
turns out not to be, Pioneer can outsource to a company that specializes in this type of process
as well as based on careful quality control considerations. In no way however should Pioneer let
the evaluation and control be performed by others, this is still a very important and competitive
function of the business and must be done by Pioneer, however, a highly accurate statistical
model should be performed when doing so. Costs can be decreased in detasseling by not
surveying an entire field, but rather by a sample method. This would take less time and
presumably less people. A statistical analysis would need to be done and thoroughly tested to
accurately calculate how many samples per field would yield the acceptable 99.5%.

Furthermore, the company should look into the possibility of closing the facilities with low levels of
production and high costs. Clearly, they are not utilizing the facilities to their maximum potential and or
are not placed in strategic locations. It could be argued that it is possible to turn them around, but it would
certainly require a detailed analysis of those facilities and the factors associated with the poor results and
only then could management make an informed decision.

Distribution

Distribution related to inventory management, transportation and customer service and was mostly
affected by the decision of Johnson in the production department.

Problems easily identified were as follows:

There was no real coordination in the supply chain with over 400 trucking companies utilized during any
typical peak season. Inventory was high and in addition, highly variable.

Recommendations:

• Increase facilities

Strategically placed facilities will help lower transportations costs as well as decrease the need
for safety stocks, thus reducing overall inventory costs. Further, more facilities increases the
responsiveness of the company to consumers, resulting in increased customer service.

• Lower carryover rate

Managing global supplier, production and distribution
networks (GSPDN)
Operation Management
Abhishek Gupta

The carryover rate of 33% is outdated and is the cause of high transportation costs and many
unnecessary departmental headaches. Efforts should be made to decrease this rate to a minimal
factor.

• Distribution system management

Coordinating 400 different trucking companies is a tremendous feat that eventually results in
higher costs and perhaps even decreased customer service. Efforts need to be made to
dramatically reduce this number and allow more coordination through advanced technology.

1. “Select” suppliers – Current suppliers should be evaluated and chosen as preferred

suppliers based on reliability, quality and cost. Inefficient suppliers need to be
immediately eliminated. Closer ties equal more willingness to work together toward a
common goal and more acceptances of company policies.
2. In-house – An analysis should be done of whether any cost savings could be realized by
purchasing a fleet of distribution vehicles for domestic markets. We believe in foreign
markets, it is best to leave this function as an outsourced capacity due to the fact that it is
a specialized component of the system, especially in unfamiliar territory.
3. Technology based distribution – The need for a computerized system is apparent, and
will become even more so as the company expands globally. Options in ERP or other
forms of technology in distribution should be thoroughly explored and applied to increase
reliability and customer service and decrease time and costs. Perhaps with closer carrier
relations produced through the proposed decrease of trucking companies, Pioneer could
even capitalize on the carrier’s existing technology.
4. Integration – Eventually, the company as a whole including providers should be involved
in the distribution process through a system in which planning and production are
integrated with other systems to support execution processes in transportation. Such
support systems include warehouse management, to provide for better distribution and
planning techniques.

All of the proposed changes will lead to a more competitive Pioneer, not only domestically, but will place
the company as a serious competitor on a global scale. Changes need to be implemented to remain as
the world’s biggest company and to keep up with the changing industry. Although there are many factors
that cannot be controlled or predicted, the recommendations proposed herein serve as a combat-
measure to these variables, allowing for the company to set realistic goals and provide for realistic means
of accomplishing them.

SWOT Analysis:

The current market is very competitive, especially in the area of biotechnological break-through. Pioneer
has done a great job at keeping up, constantly investing 10% of revenue for research. Only so much can
be invested and so, Pioneer should analyze itself and realize what its competencies are as well as those
above competitors and capitalize on them as a supplement to R&D. A first step is to look into the current
philosophy:

1. To produce the best products on the market.

Managing global supplier, production and distribution
networks (GSPDN)
Operation Management
Abhishek Gupta

2. To deal honestly and fairly with its employees, sales representatives, business associates,
customers, and stockholders.
3. To advertise and sell its products vigorously, but without misrepresentation.
4. To help its customers make the greatest possible profit from their products.

Such integrity and dedication to quality and “added value” services to customers are what will put Pioneer
above the rest. Expanding these services and increasing marketing on these core ideals emphasizing
Pioneer’s dedication to quality is crucially important given the high competitiveness of the market.

The case also mentions that many production plants had become certified under the ISO program, we
believe this should be a new company-wide requirement with a plan to do so within the next few years
established to become more competitive, especially in European markets with the ever expanding EU
countries. Doing so only illustrates and further emphasize the dedication to quality and commitment to
global operations.

References
1. http://www.search-ebscohost.co.in
2. http://www.accenture.com
3. http://www.e2open.com/dynassets/resources/en.pdf
4. http://www.ikea.com
5. http://www.walmart.com