Managing a Global Supply Chain
Describe what is required to efficiently coordinate a globally dispersed production system.
Logistics encompasses the activities necessary to get materials from suppliers to a manufacturing facility, through the manufacturing process, and out through a distribution system to the end user.33 In the international business, the logistics function manages the global supply chain. The twin objectives of logistics are to manage a firm’s global supply chain at the lowest possible cost and in a way that best serves customer needs, thereby lowering the costs of value creation and helping the firm establish a competitive advantage through superior customer service.
The potential for reducing costs through more efficient logistics is enormous. For the typical manufacturing enterprise, material costs account for between 50 and 70 percent of revenues, depending on the industry. Even a small reduction in these costs can have a substantial impact on profitability. According to one estimate, for a firm with revenues of $1 million, a return on investment rate of 5 percent, and materials costs that are 50 percent of sales revenues, a $15,000 increase in total profits could be achieved either by increasing sales revenues 30 percent or by reducing materials costs by 3 percent.34 In a saturated market, it would be much easier to reduce materials costs by 3 percent than to increase sales revenues by 30 percent.
ANOTHER PERSPECTIVE Logistics in the Service Sector: Global Account Management
Like manufacturers, professional service firms have also been learning how to better manage their delivery on a global basis. For example, some global accounting firms are dealing with other global firms in a new way, using one supplier for all their accounting-related needs around the world. The traditional approach involved the development of market-specific relationships, so the same multinational client would have 5 to 20 individual accounting relationships, one in each major market for each company division. Under a global account management approach, one relationship has a global span—and one contract. Such logistics allow for more effective relationship management, a better sense of what the client needs, more product extension opportunities, and better pricing and economies.