MIM 524 Global Sourcing Class two

1. MIM 524 Global Sourcing Class two

2. Topics for tonight… • Cultural Difference in Source Management • Social Responsibility of Sourcing Professionals • Political Landscape & Challenges • Risk Management • IKEA Case In Class Discussion • Case Study – Scotts Miracle Gro • China limitations • Guest Speaker – Morgan Hartnell

3. What is up with the class? • What global experience have you had? • Professional (Working with international companies, etc.) • Educational (Studied abroad, etc.) • Recreational (Travel, etc.) • Home of Origin is other than US (exchange student, etc.) • Based on your experience, what were some difference you observed that might impact a sourcing professional?

4. Some ideas… • Language • Currency • Culture and Values • Methods of communication, interaction • Decision Making • Embracing Change & Risk Taking • Beliefs – political, social, other? • Logistic challenges • Infrastructure (airport, rail, roads and harbors….)

5. When it comes to other cultures… • Avoid stereotypes…. • Different is not always wrong • Seek to understand before judging • Don’t under estimate the connection • High levels of global experience even in the most rural areas • Generational difference exist across all cultures • Learn from our differences… • Can be a source of strength competitively

6. Cultural Differences & Conducting Business in other countries….

7. Values & Beliefs • The role of “relationships” • Traditional Vs Contemporary Business Climate • Gender • Seniority and Levels of influence • Timing of decisions • Mode – Harmony, Saving Face, Uniformity, Aversion to Risk • Personal – Privacy, Space, Touch, Manners • Variation by Region • Respect & Interest in Culture • Food, History, Current Events, Language

8. Different Ways of Doing Business • What are acceptable business practices? • Greasing the palms = Bribery? • The Role of gift giving in a business relationship • Relationships and country of origin loyalty in preferential treatment • Undocumented business practices & protocol • Liberal Intellectual Property interpretations • Black and Grey Market • US standards and large MNC (Multi National Companies) are more conservative • Foreign Corrupt Business Practices Act

9. Governmental Considerations • Tax • Free Trade Zones • VAT Tax • Exposure – Legal Entity at Corp. Level • License • Ability to conduct what level of business • Mfg • Consolidation • Distribution • Customs • What does it take? Keep the paperwork straight…. • Downtime – holidays, closures, backlog • Storage and time limitations • People and Materials Movement limitations • Import/Export Balance of trades • Visa and travel documentation • PRC VS Taiwan

10. Global is not local… • Effective Communication – remotely • Methods • Phone • Email • Paper – Fax, Mail, etc. • Pace and Content • Time zones • Is there ever a good time for a truly global meeting? It is always midnight for someone… • Advanced prep is VERY important • Ensure they know what you want or you could lose another 24 hours…. • Language • Best case is dialog in local dialect (multilingual is key skill in global companies today) • English second best but need to keep crisp, concise and avoid slang • Give time for interpretation

11. Social Responsibility of the Source Professional

12. Who wants to know??? • Stockholders • Investment firms • Venture Capital • End Users/Customers • Government • Special Interest Groups • Employees • Others

13. Responsibilities of Sourcing Professionals • Beyond just continuity of supply.. • Labor rights • Child labor • Working conditions • Benefits and hours • Employee safety considerations • Environmental considerations • Pollution/emissions/utilization of scare or protected resources • Recycling/Reclaim • Utilization of hazardous materials (IE: ozone depleting substances, lead, etc.) • Who is responsible? What is produced via mfg process? What is included in the finished product? Have we disclosed to end customer? • What is the impact to the company?

14. Impacts of Ethical Excursions….. • Brand name erosions • Customer Loyalty Diminished • Key customers lose confidence and will disassociate • Sales/Revenue Impact • Larger customers have Code of Ethics that would prohibit interaction • Stock Price Impact • Key stockholder groups release holdings causing ripple effect in stock market • Indirect issues • Difficult to recruit talent to work at the companies • Smaller companies lose credibility with key supply chain players (operational and financial) • Employee Moral is diminished by the “bad press”

15. Political Landscape & Challenges

16. Local Content • Certificate of Origin • Positive = Made here, sold here • IE: Closed Markets – Brazil • Negative = No content allowed from certain countries • IE: Cuban Cigars • Emerging requirements from large MNC’s and Defense Contracts • Considerations for Tax Incentives

17. Trade Restrictions • Prohibitive • Excluded Countries - Embargo • Between countries • IE: Israel and Malaysia • Types of materials • IE: Agricultural products • Limitations • Balance of Payments • Repatriation of Funds

18. Controlled Countries • What is a controlled country? • US Department of Commerce Export Regulation Designation • Examples: China, Romania, Vietnam, etc. • Deemed high risk for loss of key technology • Special considerations in protection of information • IE: Encryption, approvals, technology transfers, etc. • Embargoed Countries (higher level of restriction) • Cuba, Iran, North Korea, Sudan and Syria

19. Tax Incentives and Benefits.. • Economic stimulation – Emerging Markets • Tax holidays • Local content • Government Investment • Industrial Parks • Free Trade Zones • Subsidizing R & D or other development

20. Risk Management – Business Continuity Planning

21. Risk Management • What might cause disruption in supply? • Risk Mitigation plans to address • Cost Vs Risk consideration

22. What could happen? • Labor disputes – carriers, mfg., etc. • Terrorist event • Infectious disease - SAR’s, Bird Flu, etc. • Military conflict – Iraqi, Taiwan, etc. • Natural Disasters – Tsunami, earthquake, fire, etc. • Limitations of resources – Rolling blackouts in China • Corruption and Political unrest • Poor performance – unqualified…

23. Some ideas to offset the risk… • Multiple Sources in Multiple Geo’s • Alternate or substitute strategies • Inventory strategy • Hubs • Safety Stock • On site consignment/VMI (Vendor Managed Inventory) • Strong qualification process or evaluation • Verify capabilities directly or via customer referrals • Ask for certifications, audit results, endorsements, etc.

24. Cost Vs Risk.. • Consider the Guava Puree Case • What if we had a local quote for .45/pound? • Global Source Vs Local Source • Transportation cost • Storage cost • Potential recovery cost • Agility of supply line • Loss, etc… • Should consider risk from source to proximity of use • Understand the flow of the materials in the supply chain • Manufacturing location through finished good distribution • Value add should increase as you get closer to the end customer • Ensure you understand ALL of the costs and understand the Risk • What happens if the lines go down? Cost per minute? Loss of revenue or sales?

25. IKEA Class Discussion

26. Scotts Miracle Gro Case • Class Lecture/Set Up

27. Scott’s Miracle-Gro – Key Points to Address • Strategic Risks & Benefits of Outsourcing, Off Shoring and Staying the Course • Possible Frameworks to be reviewed in class • Financially Compare (Net Present Value) all three options of: • Stay the course • Outsource • Offshore • What should Scotts do? Defend your assigned position. • Note: For more info on NPV: http://en.wikipedia.org/wiki/Net_present_value

28. Possible Frameworks to Consider • Transaction Cost Economics (TCE) Framework • Hayes, et. Al Framework • Quinn & Hilmer Framework • Chopra & Meindl Framework

29. Decision Frameworks

30. TCE Framework (Transaction Cost Economics) High Asset Specificity Low High Low Uncertainty

31. Hayes, et. Al Framework

32. Quinn & Hilmer Framework High Potential for Competitive Advantage Med. Low Med. Low High Degree of Strategic Vulnerability

33. Chopra & Meindl Framework

34. Students are able to leverage other frameworks beyond these….

35. Challenges in a China Supply Chain: outsourcing or offshoring

36. Environmental Factors • Economic factors drive over supply and tight supply • Tax, customs and duty laws change from year to year, country to country • Customer business models adapt and change • Accelerated Growth Causing Issues • Inflation, Traffic, Power Shortage A supply chain must be adaptable to address these environmental factors

37. Current Issues • Some companies can not sell products directly into China • Need to export products to HK before they can perform the “buy-sell” transaction • Company will buy products from ODM • Immediately sell back to ODM to import into China for higher level integration • Key business issue is two-fold: • Adds significant freight/handling cost • Adds significant thru-put time

38. A Supply Chain Strategy Virtual Hubs/Delayed Buy Sell (Raw & FG)

39. Basic Strategy Build and maintain a flexible and adaptive supply chain to secure the availability required of our customers at the lowest part cost with the lowest overhead and fewest touches

40. Historical Subassembly (the ingredient) Model China ODM Board Plant Buy Sell Hong Kong

41. Current Higher Integration Support Model Depending on the location of the ODM, between $.80 and $6.00 of transportation and packaging waste. Significant competitive disadvantage for Business Unit Hong Kong ODM System Plant Sell ODM Board Plant Buy China

42. Generic Delay Buy/Sell Model Eliminates wasted run to HK Hong Kong ODM System Plant Virtual Buy/Sell ODM Board Plant Intel HK Sales Office China

43. Get to Know China

44. General Introduction • Over 5,000 years history • Closed after 1949 and re-opened up early ’80s • Economy began to boom early ’90; fast growth (>7%) for consecutive 15 years • Religions:Daoist (Taoist), Buddhist, Muslim 2%-3%, Christian 1% (est.). Most people don’t get religions • Area: 9,596,960 sq km; Similar to US • Languages:Mandarin widely used. English, as the 2nd language, gets popular; graduates can generally speak reasonably good English • Economy:Uneven development; GDP/Capita 15x difference between the richest province (east) and the poorest one (west) • Resource:Millions of graduates every year; 172,800 returnees since ’78

45. North-east: • Plain/mountain • Medium • population • Slow development • West: • Tableland • Low population • Underdevelopment Four Areas Beijing Shanghai Chengdu • Coastal: • Plain • High • population • Relative • developed • Meddle: • Mountain • Medium population • Developing Shenzhen

46. Culture and Customs Name: Familyname (1 syllable) is in front of given name (2 syllables).Women do not change family name after marred. Call title with family name shows respect. Do not call people’s first name unless you are really close friends Relationships (Guanxi) • Build relation is very important for doing business in China • Leading to trust • Referring to power the one has based on one’s network • Implying a web of obligations and debts • Entering into a relationship with an individual or • entity is an expectation of reciprocity, • commitment, and obligation.

47. Culture and Customs (con’t) Face value • Face represents one’s image in public in term of his/her network, social status and ability. It is crucial to Chinese; try never let people lose face. • Saving face – Successfully managing an embarrassed situation in public • Losing face – slip a gear or to be reprimanded in front t of his/her peers • Building face – To be appraised in front of his/her peers • Giving face – Help one to build face or not to lose • face (usually senior to junior) Hierarchy • People in senior position make all decisions, junior do not challenge and confront senior.

48. Business Protocol • Handshakes are now common in the PRC. • Titles are important in China and should be used whenever possible • Business card is widely used in China • Physical contact is common among members of the same gender; private space is small • People usually keep their emotions concealed • In formal business meetings, the senior person walks into room first, and generally should sit in the middle of one long side of the table. • After-hours entertainment is a vital part of doing business in China • (it is an important part of building relationships in China) • Some personal questions may be asked; the general purpose is to find something that you have in common with the person you are meeting

49. Communicating effectively • FTF interactions are most effective in building relationships, and use an intermediary for introduction may be necessary. • Associating oneself or one's project with high status institutions or people is an effective way to persuading people. • Do not expect English is well understood; avoid using long or complex sentences, idioms, slang and jargon. • Don’t use technology as your sole mode of communicating, as Chinese are reluctant to reply to messages from people they do not know. Managing people • Leaders shall balance between authority and empathy • Good career opportunity inspire people more effectively • Better to acknowledge the positive before discussing the negative. • Never openly criticize people in front of their peers or subordinators

50. China in Transition Economy growth, global integration and foreign culture influence drive China transit from its tradition to a member of global community • Government • From production to administration • From controller to service provider • From central planning to macro control • Culture • More sense of privacy • More open and direct • Attitudes towards west concepts and entertainments products • From blindly accept to selectively accept • Fast IT technology spread • Home PC penetration: 60-70% in coastal area • Mobile phone penetration: ~60% in coastal area It will take long time