Global supply chains Definition: • Global supply chains (GSCs) are the connective tissue that allows fractionalized and dispersed stages of production to operate as a harmonious whole. Business model based on highly competitive settings. Cost min – Profit max Win-Win. Advantageous for everybody participating, but for some more than others. Not participating may not be an option anymore. Two main implications for developing countries: • GSCs allow poor nations to join supply chains rather than investing decades in building up their own industrialization. • GSC offshoring of labor-intensive manufacturing stages brought with it technical and managerial know-how. Some of which is inevitably transferred to local firms.
Global supply chains. Definition: Global supply chains (GSCs) are the connective tissue that allows fractionalized and dispersed stages of production to operate as a harmonious whole. Business model based on highly competitive settings. Cost min – Profit max - PowerPoint PPT Presentation
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Global supply chains
Definition:• Global supply chains (GSCs) are the connective tissue
that allows fractionalized and dispersed stages of production to operate as a harmonious whole. Business model based on highly competitive settings. Cost min – Profit max
Win-Win. Advantageous for everybody participating, but for some more than others. Not participating may not be an option anymore.
Two main implications for developing countries:• GSCs allow poor nations to join supply chains rather than
investing decades in building up their own industrialization.
• GSC offshoring of labor-intensive manufacturing stages brought with it technical and managerial know-how. Some of which is inevitably transferred to local firms.
GSCs – Why increasingly important?
Main cause of production fragmentation was Lower Trade Costs, now is: TECHNOLOGY
…someone figured out that combining high technology with low labor cost was a profitable strategy!
Technology is become far more mobile internationally.
Technology has become more mobile due to: – Lower IT costs– Still, know-how can be retained by firms (Patents):
Technology/know-how is one of the most valuable advantages of GSCs and thus GSCs actively protect their technology.
Key Factors in Shaping Value Chain Decision
GSC relocation processes driven by: cost-minimization of all production processes (from idea to consumers)
GSC Cost function depends on: • Human Capital
– Productivity - Labor Costs• Infrastructure
– IT, Transport, Energy, Reliability of trade routes• Policy Environment
– Rule of Law, Intellectual property rights– Favorable business environment, Trade related policies
Value Added …Profit sharing• …Apple’s story tells how it works. Suppliers do not profit
much. • …Why work for Apple? endorsement of manufacturing
quality.
Know-how…knowledge transfer• …but GSCs wants to retain know-how. Technology lending• … still “Incentives” to innovate, Who gains? (Wal-Mart)
Externalities… spillovers to local economy• …GSCs help establishing industrial clusters• …GSCs related infrastructure development
Smiley Face – Balance of Power
Moving up the value chain?
• Very difficult to rise along the supply chain– Requires large investments– Requires the acquisition of technology– Requires competitive edge in the segment.
• Moving up / creating another supply chain– Samsung supplies Apple– Samsung leads its own supply chain.
• Different profit sharing depending on the chain. – Supplying leading companies: low profit but signal firm
efficiency• Gets more favorable terms with other firms.
Some Policy Implications
– Export led growth still viable strategy… but GSC export sectors need to produce spillovers to the domestic economy.
– Industrial policy may no longer be viable… Import substitution strategy is not cost minimizing. GSC need lowest cost suppliers.
– Export diversification is a bad indicator of development…diversification does not really matter if you don’t own the
skills. – Trade costs are still important (Trade Policy / Trade
Facilitations). • NTM, tariffs on intermediates (Imports are also exports)• Market segmentation (preferences, standards)
Negotiating Issues
• Global vs Regional Trade Negotiations– GSCs are regional, Regional Policy is key
• Market segmentations
• Importance of Intellectual Property Rights– Guarantee leading firms– Allow for some transfers
• Trade Policy: Market access is only part of the story, liberal policies on intermediates inputs are key. – Export Processing Zones– Smaller economies need more access to low cost
input
Summary: Key points
• GSC participation does not imply development
• Rising along the value chain is difficult, moving up in lower level chain is easier.
• Most GSCs are regional -> regional policies are prominent
• Trade costs remain important, but not low trade costs are not sufficient as GSC have multiple and diverse costs sources.
• Low labor cost is not enough, and competing on labor cost is not a viable development strategy.