In today’s global economy, logistics and supply chain management play a critical role in how businesses are ran. From competition, how products move across borders to how customers receive goods and services on time, the logistics of supply chains are paramount.
Whether you’re preparing for an exam, building your career in logistics, or simply trying to understand how globalization works, this study guide will give you a strong foundation.
This study guide covers:
- Theories of global trade (Absolute vs Comparative Advantage).
- Key drivers of global trade and supply chains.
- How organizations are changing in response to globalization.
- The role of supply chains in competitiveness.
- Major challenges: customer service, security, ports, and trade agreements.
- Practice questions and answers to test your understanding.
Save study time and boost your grades with the official Solution Manual for Supply Chain Management: A Logistics Perspective (10th Edition), packed with more questions, detailed explanations, and practice problems.
Practice Questions and Answers
1. Explain the underlying rationale for global trade and explain the difference between comparative and absolute advantage.
Answer: Adam Smith in his renowned treatise, THE WEALTH OF NATIONS, provided not only a rationale for a market economy based upon competition, but also advanced a rationale for trade among nations called the Theory of Absolute Advantage.
Smith argued that countries would be better off if they would trade commodities where each country had an economic or cost advantage for one or more of the products that they produced.
In other words, sell or trade products where they had a cost advantage and buy or trade for products where they did not have an advantage.
Smith concluded that all participants in such transactions would be better off than trying to be self-sufficient. While the analysis was relatively simplistic, it was valuable advice, especially for that time period.
The underlying logic of Absolute Advantage was also used by Adam Smith to advance the rationalization what he called “division of labor” or specialization of labor. The latter concept led to mass production or assembly lines in manufacturing plants. The underlying logic was that the specialization led to increased aggregate output and lower unit cost, and provided an opportunity for regional specialization and inter-region commerce for an overall economic benefit.
The theory of Comparative Advantage was advanced about 40 years later by several economists. They maintained that even if one country had a comparative advantage (lower cost) in the production of two products, they should focus on the production of the one that they had the greatest advantage and trade for the other. The analyses were also somewhat simplistic because not all of the relevant costs were considered.
However, the logic was sound as long as total landed costs were considered. The importance of both Absolute and Comparative advantage is they demonstrate that global trade and related global supply chain flows can be based not only upon scarcity of items among countries but also differences in the cost of production with implicit benefit to all parties involved.
As one would expect, later economists explored more fully the rational of global trade and specialization. For example, the Factor Endowment Theory postulates that when a country has more of one of the four so-called Factors of Production (land, labor, capital and entrepreneurship), they may have a comparative advantage in producing one or more products. For example, a country with an abundance of capital and an educated workforce may produce high tech products and import labor intensive products and agriculture products.
2. What are the essential factors for economic growth and increased development of global trade flows? Why are they so important in today’s global economy?
Answer: Essential factors for economic growth and increased development of global trade flows include population growth and age distribution, urbanization, land and resources, economic integration, knowledge dissemination, labor mobility, financial flows and investment in infrastructure by public and/or private sources, faster communication systems, improved financial services for the effective flow of goods and services.
These factors are the driving forces for globalization around the world and need to be discussed in order to understand the future course of global trade and development.
3. A number of authors have observed that traditional, hierarchical organizations have changed in the current global economy. How have organizations changed? Why have they changed? What are the impacts of those changes likely to be?
Answer: Changes have resulted in shorter product life cycles, new forms of competition and new business models. Traditional organizational structures and related business models frequently change as companies get more involved in outsourced manufacturing and some logistical activities such as transportation, warehousing, and order fulfillment. All of this impacts the supply chain and its related customer service activities.
Outsourcing, off-shoring, and insourcing have become part of the lexicon of 21st century businesses, and information technology has allowed supply chains to be redesigned for more efficiency and effectiveness as well as better execution. Supply chain management has become an important and for some organizations, even critical ingredient for their competitive strategy and success in this global environment. Companies have transformed themselves by changing their supply chains to take advantage of global opportunities.
The synergism between globalization and technology, especially, has permanently changed the dynamics of the world’s marketplace. This new era has and will continue to spotlight supply chains as a critical part of the ability of organizations to compete economically.
4. What private sector company epitomizes the concept of a global company with a well managed global supply chain? Provide a rationale for your response.
Answer: Evaluate each student on the merits of their work
5. What special role do supply chains play in the globalization of organizations? What contributions do successful supply chains make to companies?
Answer: A supply chain is boundary spanning; that is, encompassing a group of interrelated firms focused on delivering the best price or value products and services to the ultimate customer at the end of the supply chain. It was also noted a supply chain can manage four important flows, namely, materials/products, information, financials and demand.
An important characteristic of today’s world economy is the increasing regional economic integration. The globalized economy has led to multilateral trade promotion and lowered barriers to international business transactions. The best supply chains allow organizations to compete very successfully on a national, regional and global basis.
6. What is meant by the current description of the global economy that “time and distance have been compressed”? Do you agree? What has been the impact of this compression?
One can hardly dispute that the exponential rise and evolution of information technology, boundary spanning trade agreements, advances in transportation medium capabilities/capacities (better shipping, better over-ground transportation, access to ports and shipping lanes, etc.), and reduced product life cycles, along with many other factors, have combined to relatively “compress” time and distance when compared to business models of yesteryear.
Whereas a customized personal computer may have taken weeks to build and ship in the mid-90s, an accepted standard due to lack of available alternative, can now reach the customer in a matter of days, if not hours.
It can be argued supply chains help to establish the limits of what is competitively possible in the market. In other words, the cost and value at the end of the supply chain help determine a firm’s ability to compete in a global marketplace. Good supply chains are business power and good supply chain managers are continually pushing the limits of their supply chains to be viable in both domestic and global markets.
Operating globally has become easier to accomplish due to advances in information/communications technology, as noted above, and the continuing improvement of specialists such as UPS, FedEx, DHL, etc., which can provide global supply chain services at a very reasonable cost. A growing number of specialists and continuing improvements in information technology/communications are contributing to the flattening of the world.
Obviously, large global companies are also contributing to this phenomenon. It is safe to conclude supply chains and supply chain management play an important role in the global economy and have helped to push the growth and success of companies that do “supply chaining” very well.
Reduced order cycle time, for example, has become an important part of supply chain management since it can lead to lower inventory levels for customers, improved cash flow, lower current assets and accounts receivable. Conversely, the increased length and complexity of the supply chain make it more difficult to achieve shorter lead times. Global supply chains impact all with lower prices, increased array of products, and convenience (read 24/7, one-stop shopping, etc.), but are not without challenges.
7. Why are customer service and its related strategy so important for companies operating global supply chains? Do you think that customer service is more important than lower cost to the customers?
From a customer service perspective, global markets and strategy have four important characteristics. First, companies attempt to standardize to reduce complexity, but they have to recognize that global markets need some customization. For example, in contrast to the U.S. market where large retail stores buy in volume quantities for delivery to their large warehouses, less developed countries may have tiny retail stores that are only 80 to 100 square feet.
This means deliveries of small quantities, more frequent deliveries, different packaging, etc. Customer service levels have to be adjusted for these markets in terms of delivery schedules, volumes, order fulfillment, and other areas.
Second, global competition often reduces the product life cycle, as previously mentioned, since products can be copied or reengineered quickly by competitors. Technology companies are faced with this phenomenon even in the U.S. market, but globally other products are faced with similar experiences.
Technology companies counteract with continual upgrades and new products. Apple, for example, had great success with its iPod, but it quickly followed this with the iPhone, and now the iPad, to maintain financial momentum. Shorter product life cycles present challenges for inventory management with respect to obsolete items.
Customer service levels are also impacted because changes have to be made as the product matures in terms of sales volume and then declines, which reduces product profitability. Usually, companies cannot afford to provide the same level of customer service when the product volume declines.
Third, traditional organizational structures and related business models frequently change since companies get more involved in outsourced manufacturing and some logistical activities such as transportation, warehousing, and order fulfillment. All of this impacts the supply chain and its related customer service activities.
The collaboration indicated requires effective coordination among the various parties to ensure that customer service levels (on-time delivery, complete orders, reliability, etc.) are maintained.
There are many challenges for supply chain managers. The soft side of global supply chain management presents significant challenges. The social and cultural elements come into play when dealing with foreign business partners and require daily effort to ensure smooth supply chain execution.
This is because “soft” issues and physical problems are, in many cases, not mutually exclusive. Misunderstanding the culture and miscommunicating can cause havoc on the physical side of global supply chain planning and execution.
Cross-cultural communication is made complicated by not only different languages and time zones, but also other culturally-rooted practices such as communication styles, different approaches to completing tasks, different attitudes toward conflict, and different decision-making styles, among other factors.
Fourth, globalization introduces more volatility and complexity. It is much more likely that global supply chains will experience challenges with weather, terrorism, strikes, and other disruptions. The need for flexibility and responsiveness is a requisite for customer service throughout the supply chain. The expanded networks cover long distances and many are complex.
Trade policy, regulations, tariffs and currency exchange rates exacerbate the level of complexity for global supply chains. Furthermore, the number of intermediaries that can be involved adds another additional layer of complexity.
When considering which is more important, customer service or lowered cost, one must take into consideration not only physical, but “soft”, cultural factors as well. Some, more affluent sectors may be willing to pay an increased price for goods so long as those goods are backed by a good and robust customer service “tail” – think customer loyalty.
However, more developing nations and counties, whose population may be more defined by “fickle” youth and rapid change of taste, customer service becomes less important when compared to price point. These phenomenon must then be weighed against the physical cost of providing either prime customer service, competitive cost, or a delicate balancing of both.
8. What is meant by the phrase “that supply chain security, especially on a global basis,” is a balancing act? Is the pendulum swinging in one direction or the other?
Given the importance of global trade to the United States, a delicate balance exists between security and the efficient flow of global commerce. If security is too tight it could impede the flow of needed goods or materials, causing delays and decreased efficiency. Ports and border gateways can become congested because of security measures.
Consequently, clearance time has increased from hours to days in some instances. Steps have been taken to improve the flow through border crossing that include infrastructure improvements/adjustments, and regional and global trade agreements.
This is necessary for our global economy. There are continuing challenges to achieving this balance, for certain. For example, migration from Mexico into the U.S continues to be a political “hot button” because of the relative ease of entry into the U.S.
Due to globalizations inherent threats, physical, geopolitical, weather related, or otherwise security measures are necessarily increasing to adjust, while still attempting to pay homage to cross-boundary principals that help define global supply chains and corresponding management thereof.
9. Why are regional trade agreements among countries so important in the global economy? What is your evaluation of NAFTA, now USMCA and its impact on the participating countries?
Steps have been taken to improve the flow through border crossing that include infrastructure improvements/adjustments, and regional and global trade agreements.
This is necessary for our global economy.
Electronic filing of cargo information has helped to improve the border clearance times. The Trade Act of 2002 requires exporters to electronically submit shipping documents to U.S. Customs 24 hours after delivery to a port or 24 hours before vessel departure.
For imports, the manifest must be filed by the ocean carrier or the consolidator 24 hours before the U.S.-bound cargo is loaded on the vessel in the foreign port. Because of Canada’s importance as a trading partner, an expedited procedure (FAST) has been developed to speed up clearance through the U.S.-Canadian border.
The North American Free Trade Agreement was signed by leaders of Canada, the United States, and Mexico in 1993 and was ratified by Congress in early 1994. NAFTA, now USMCA establishes free trade between these three countries and provides the way the agreement is to be interpreted.
NAFTA states that the objectives of these three countries is based on the principles of an unimpeded flow of goods, most favored nation (MFN) status, and a commitment to enhance the cross-border movement of goods and services. MFN status provides the lowest duties or customs fees, if any, and simplifies the paperwork required to move goods between the partner countries.
In the long run, the goal of NAFTA is to create a better trading environment. NAFTA’s goals involve making structural changes to operate a borderless logistics network in North America. Information systems, procedures, language, labels, and documentation are being redesigned to expedite the border crossings and the flow of commerce.
Canada and Mexico in the top three recipients of exports from the United States.
Canada is by far the most important trading partner of the U.S., in terms of exports. The U.S. is a major global exporting country with some concentration of trade with its two closest “neighbors”, but also with a broad reach throughout the world.
10. What is the role of ports for global commerce and why is that role important? Is our current port infrastructure sufficient? Why or why not?
Ports are a critical part of global supply chains and also a major focus for global security. Every day, thousands of containers from countries all around the world arrive at U.S. seaports.
Over $2 trillion in trade value per year passes through U.S. ports, and over $20 billion is collected in industry fees and taxes. The 50 states utilize about15 ports to handle their imports and exports; over $6 billion worth of goods moves in and out every day. About 99 percent of the international cargo of the United States moves through its ports, or about 3 billion tons annually. In 1960, international trade accounted for about
9 percent of U.S. gross domestic product (GDP). Today, it is over 30 percent.8 Accounting for a threefold increase in international trade using largely the same historical number and locations of ports, infrastructure may need to be reevaluated, particularly if, due to globalization and global warming other shipping routes gain primacy (Suez Canal widening, Northeast with Northwest Passage, etc.).
U.S. ports also play a vital role for the cruise industry. In 2015, about 80 million passenger nights were booked on North American cruises. The top five departure ports account for about 60 percent of the North American cruise passenger departures. The top three are Florida ports: Miami, Fort Lauderdale and Port Canaveral.
This flow of passenger traffic has a very positive economic impact on the U.S. economy because of the expenditures to support the cruise industry.9
The ports also play a vital role in national defense and security. The ports are bases of operation to deploy troops and equipment. Port security is very important for military and civilian purposes, and it is a shared responsibility between the public and private sectors.
Want more exam-ready practice? Get the complete set of questions and detailed answers in the Solution Manual for Supply Chain Management: A Logistics Perspective, 10th Edition by John Coyle, C. Langley, Robert Novack, and Brian Gibson.
Global Dimensions of Supply Chains: Summary Points
- Global companies usually are faced with more complex and longer supply chains which challenge them in terms of efficiency, effectiveness and execution.
- Successful global companies have transformed their supply chains on a continuing basis as economic and political circumstances have changed to enable them to deliver best cost and best value to the ultimate customer.
- The scope and magnitude of trade flows between the United States and other countries have grown considerably in the last several decades. One very important development has been the growth in the volume of trade with China and several other Asian countries.
- Global trade is based upon economic factors of production including land, labor, capital, and entrepreneurship. Population and the age distribution of a country total population are important factors for labor availability
- Migration and urbanization are important issues for economic development and vitality of the economy.
- Success in the global marketplace requires ongoing development of a cohesive set of strategies including customer service, product development, business model, and supply chains management. Supply chains have become increasingly more important during the 21st century.
- Supply chain security has taken on increased significance since September 11, 2001. Companies individually, jointly, and in cooperation with the various levels of government are actively involved. The federal government, in particular, has expanded the scope of its regulations and policies for global security.
- U.S. ports play a critical role in global supply chains since over 90 percent of global trade U.S. passes through them. Ports are also an important focus for security. The U.S. needs to focus more attention upon port infrastructure.
- Canada and Mexico are ranked number 1 and 3, respectively, on the list of most important trading partners with the United States. That relationship is enhanced by the North American Free Trade Agreement ratified by Congress in 1994. While the treaty had lofty goals, it still is experiencing problems with full implementation of its objectives. Nevertheless, it has helped to foster trade in North America.
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