Supply chain management upstream downstream

1.0 Introduction

Supply chain management is concerned with the management of upstream and downstream interactions and activities between various entities/organizations in order to maximize the value creation to the benefit of the customer (Christopher, 2005). Globalisation has resulted in supply chains crossing international borders thus leading to greater exposure to disruptive risks.

Hyundai Motors is an automaker with a strong global presence. Its supply chain entities, from manufacturing to retail, include external suppliers; plants manufacturing intermediate and/or finished products; distribution centers; demand zones; and transportation assets.

Between 20th June and 6th August 2003, there was a major disruption in the company’s ability to deliver passenger cars to its customers due to a labour strike at its biggest production plant. Although labour strikes are highly probable, the duration of this strike (47days) was highly unforeseen. The timing was also critical as the labour union targeted the strike to a time when domestic sales were expected to rise due to newly implemented excise-tax cuts for new car buyers by the Korean Government. The impact of the disruption was thus highly significant; a staggering $1.1billion in lost sales together with other unquantifiable losses, as a result of the inability of the supply network to remain completely resolute during the strike.

2.0 Literature Review

Supply chain disruptions are the outcomes of the materialization of threats which results in a serious halt of the operations of one or more production or distribution entities and subsequently affects other entities/nodes within the supply. Handfield et al. (2008) suggest that the likelihood of disruption in:

* Global sourcing supply networks; characterized by workforce instability, customs regulations, potential for terrorism, natural disasters, number of transfer points etc.

* Supply networks with constrained dependencies; characterised by limitations on number of sources, uniqueness of sourced parts etc.

Kleindorfer & Saad (2005) classified sources of disruption risks into three groups:

* Operational contingencies; such as equipment malfunction and systemic failure, loss of a supplier and human centred issues like labour strike and fraud.

* Natural disasters; such as hurricanes, earthquakes and storms.

* Terrorism and political instability.

Sheffi (2005) suggests that in order to build resilience against disruption risks into a supply chain, each type of disruption should be anticipated and guarded against individually. Handfield et al. (2008) suggest two types of resilience: proactive e.g. flexibility, in which the supply chain is re-routed away from the anticipated source of the disruption; and reactive e.g. redundancy and responsiveness, in which supply chain resources are coordinated to respond to a supply chain disruption.

2.1 Global Operations (Hyundai Motor Company)

As at 2003, Hyundai Motor Company (HMC) was the seventh largest automobile manufacturer in the world in terms of volume. HMC had 3 manufacturing plants and 8 CKD assembly plants. Hyundai’s target markets were classified into 3 types: advanced; emerging; and developing markets.

Table 1.1- Hyundai’s Global Operations

Plant Type

Location

Regions Supplied

Type of Markets Supplied

Manufacturing Plants

S. Korea

Domestic & North America

Advanced

China

Domestic & Australia

Emerging

India

Domestic

Emerging

Assembly Plants

Egypt

Africa

Developing

Pakistan

Middle East

Developing

Malaysia

Asia

Developing

Russia

Eastern Europe

Emerging

Taiwan

Asia

Developing

Indonesia

East Asia

Developing

Brazil

South America

Emerging

Turkey

Western Europe & Middle East

Advanced

The company located manufacturing plants in the emerging markets such as China and India, in order to meet growing domestic demand as well as take advantage of relatively low labour costs in the countries.

HMC however did not have any manufacturing plants in the advanced markets but relied on imports to meet demands in the zones. In order to compete with established automotive manufacturers in the advanced markets, especially the United States of America, HMC focussed its strategy on improving quality and maintaining low costs using TQM and supply chain strategies such as just in time and assembly postponement.

HMC operated the largest integrated automobile plant in the world, the Ulsan plant located in South Korea, with an output of about 1.6 million units annually, in form of cars and Completely Knockdown (CKD) kits. The plant had a co-located privately owned port which made export convenient. In order to respond quickly to specific customer demands, at minimal costs, Hyundai practices JIT and holds limited finished goods inventory of not more than 7days, at its plants and distribution centre. Delivery lead time for export vehicles was 45days with shipping lead time of 30days (Hahn et al., 2000).
2.2 Hyundai’s European Supply Chain

Importing passenger cars into European Union (EU) was relatively easy because as at 2003, the 15 members and 10 aspiring members of the EU shared import and export policies thus had no local content regulations on car imports.

Turkey was chosen as a location of the CKD plant to supply Western Europe because of its low labour costs and surface transport links to Western European countries.

The other CKD plant supplying European nations was located in Russia, a non EU member which probably had its own peculiar automotive import regulations. However due to domestic demand opportunities in Russia, its influence and available transportation links to other landlocked Eastern European countries; it was a good choice to locate a CKD plant.

The Korean plants produced CKD kits which were exported to the Russian and Turkish assembly plants. This supply strategy meant freight charges and other logistics costs were reduced by: producing whole cars in form of parts and modules in Korea; shipping to CKD plants located in Europe, assembling based on customer demands in Europe and distributing assembled cars, mainly via surface transport, to the customers around Europe.

However, the dependence on the Ulsan plant as the only plant capable of supplying passenger car CKD kits to the Turkish and Russian plants, which were responsible for supplying the European market, had a major risk inherent, as would be shown subsequently.

3.0 RESILIENCE FRAMEWORK
3.1 Theoretical Framework

The possibility of disruption is a reality to every modern global supply network. Supply chain resilience should therefore involve more than simply recovering from disruptions but must be a proactive, systematic and integrated exploration of capabilities within the supply chain to cope with unforeseen events. The framework below uses this approach.

The different parts of the resilience framework are consistent with supply chain resilience literature. For instance:

· The framework proposes the use of excess/ redundant resources as a reactive strategy to mitigate risks. Another recommendation is to improve the ability to detect disruptions and subsequently improve responsiveness through investment in visibility systems. Supply chain planning and collaboration would help to aid the robustness of the supply network. Finally, the framework proposes that the supply chain should be redesigned if the effect of the disruption is so enormous that it cannot be efficiently mitigated.

* Continuous cycle of monitoring and reassessing disruption risks.

3.2 Mapping the Supply Chain & Identifying Risks

The map shows the paths through which materials move in the supply network as well as major risks at various critical nodes.

The identified risks are grouped in Table 3.1. The most probable disruption risk is selected at each node and its potential primary effect on the supply chain is determined.

TABLE 3.1- Hyundai’s European Supply Chain’s Risk Assessment

NODES

RISK TYPES

DISRUPTION RISKS

MOST PROBABLE/ DISRUPTIVE EVENTS

PRIMARY EFFECTS

Korean Plants

Operational

Labour disputes; Pilferage; Quality issues; Parts damage, Loss of critical suppliers;

Labour Strikes; Loss of critical supplier

· Disruption of supply of cars to domestic and export markets(mainly US)

· Failure to supply CKD kits to European plants

Natural disasters

Typhoons;

Terrorism/ Political

Devaluation of the Korean currency (Won); Terrorist attacks

Ulsan Port

Operational

Labour disputes; Dispatch errors; Parts damage; Pilferage;

Typhoons ; Dispatch errors

· Port Closure: Disruption in ability to ship finished cars and CKD kits

Natural disasters

Typhoons

Terrorism/ Political

Terrorist attacks

Turkey CKD Plant

Operational

Labour dispute; Turkish port closure

Earthquakes; Terrorist attacks

· Disruption of plant’s operations.

· Disruption of transportation links to Western European markets( a high demand zone)

Natural disasters

Earthquakes

Terrorism/ Political

Changes in government’s import & export policies; Terrorist attacks

Russia CKD Plant

Operational

Labour dispute, Turkish port closure;

Natural disaster; Political instability

· Disruption plant’s operations

· Disruption of assembled cars exports to Eastern European markets

Natural disasters

Earthquakes; Floods; Tornadoes

Terrorism/ Political

Changes in Russian government’s import & export policies; Terrorist attacks; Eastern Europe’s political instability

European Union Countries

Operational

Fluctuating demand; Transport links disruptions

Fluctuating demand

· Sales disruption

Natural disasters

Earthquakes; Floods; Tornadoes; Hurricanes;

Terrorism/ Political

Changes in European Union’s import & export policies; Terrorist attacks;

Grouping the disruptive events into the vulnerability matrix shown below would help to prioritize resilience strategies to the high severity disruptions. However the low severity events are not entirely ignored. For instance, dispatch errors at the Ulsan port are operational risks can be managed by actions such as introducing RFID while political instability can be managed through maintenance of good relationships with Government.

Steps for making supply networks resilient against high severity disruptions

* Identify nodes with high impact disruptive risks

* Identify probability of occurrence of the disruption

* Select degree of flexibility: Higher degrees of flexibility would be required for high probability risks, while lower degrees of flexibility would be required for low probability risks.

4.0 Hyundai’s European Supply Network’s Resilience
4.1 Hyundai’s Resilience of the Labour Strike Disruption

Redundancy: Excess resources were used reactively by Hyundai to maintain operations while the disruption lasted and also to subsequently recover.

Speed of recovery: As shown in figure 4.2, Hyundai’s monthly sales grew speedily within 1-3 months after the disruption ended. The following inferences/ assumptions are made about how this was achieved:

* Hyundai’s redundant production capacity at its plants aided the speed of recovery. The plants must have used production ramp up strategies to increase output.

* Logistics of the CKD kits away from the plants was enhanced by the co-located shipping port. It is assumed that some CKD kits were flown by air to the CKD plants.

* Management at Ulsan plant had visibility and control over the entire supply network. This aided the co-ordination of expedited international logistics of the cars to the customers.

Although excess resources proved to be a useful resilience strategy, it can be quite expensive. Moreover, as observed, the extent of the disruption was difficult to predict and eventually resulted in complete depletion of some inventories.

On the other hand, appropriate levels of redundancy combined with appropriate levels of supply chain flexibility is believed to enable organizations to not only cope with unanticipated events but also improves normal operations efficiency while providing oppourtunity to utilize disruptions to gain competitive advantage ( Sheffi & Rice, 2005;Fawcett et al., 1996; and Skipper & Hanna, 2009).

Hyundai’s European supply network however lacked the required flexibility because of dependence on the Korean plants for CKD kits. A major supply chain redesign (as suggested by the framework), is thus required to mitigate impact and/ or ensure business continuity in the event of occurrence of these types of high severity disruptions.

4.2 Avoidance/ Reactive Strategies – business continuity (for the high impact/high probability disruptions)
4.2.1 Labour strike in Korea

To cope with a future occurrence of this, Hyundai needs to reduce dependence of the Turkish and Russian CKD plants on the Ulsan plants by increasing the manufacturing flexibility of the CKD kits.

The India plant was the only plant not affected by the labour disruption. This was attributed to its minimal dependence on any supplies from Korea. It can thus be easily made an alternative manufacturer of European CKD kits.

Also, Hyundai may adopt outsourcing complete components design and manufacture to suppliers. This would eliminate the need for manufacturing plants to supply the

4.2.2 Loss of a critical supplier at Ulsan Plant
4.2.3 Natural Disasters or Terrorism at Assembly Plants’ Regions

Two common risks across both CKD nodes of Hyundai’s supply network are: natural disasters; and terrorism. These are low probability external threats thus redesigning to avoid them may be costly and eventually unjustified. Rather, the supply chain needs to be made reactively resilient against them. This can be achieved by designing a robust supply network.

To cope with effect of any of these disruptions to any of the CKD plants redundant capabilities would be required. For instance the Russian plant should have the capability of assembling passenger car models made in the Turkish plant. However for economic reasons, this capability should lie redundant until actual occurrence of the disruption risk.

However Russia’s exclusion from EU countries may make it difficult for it to supply the Western European markets (all EU countries) because of trade regulations. Thus another plant located in the EU may be required to supply Western Europe if there is a disruption at Turkey. However this plant would not use redundant capability but should constantly supply both Eastern and Western Europe.

As at June 2008, the EU country with the lowest VAT was Czech Republic. Assuming this was the case in January, 2004, when it joined the EU, this would make Czech a good location for the alternative manufacturing or CKD plant.

DEMAND FLUCTUATION AT EU DISTRIBUTION CENTERS

The distribution of the passenger cars across Europe can be made flexible across both European zones

Table 4.1- Proposals Evaluations

Resilience Strategy

Requirements

Proposals

Implications

Manufacturing flexibility

Parts Standardisation

Capacity increases

Manufacture CKD in India

Relatively lower transportation costs;

Increased manufacturing costs

Manufacture CKD in a low wage European Union country

Much lower transportation costs; Increased manufacturing costs; Long term investment in new facility.

Modularization

Capable suppliers

Outsource components design and manufacture

Significant cost reduction; Increased efficiency of JIT; technical difficulties

THE ROBUST SUPPLY CHAIN

Combining the manufacturing, assembly and distribution nodes would give the new supply chain design shown below.

Testing the New Supply Chain

Scenario

Manufacturing

Assembly [Effect]

Distribution

Labour strike at Korean plant [closure of Korean plant]

Ramp up manufacturing at Indian plant [strain on Indian plant’s resources to supply both Turkey and Russia CKDs]

Turkish and Russian plants operate as usual [little or no impact]

EU distributions operate as usual [little or no impact]

Earthquake at Turkey [closure of Turkish CKD plant]

Indian and Korean plants operate as usual, but supply all CKD kits to Russian CKD plants

Ramp up assembly operations at Russian CKD

[Strain on Russian plants resources to Supply passenger cars to Western European countries]

EU distribution operates as normal [little or no impact]

Sudden demand growth in France with simultaneous drop in Portuguese demand

Indian and Korean plants operate as usual

Turkish and Russian plants operate as usual [little or no impact]

Portuguese distribution center re- routes supply to French retailers.

SOURCES OF COPETITIVE ADVANTAGE

The robustness of manufacturing, assembly and distribution would help

* The supply chain match demand more responsively. This would lead to reduction in inventory holdings

* Flexibility to customize to customer requirements is enhanced.

5.0 Recommendations (Business Continuity)

Hyundai should develop contingency plans for each of the identified risks. The major flexibility and redundant resources available in the supply network would need to be coordinated for the supply chain to remain resilient in the event of a major disruption.

Also the supply chain proposed is for short term implementation. To build resilience in the long term Hyundai would need to build a facility in the EU and depending on demand