Question

EcoWorld is a manufacturer of enclosed, decorative environments. They are composed of a hand-blown glass sphere filled with water, one fish, and some aquatic plants. The fish and plants work together so that the system will continue as long as it has light. The spheres have become a popular holiday gift so sales skew towards November/December. EcoWorld, located in Seattle, Washington, wants to globalize its process. This year, the European country of Latervia, renowned for its cheap and expert glass blowing, has lifted its export tariff. EcoWorld has also identified another European country, Rombia, as a new market because it has no import fees. Raw materials will be transported via aircraft and the final product will be delivered by aircraft and then truck. You are hired by EcoWorld to assist them in developing a global manufacturing and distribution plan. Create a report that includes the following elements:

1. Identify and assess the risks and benefits to moving the supply chain to a global market. Be certain to analyze both the supplier and the consumer ends of the supply chain.

2. Discuss how globalization will affect the various modes of transportation. What are some strengths and weaknesses of each mode of transportation? How would a 10% increase in fuel prices affect EcoWorld's globalization plans?

3. Discuss how insurance costs will be affected by globalization and the use of multiple means of transportation across borders.

4. How should EcoWorld adjust its manufacturing and distribution to take into account the product's seasonality?

5. What inventory valuation / policy method should EcoWorld use? Identify some of the costs for creating and maintaining inventory of a final product. How will these costs be affected by globalization?

Answer 1

1.

The benefits of moving EcoWorld's supply chain to a global market are

• Low labor costs: Labour costs are relatively high in North America. Moving production to Latervia & Rombia would significantly lower production costs

• Low Tax Rates. : Since EcoWorld will be creating a lot of jobs in their host countries, they will receive several tax breaks and tax benefits/rebates along with no export tariffs for Latervia and no import tariffs for Rombia

• Access to new markets: EcoWorld can also use its manufacturing or production presence to raise brand awareness and sell its decorative items in Latervia & Rombia

The risks of moving EcoWorld's supply chain to a global market are

• The risk of unethical sourcing and procurement: Since Latervia & Rombia are not North American countries, their supply chain may not be well regulated or well audited which means that EcoWorld could potentially risk sourcing supplies from vendors who source their raw materials or labor unethically. For eg Nike's brand image took a hit when the world found out that some of their shoes were being made in sweatshops in Southeast Asian countries.

• Quality control will be a challenge: Since EcoWorld will have to rely on third-party vendors and labor for manufacturing, the company will find it difficult to implement quality control, implementing quality standards and quality systems, standards and policies.

• International Shipping and Logistics: While Latervia has waived off export tariffs, importing raw material into the country would be a challenge because it would still be taxed. Rombia, on the other hand, poses the exact opposite challenge, importing raw material wouldn't be a problem but the end product would still be taxed before shipping and distribution.

2.

Globalization would be followed by a steep increase in demand for air and shipping freight and logistics, which would, in turn, the demand for diesel fuel or oil. Globalization would also see an increase in the demand for last-mile delivery of goods and services which would use modes of transportation like large trucks, semi-trucks and delivery vans.

Air Freight: Air freight is the most expensive mode of transportation, however, its also the fasted mode of transporting EcoWorlds goods and services, especially during peak demand periods like the holiday season. Airfreight also will also allow EcoWorld to implement JIT or Just In Time Production, which would save the company money on storage, logistics, and inventory. However, two of the air freight's main disadvantages are that it cannot transport bulk cargo and it isn't cost-efficient.

Shipping Freight: Shipping freight is the cheapest form of long-distance bulk transportation across international waters. Its primary advantage is that it can carry large bulks of cargo which significantly brings down shipping costs. Another advantage of Shipping is that it's cheaper than air freight. Its primary disadvantages are that it takes longer than air fright, depending on the route, weather conditions, the sea, and the distance. it also comes with additional costs such as port costs, international taxation laws, etc. Another disadvantage of shipping freight is that it can only deliver products to the port, unlike air freight which can deliver the product right up to the nearest airport near the storage and distribution center.

Road Transportation: Road transportation is much cheaper than both air and shipping freight, it also enables companies to provide last-mile delivery. Another major advantage of using road transportation is that there are many service providers. This increases the overall reliability when it comes to finding a transporter and reduces cost. One major disadvantage of road transportation is that its only good for interstate and intercity transport.

A 10 % increase in fuel prices would increase EcoWorld's COGS or Cost of Goods Sold, which directly affects gross as well as net margins. These costs will have to either be absorbed by EcoWorld or passed on to the customer or should be evened out by cutting production costs.

3.

In a globalized operation, where a company would require an end to end shipping, often requires multiple insurance vendors. Because each type of transportation has a specific insurance provider and each type of insurance has different types of liability protection for eg some insurance policies only cover the loss or damage of the cargo once the cargo is safely boarded onto the ship. However, if there's any loss in cargo during its journey to the port or on the journey from the barge to the ship, the insurance may not cover the cargo. Similarly, each mode of transportation has a different insurance service provider and has varying scenarios for their claims coverage and requirements. Which is why EcoWorld will have to work with multiple insurance vendors at varying premiums.

4.

Ecoworld should utilize demand forecasting in order to identify and map its demand trends. As stated earlier, EcoWorld is likely to see an uptick in demand during the holiday season. EcoWorld can forecast its future demand by using historical CAGR or Compounded Annual Growth Rates and Churn Rates (or rates of cancellations and Returns) and then use the same growth rate to forecast future demand for their products across different seasons and months.

5.

EcoWorld can value its inventory by taking into account the total COGS or Cost of Goods Sold which includes the product's production costs, raw materials, and labor costs along with its total operating expenses which include payroll, rent, property plant and equipment, administrative, marketing and sales costs. Once we determine the total capital and operational expenditure for manufacturing our products, we can determine the inventory costs and place a value on it. However, we'll also have to take into account a 10 -20 % annual depreciation rate for all of our unsold inventory.

Here are some costs involved in creating and maintaining the inventory of a final product

• Logistics or Storage / Warehousing Costs

• Raw Material Costs

• Freight Costs

• Last Mile Delivery Costs

• Fuel Costs

• Pay Roll

• Rent

• Property, Plant and Equipment

• Admin

• Sales and Marketing

• Depreciation & Amortization Costs

Most of the COGS or the Cost of Goods Sold should decrease as a result of globalization, while, operational costs should increase as a result of an increase in over all sales.