Globalizing Furniture Supply Chain: Managing Risks
The company is located in Quebec, Canada from where it would like to globalize their business by selling furniture in Europe. The firm also has some components produced in Asia. From the case, it is understood that the business wants to get involved in the global market which brings about some risk factors associated with it. The analysis below describes 5 risks associated with the business and shows ways to mitigate those.
Trading Risk
Any global operation of a business would present a high trade risk in a foreign market which includes, but is not limited to, changes in interest rates, exchange rates, tariff barriers, inflation, and so on. Therefore, the perceptive knowledge of the European and Asian economy, strengthening the flow of cash, and avoiding bad debts are the ways to trading risk mitigation for the home company.
Political-Legal Risk
Political and legal risks in a foreign country are undeniably alarming for the business. Thus, trade laws, changes in political parties or even the economic policies of host countries can be threatening and the home company, therefore, may face personal, financial as well as strategic harm through this. In addition, political riots, instability in the nation, a civil war, abuse in trade agreements, and the extraction of a treaty between countries can become a concern for the home company. The after effects of BREXIT could be considered as an example of such risks. In managing such risks, the Canadian company may seek out opportunities from the available legal provisions in the host countries, financially insure the business, or may also merge with a local company.
Knowledge Deficiency
Most companies jump into global operation without having adequate knowledge on different significant aspects related to host countries, such as consumer purchasing power, purchasing behavior of people, or the underlying demand for company products. Contemporary industry trends could be considered as important factors of business failure. To combat this risk, the Canadian home company must conduct prior research on the market, customer, and demographic segmentation of Asian or European countries where they want to operate their business. For instance, a research or survey on customer’s preference of the model, type or features of furniture would add a lot of value before starting the operation overseas.
Strategic Risk
Strategic planning of one country may not match with that of another country. Country policies, buying patterns, and economic conditions vary much from nation to nation. In response to the risk, the company must come up with an innovative strategy which matches with the Asian and European economy, market, labor, policies, and culture.
Cultural Risk
This is the most common type of risk the home company would face in its cross-border operations. The language barrier, variation in behavior and attitude, ideology or even gestures can lead to a greater misunderstanding between two business parties. Hence, the Canadian home company can offer a training program, language classes etc. for the employees overseas where the local trainer will show guidelines for better communication.
To conclude, the risks mentioned above are always faced by both the buyer and seller during any global business or operation. Therefore, a cautious way of doing global business can be much more fruitful for both parties.
Supply Chain Management
Given that sales of 2015 is 100M USD and Cost of goods sold 30% of 10000000 = 3000000USD
Inventory turnover rate = Cost of goods sold/ average inventory = 30 M/3.5M = 8.57 times.
The company has a turnover of 8.57 times of its inventory in a year which is suggesting that the company has to order inventories 9 times to keep its operations up and running. Whether the company is maintaining a perfect inventory level or not depends on the industry practice.
Percentage of asset of inventory = average inventory/total asset
= 3.5 M/20 M = 0.175 *100 = 17.5%
Here, the percentage of asset as inventory is 17.5%, which is moderate. If the company’s competitors doing similar business have the same ratio on average, let us assume, 23%, then the company should increase it by planning to rise the quantity of inventory to prevent the out-of-stock risk.
Weeks of Supply = Weeks in year/Inventory turnover = 52/8.57 = 6.06 weeks.
The calculation suggests that the company keeps 6 weeks of supply in its inventory, whether this inventory strategy is perfect or not would depend on the industry practice. Further analysis on the inventory management might help the firm to accomplish an efficient inventory management system.
Inventory Management
The average quantity of wood is 500 batches, Ordering cost per order 150USD, monthly inventory cost 5 USD, 300 working days per year.
In this case, the inventory management plan should be focused on ensuring there is no shortage of inventory while demand occurs. The EOQ allows a company to make the optimum decision regarding the quantity of products.
If the company orders an average of 500 batches of wood per year then,
The EOQ for the company, Q* = 
Total inventory Cost = 500*60 = $30,000.
Therefore, the company should purchase 50 wood batches at a time to lessen the total ordering and carrying a cost. Here, the order should be placed when the next ordering time is closer and the inventory stock is about to be finished. Doing so protects the company from the out-of-stock risk.
If the company follows JIT ordering system and starts ordering every two days then the total inventory management procedure would change for the company. It usually orders inventory 9 times a year, but if the company chooses to order every two days then it will place an order 150 times in a year (considering 300 days in a year). Assuming the demand for total inventory will not change (the decision to implement JIT), the result would require less space for inventory storage, therefore, the holding cost will significantly go down. If the ordering cost remains the same then the total ordering cost would increase by $21,150 which would essentially increase the inventory managing cost. Apart from that, the operational efficiency would increase in the company.
Aggregate Planning
An effective inventory management system can assist the company to maintain a structured, well-designed inventory management plan. Also, the company can use materials resource planning (MRP) which is the most widely used inventory management system for many local or multinational companies. MRP is an inventory system where all the necessary data regarding inventory such as gross requirement, schedule receipt time, the net requirement of inventory, the point of order, etc. are recorded and updated automatically in a way that allows any operation manager to maintain inventory efficiently.
The MRP would efficiently forecast the seasonal demand of the net material requirement and it would adjust the master production schedule accordingly. As a result, the company will not face any difficulties in managing seasonal demands.
The MRP inventory management strategy not only helps the inventory/capacity management but also ensures the proper distribution of goods, balance between supply and demand, and ways for strategic decision-making. Therefore, the company must enroll itself into such kind of inventory management system that includes optimum EOQ quantity, information system, and the proper use of supply chain management tools.