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McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Introduction As trade barriers fall and global markets develop, firms must confront a set of interrelated issues -Where in the world should production activities be located -What should be the long-term strategic role of foreign production sites? -Should the firm own foreign production activities or is it better to outsource to vendors? -How should a globally dispersed supply chain be managed? -Should the firm manage global logistics itself, or should it outsource the management to enterprises that specialize in this activity?TRANSCRIPT
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McGraw-Hill/IrwinInternational Business, 6/e
© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter Sixteen
Global Production, Outsourcing, and Logistics
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Opening Case
• When introducing the X-Box gaming console, Microsoft had to decide if it should manufacture the console or outsource manufacturing to a 3rd party
- Microsoft primarily creates software and lacked the manufacturing capabilities to make the X-Box
• Microsoft decided to outsource production to Flextronics for four reasons
- Flextronics had been pursuing an industrial park strategy so that it could control its supply chain
- Flextronics had a global presence- Flextronics could use Web-based information
systems to share information with Microsoft- Microsoft trusted Flextronics
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Introduction
• As trade barriers fall and global markets develop, firms must confront a set of interrelated issues
- Where in the world should production activities be located- What should be the long-term strategic role of foreign
production sites?- Should the firm own foreign production activities or is it
better to outsource to vendors?- How should a globally dispersed supply chain be
managed?- Should the firm manage global logistics itself, or should it
outsource the management to enterprises that specialize in this activity?
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Strategy, Production, and Logistics
• Production is the activities involved in creating a product
- Can be both service and manufacturing activities
• Logistics is the activity that controls the transmission of physical materials through the value chain
• Production and logistics are closely linked since a firm’s ability to perform its production activities efficiently depends on a timely supply of high quality material inputs
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Strategy, Production, and Logistics
• Production and logistics functions have a number of important strategic objectives
- Lower costs- Increase product quality by eliminating defective products from both the
supply chain and the manufacturing process
• These objectives are interrelated- Increasing productivity because time is not wasted producing poor-
quality products that cannot be sold, leading to a direct reduction in unit costs
- Lowering rework and scrap costs associated with defective products- Reducing the warranty costs and time associated with fixing defective
products
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Relationship Between Quality and Costs
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Total Quality Management
• The total quality management (TQM) philosophy was developed by a number of American consultants such as W. Edwards Deming, Josephy Juran, and A. V. Feigenbaum
• Deming identified a number of steps that should be included in any TQM program
- Management should embrace the philosophy that mistakes, defects, and poor quality materials are not acceptable
- Supervisors should work more with employees and provide them with the tools they need to do the job
- Management should create an environment in which employees will not fear reporting problems
- Work standards should not only be defined as numbers or quotas, but should include some notion of quality
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Six Sigma
• Six Sigma is the modern successor to TQM- It is a statistically based philosophy that aims to reduce
defects, boost productivity, eliminate waste, and cut costs throughout a company
• Production process operating at Six Sigma are 99.99966 percent accurate
- Only 3.4 defects per million units
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Strategy, Production, and Logistics
• In addition to lowering costs and improving quality, two other objectives have particular importance
- Production and logistic functions must be able to accommodate demands for local responsiveness
- Production and logistics must be able to respond quickly to shifts in customer demand
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Where to Produce
• For the firm contemplating international production a number of factors must be considered
- Country factors- Technological factors- Product factors
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Country Factors
• Optimum economic, political, and cultural conditions• Externalities
- Skilled labor pools- Supporting industries
• Formal and informal trade barriers• Exchange rate
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Technological Factors
• Fixed costs• Minimum efficient scale• Flexible manufacturing
- Reduce setup times for complex equipment- Increase machine utilization - Improve quality control
• Flexible machine cells to perform a variety of operations
Mass customizationLow cost
Product customization
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Typical Unit Cost Curve
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Manufacturing Location
• Arguments for concentrating production to a few locations include
- Fixed costs are substantial- Minimum efficient scale is high- Flexible manufacturing technologies available
• Arguments to manufacture in all major markets the firm operates in include
- Fixed costs are low- Minimum efficient scale is low- Flexible manufacturing technologies unavailable- Trade barriers and transportation costs remain major impediments
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Product Factors and Location Strategies
• Two product features affect location decisions:- Value to weight ratio- Product serves universal needs
• Two basic strategies- Concentrating in a centralized location and serving the world
market - Decentralizing them in various regional or national locations
close to major markets when opposite conditions exist
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Centralized Location
• Factor costs have substantial impact• Low trade barriers• Externalities favor certain location• Stable exchange rates• High fixed costs, high minimum efficient scale
relative to global demand or flexible manufacturing technology
• Product’s value-to-weight ratio is high• Product serves universal needs
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Decentralized Location
• Factor costs do not have substantial impact• High trade barriers• Location externalities not important• Exchange rates volatile• Low fixed costs, low minimum efficient scale• Flexible manufacturing technology unavailable• Product’s value-to-weight ratio is low• Significant differences in consumer tastes and
preferences exist between nations
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Location Strategy and Production
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Strategic Role of Foreign Factories
• Initially, established where labor costs low• Later, important centers for design and final assembly• Upward migration caused by pressures to:
- Improve cost structure- Customize product to meet customer demand- An increasing abundance of advanced factors of
production
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Make or Buy Decisions
• Should a firm make or buy the component parts that go into their final product?
• Advantages of making own components:- Lower costs if most efficient producer- Facilitating specialized investments- Proprietary product technology protection- Improved scheduling
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Advantages of Buy Versus Make
• Strategic flexibility in sourcing components• Lower firm’s cost structure• Offsets• Strategic alliances with suppliers give benefits of
vertical integration without the associated organizational problems
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Managing a Global Supply Chain
• Objective of materials management in managing a firm’s global supply chain
- Maintain lowest possible cost - In a way that best serves the customer’s needs
• Role of just-in time inventory- Economize on inventory holding costs- Speeds inventory turnover- Drawback: no buffer stock
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Role of Information Technology and the Internet
• Firms increasingly use electronic data interchange (EDI) to coordinate the flow of materials into manufacturing, through manufacturing, and out to customers
• EDI systems require computer links between a firm, its suppliers, and its shippers; these electronic links are then used
- To place orders with suppliers- To register parts leaving a supplier- To track them as they travel toward a manufacturing
plant- To register their arrival
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Role of Information Technology and the Internet
• EDI systems have resulted in- Suppliers, shippers, and the purchasing firm communicate with each
other with no time delay- Increased flexibility and responsiveness of the whole global supply
system- Paperwork between suppliers, shippers, and the purchasing firm is
eliminated• Web-based systems are rapidly transforming the management
of globally dispersed supply chains, allowing even small firms to achieve a much better balance between supply and demand
• Because the number of firms adopting these systems has increased, those that don’t may find themselves at a significant competitive disadvantage
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Looking Ahead to Chapter 17
• Global Marketing and R & D- The Globalization of Markets and Brands- Market Segmentation- Product Attributes- Distribution Strategy- Communication Strategy- Pricing Strategy- Configuring the Marketing Mix- New-Product Development