Chapter 16. Global Chapter 16. Global Production, Production,

Outsourcing, and Outsourcing, and LogisticsLogistics

Introduction Introduction trade barriers fall & global market develop trade barriers fall & global market develop ⇒⇒ ⇒⇒ Firms confront something : Firms confront something : 1. production activity location 1. production activity location 2. the long - term strategic of foreign 2. the long - term strategic of foreign

production site production site 3. own production ? or another production ? 3. own production ? or another production ? 4. globally dispersed supply chain be managed4. globally dispersed supply chain be managed5. manage global logistics itself 5. manage global logistics itself or outsource the management to enterprisesor outsource the management to enterprises

MicrosoftMicrosoft

Microsoft outsourced production of its XbMicrosoft outsourced production of its Xbox video game console to Flextronicsox video game console to Flextronics

Because it lacked the skills required to asseBecause it lacked the skills required to assemble a complex electronics product.mble a complex electronics product.

After ??After ??

Strategy, Production, and Strategy, Production, and Logistics Logistics

Production Production → production of physical goods production of physical goods

Logistics Logistics → the activity that controls the the activity that controls the

transmission of physical materials transmission of physical materials through the value chainthrough the value chain

Production & Logistics are linkedProduction & Logistics are linked

Strategy, Production, and Strategy, Production, and LogisticsLogistics

Strategic objectivesStrategic objectives

1. lower costs 1. lower costs

2. increasing quality 2. increasing quality The objectives of reducing costs and The objectives of reducing costs and

increasing quality are dependentincreasing quality are dependent

Strategy, Production, and Strategy, Production, and LogisticsLogistics

TQMTQM Six SigmaSix Sigma ISO 9000ISO 9000

Two Other Objective – Two Other Objective – Production & Logistics Production & Logistics

1. Accommodate demands for local 1. Accommodate demands for local responsiveness responsiveness

2. Shift in customer demand quickly 2. Shift in customer demand quickly

Where to produceWhere to produce Country specific factorsCountry specific factors Political economy, culture and relative Political economy, culture and relative

factor costsfactor costs Presence of concentrated global activitiesPresence of concentrated global activities Local manufacturing activitiesLocal manufacturing activities

Technology factorsTechnology factors Fixed costs Fixed costs Minimum Efficient Scale Minimum Efficient Scale Flexible ManufacturingFlexible Manufacturing Mass CustomisationMass Customisation

Product factorsProduct factors Value to Value to

weight rationweight ration HighHigh LowLow Universal Universal

needsneeds Consumer Consumer

tastes and tastes and preferencespreferences

Location of Production Location of Production facilitiesfacilities

Centralisation of locCentralisation of locationation

Decentralisation of lDecentralisation of locationocation

Location decisions cLocation decisions can be difficultan be difficult

Automobile IndustryAutomobile Industry Strategic role of foreStrategic role of fore

ign factoriesign factories

Outsourcing Production : Outsourcing Production : Make or Buy DecisionsMake or Buy Decisions

Decisions about whether they should Decisions about whether they should

perform a certain value activity perform a certain value activity

themselves or outsource it to themselves or outsource it to another another

entity.entity.

The Advantage of MakeThe Advantage of Make

Lowering CostsLowering Costs

Facilitating Specialized InvestmentsFacilitating Specialized Investments

Protecting Proprietary Product Protecting Proprietary Product TechnologyTechnology

Improving SchedulingImproving Scheduling

Lowering CostsLowering Costs

If the firm can perform the If the firm can perform the production activity most efficiently, production activity most efficiently, they can continue manufacturing a they can continue manufacturing a product or component part in-house.product or component part in-house.

Boeing decided to keep the design Boeing decided to keep the design and final integration of aircraft.and final integration of aircraft.

Facilitating Specialized Facilitating Specialized InvestmentsInvestments

When substantial investments in When substantial investments in specialized assets are required to specialized assets are required to manufacture a component, the firm manufacture a component, the firm will prefer to make the component will prefer to make the component internationally rather than contract it internationally rather than contract it out to a supplier.out to a supplier.

Protecting Proprietary Protecting Proprietary TechnologyTechnology

If the firm outsources the production containing pIf the firm outsources the production containing proprietary technology, it runs risks. roprietary technology, it runs risks.

To maintain control over its technology, the firm To maintain control over its technology, the firm might prefer to make such products or componenmight prefer to make such products or component parts in-house.t parts in-house.

Improving SchedulingImproving Scheduling

Production cost savings by making Production cost savings by making planning, coordination, and planning, coordination, and scheduling of adjoining processes scheduling of adjoining processes easier.easier.

Scheduling can be exacerbated by Scheduling can be exacerbated by the time and distance between the the time and distance between the firm and its suppliers.firm and its suppliers.

The Advantage of BuyThe Advantage of Buy

Strategic FlexibilityStrategic Flexibility

Lower CostsLower Costs

OffsetsOffsets

Strategic FlexibilityStrategic Flexibility

The firm can maintain its flexibility to The firm can maintain its flexibility to switch orders between suppliers as switch orders between suppliers as circumstances dictate.circumstances dictate.

The firm can avoid risks which come The firm can avoid risks which come from exchange rates, trade barriers from exchange rates, trade barriers and political unstableness by buying and political unstableness by buying from an independent suppliers in from an independent suppliers in that countrythat country

Lower CostsLower Costs

The more subunits in an The more subunits in an organization, the more problems organization, the more problems coordinating coordinating

The resulting increase in The resulting increase in organizational complexity can raise a organizational complexity can raise a firm’s cost structure.firm’s cost structure.

OffsetsOffsets

Outsourcing may help the firm Outsourcing may help the firm capture more orders from that capture more orders from that country.country.

Managing A Global Supply Managing A Global Supply Chain Chain

LogisticsLogistics

Pioneered by Japanese firms during the Pioneered by Japanese firms during the 1950s and 60s, just in time inventory 1950s and 60s, just in time inventory systems now play a major role in most systems now play a major role in most manufacturing firms. The basic manufacturing firms. The basic philosophy behind just in time (JIT) philosophy behind just in time (JIT) systems is to economize on inventory systems is to economize on inventory holding costs by having materials arrive holding costs by having materials arrive at a manufacturing plant just in time to at a manufacturing plant just in time to enter the production and not before. enter the production and not before.

Information technology, particularly interneInformation technology, particularly internet based electronic data interchange, plays t based electronic data interchange, plays a major role in material management. EDI fa major role in material management. EDI facilities the tracking of inputs, allows the fiacilities the tracking of inputs, allows the firm to optimize it's production schedule, letrm to optimize it's production schedule, lets the firm and its supplier communicate in s the firm and its supplier communicate in real time and eliminates the flow of paperwreal time and eliminates the flow of paperwork between a firm for its supplier. ork between a firm for its supplier.