International Business An Asian Perspective By Charles W. L. Hill Chow-Hou Wee Krishna Udayasankar
Chapter 16 Global Production, Outsourcing, and Logistics Mc. Graw-Hill/Irwin Copyright © 2011 by the Mc. Graw-Hill Companies, Inc. All rights reserved.
What Are The Main Production Issues For Firms? v International firms must answer five interrelated questions 1. Where should production activities be located? 2. What should be the long-term strategic role of foreign production sites? 3. Should the firm own foreign production activities or outsource those activities to independent vendors? 4. How should a globally dispersed supply chain be managed, and what is the role of Internet-based information technology in the management of global logistics? 5. Should the firm manage global logistics itself, or should it outsource the management to enterprises that specialize in this activity? 16 -3
How Are Strategy, Production, And Logistics Related? v v v 1. Production - activities involved in creating a product Logistics - procurement and physical transmission of material through the supply chain, from suppliers to customers Questions: How can production and logistics Lower the costs of value creation? v v 2. disperse production to the most efficient locations manage the global supply chain efficiently to better match supply and demand Add value by better serving customer needs? v eliminate defective products from the supply chain and the manufacturing process 16 -4
How Can Quality Be Improved? v Most firms use the Six Sigma program - a direct descendant of total quality management (TQM) vaims to reduce defects, boost productivity, eliminate waste, and cut costs throughout the company v In the European Union, firms must meet ISO 9000 standards before gaining access to the European marketplace v Improved quality reduces costs 16 -5
How Can Quality Be Improved? The Relationship Between Quality and Costs 16 -6
Where Should Production Be Located? v Firms should locate production so that v production and logistics can be locally responsive v production and logistics can respond quickly to shifts in customer demand v 1. 2. 3. Firms should consider Country factors Technological factors Product factors 16 -7
Why Are Country Factors Important? v Manufacturing should be located where economic, political, and cultural conditions are most conducive to the performance of that activity v Firms should consider vthe availability of skilled labor and supporting industries vformal and informal trade barriers vexpectations about future exchange rate changes vtransportation costs vregulations affecting FDI 16 -8
Why Are Technological Factors Important? v 1. Firms should consider The level of fixed costs v v 2. if fixed costs are high, produce in a single location or a few locations when fixed costs are low, multiple production plants may be possible – allows firms to respond to local demands The minimum efficient scale v v when minimum efficient scale (the level of output at which most plant-level scale economies are exhausted) is high, choose centralized production in a single location or a limited number of locations when minimum efficient scale is low, respond to local market demands and hedge against currency risk by operating in multiple locations 16 -9
Why Are Technological Factors Important? 3. The flexibility of the technology v flexible manufacturing technology or lean production v reduces set up times for complex equipment v increases the utilization of individual machines v improves quality control v Flexible manufacturing allows firms to produce a wide variety of end products at a relatively low unit cost v Mass customization v Flexible machine cells 16 -10
What Should a Firm Do? v Production should be concentrated in a few locations when vfixed costs are substantial vthe minimum efficient scale of production is high vflexible manufacturing technologies are available v Production in multiple locations makes sense when vboth fixed costs and the minimum efficient scale of production are relatively low vappropriate flexible manufacturing technologies are not available 16 -11
Why Are Product Factors Important To Location Decisions? v Two product factors impact location decisions 1. The product's value-to-weight ratio v If the value-to-weight ratio is high, produce the product in a single location and export to other parts of the world v If the value-to-weight ratio is low, there is greater pressure to manufacture the product in multiple locations across the world 2. Whether the product serves universal needs v When products serve universal needs, the need for local responsiveness falls, and concentrating manufacturing in a central location makes sense 16 -12
How Are Location, Strategy, And Production Related? Location, Strategy, and Production 16 -13
What Is The Strategic Role Of Foreign Factories? v The strategic role of foreign factories and the strategic advantage of a particular location can change over time v factories established to take advantage of low cost labor can evolve into facilities with advanced design capabilities v Improvement in a facility comes from 1. Pressure to lower costs or respond to local markets 2. An increase in the availability of advanced factors of production 16 -14
What Is The Strategic Role Of Foreign Factories? v. Many companies now see foreign factories as globally dispersed centers of excellence vsupports the development of a transnational strategy vglobal learning - valuable knowledge can be found in foreign subsidiaries vimplies that firms are less likely to switch production to new locations simply because some underlying variable like wage rates has changed 16 -15
Should A Firm Outsource Production? v. Should a firm make or buy the component parts to go into its final product? v. Make-or-buy decisions are important to firms' manufacturing strategies vservice firms also face make-or-buy decisions vdecisions involving international markets are more complex than those involving domestic markets 16 -16
Why Make? v Vertical integration - making component parts in-house 1. Lowers costs - if a firm is more efficient at that production activity than any other enterprise, manufacturing in-house makes sense 2. Facilitates investments in highly specialized assets internal production makes sense when substantial investments in specialized assets are required 3. Protects proprietary technology – in-house production makes sense when component parts contain proprietary technology 4. Facilitates the scheduling of adjacent processes planning, coordination, and scheduling of adjacent processes can be easier with in-house production 16 -17
Why Buy? v Buying component parts from independent suppliers 1. Gives the firm greater flexibility v important when changes in exchange rates and trade barriers alter the attractiveness of various supply sources over time 2. Helps drive down the firm's cost structure v avoids challenges of coordination and control of additional subunits v avoids the lack of incentive associated with internal suppliers v avoids the difficulties with setting appropriate transfer prices 3. Helps the firm capture orders from international customers v can help firms gain orders from suppliers’ countries 16 -18
Do Strategic Alliances With Suppliers Make Sense? v. Sometimes, firms can capture the benefits of vertical integration without the associated organizational problems by forming longterm strategic alliances with key suppliers v. However, these commitments may actually limit strategic flexibility 16 -19
How Do Firms Manage The Global Supply Chain? v Logistics encompasses the activities necessary to get materials to a manufacturing facility, through the manufacturing process, and out through a distribution system to the end user v The goal is to vmanage a global supply chain at the lowest possible cost and in a way that best serves customer needs vestablish a competitive advantage through superior customer service 16 -20
What Is The Role Of Just-In-Time Inventory? v Just-in-time (JIT) systems economize on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter the production process v JIT systems vgenerate major cost savings from reduced warehousing and inventory holding costs vcan help the firm spot defective parts and take them out of the manufacturing process to boost product quality v But, a JIT system leaves the firm with no buffer stock of inventory to meet unexpected demand or supply changes 16 -21
What Is The Role Of Information Technology And The Internet? v Web-based information systems play a crucial role in materials management vallow firms to optimize production scheduling according to when components are expected to arrive v Electronic Data Interchange (EDI) vfacilitates the tracking of inputs vallows the firm to optimize its production schedule vlets the firm and its suppliers communicate in real time veliminates the flow of paperwork between the firm and its suppliers 16 -22
Review Question What allows firms to increase efficiency by improving capacity utilization and reducing work-in-progress? a) mass customization b) Six Sigma technology c) ISO 9000 d) flexible machine cells 16 -23
Review Question Firms should produce in multiple locations when a) fixed costs are low b) fixed costs are substantial c) the minimum efficient scale of production is high d) flexible manufacturing technologies are available 16 -24
Review Question All of the following are key factors that influence the decision of where to produce except a) country factors b) competitor factors c) technological factors d) product factors 16 -25
Review Question When _______, firms will favor decentralized production. a) there are substantial differences in political economy b) fixed costs are high c) the product’s value-to-weight ratio is high d) exchange rates are volatile 16 -26
Review Question Concentrated production makes sense when a) minimum efficient scale is high b) location externalities are not important c) the product does not serve universal needs d) there are few trade barriers 16 -27
Review Question Which of the following is not an advantage of buying from independent suppliers? a) it gives the firm greater flexibility b) it helps drive down the firm's cost structure c) it protects proprietary property d) it helps the firm to capture orders from international customers 16 -28
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