Slide international business 6e by CHarless hill 07IBChapter 16

International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.. - Can be both service and manufacturing activities• Logistics is the activity that controls the

Chapter Sixteen

Global Production, Outsourcing, and Logistics

International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

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 Box

X-• 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

• 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?

- 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

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 quality products that cannot be sold, leading to a direct reduction in unit costs

poor Lowering rework and scrap costs associated with defective products

- Reducing the warranty costs and time associated with fixing defective

products

International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

Relationship Between Quality and Costs

Total Quality Management

developed by a number of American consultants such as W

Edwards Deming, Josephy Juran, and A V Feigenbaum

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

International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

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

International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

Where to Produce

• For the firm contemplating international production a

number of factors must be considered

- Country factors

- Technological factors

- Product factors

- Reduce setup times for complex equipment

- Increase machine utilization

- Improve quality control

• Flexible machine cells to perform a variety of

operations

Mass customization

Low cost

Product customization

Typical Unit Cost Curve

- 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

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

International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

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

International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

Location Strategy and

Production

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

International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

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

International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

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

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

plant

International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

Role of Information Technology

and the Internet

• EDI systems have resulted in

with no time delay

• 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

Looking Ahead to Chapter 17

• Global Marketing and R & D