Chapter 15 Global Production and Supply-Chain Management 1

Supply Chain Management How can production and supply chain management be conducted internationally to lower the costs of value creation and add value by better serving customer needs (higher quality and fewer defects)? Production: activities involved in creating a product Supply chain management: the procurement and physical transmission of material through the supply chain, from suppliers to customers Purchasing Logistics 2

Supply Chain Management 3 The Relationship Between Quality and Costs

What management tool is used to increase the reliability of product offerings? The Six Sigma quality improvement program aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout a company Six Sigma is a direct descendant of total quality management (TQM) In addition, some countries have also promoted specific quality guidelines like the EU’s ISO

Where should production activities be located? When deciding where to locate production facilities, firms must consider: Country factors Technological factors Production factors 5

Country Factors Firms should locate manufacturing activities where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity Regulations affecting FDI and trade can significantly affect the appropriateness of specific countries, as can expectations about future exchange rate changes 6

Technological Factors Firms should consider: 1.The level of fixed costs involved: if they are very high, it could make sense for the firm to serve the world market from a single location or from a very few locations 2.The minimum efficient scale of the technology: the larger the minimum efficient scale (the level of output at which most plant-level scale economies are exhausted) of a plant, the more likely centralized production makes sense 3.The flexibility of the technology The term flexible manufacturing technology or lean production covers a range of manufacturing technologies that are designed to: Reduce set up times for complex equipment Increase the utilization of individual machines through better scheduling Improve quality control at all stages of the manufacturing process 7

Technological Factors Flexible manufacturing technologies: enable firms to produce a wide variety of end products at a unit cost that traditionally would require mass production of a standardized output Mass customization: a firm may be able to customize its product range to suit the needs of different customer groups without bearing a cost penalty Another common flexible manufacturing technology is the flexible machine cells: grouping of various types of machinery, a common materials handler, and a centralized cell controller Adopting flexible manufacturing technologies can help the firm to customize products to meet the demands of small customer groups in different national markets So, firms can act like a local firm without bearing the costs of establishing local manufacturing facilities 8

Production Factors Several production factors influence why production facilities are located and used in certain ways 1.Product features 2.Locating production facilities 3.Strategic roles for production facilities 9

Production Factors Two product features impact location decisions: 1.The product's value-to-weight ratio If the value-to-weight ratio is high, produce the product in a single location and export it If the value-to-weight ratio is low, manufacture the product in multiple locations across the world 2.Whether the product serves universal needs The need for local responsiveness is reduced for products that do, which increases the attractiveness of concentrated manufacturing 10

Production Factors There are two basic strategies for locating manufacturing facilities 1.Concentrating them in the optimal location and serving the world market from there 2.Decentralizing them in various regional or national locations that are close to major markets 11

Production Factors 12 Location Strategy and Production

Production Factors Concentrated production makes sense when: Fixed costs are substantial The minimum efficient scale of production is high Flexible manufacturing technologies are available Concentrated production does not make sense when: Both fixed costs and the minimum efficient scale of production are relatively low Appropriate flexible manufacturing technologies are not available 13

Production Factors The strategic role of foreign factories and the strategic advantage of a particular location can change over time A factory initially established to make a standard product to serve a local market, or to take advantage of low cost inputs, can evolve into a facility with advanced design capabilities As governmental regulations change and/or countries upgrade their factors of production the strategic advantage of a particular location can change 14

Production Factors As the strategic role of a factory is upgraded and a firm develops centers of excellence in different locations worldwide, it supports the development of a transnational strategy A focus of a transnational strategy is global learning: the idea that valuable knowledge does not reside just in a firm’s domestic operations, it may also be found in its foreign subsidiaries Managers should promote the idea that factories are potential centers of excellence with strategic importance to the firm 15

Production Factors Foreign factories can have a number of roles or designations: Offshore factory: a factory that is developed and set up mainly for producing component parts or finished goods at a lower cost than producing them at home or in any other market Source factory: a factory whose primary purpose is also to drive down costs in the global supply chain Server factory: a factory that is linked into the global supply chain for a global firm to supply specific country or regional markets around the world Contributor factory: a factory that serves a specific country or world region Outpost factory: a factory that can be viewed as an intelligence–gathering unit Lead factory: a factory that is intended to create new processes, products, and technologies that can be used throughout the global firm in all parts of the world 16

Hidden Costs of Foreign Locations There may be hidden costs associated with foreign production High employee turnover Shoddy workmanship Poor product quality Low productivity Make-or-buy decisions: decisions about whether to perform a certain value creation activity in-house or outsource it to another firm - are important to a firm’s manufacturing strategy 17

Make-or-Buy Decisions (continued from Slide 15-26) 18 Operationally Favoring a Make Decision

Make-or-Buy Decisions (continued from Slide 15-27) 19 Operationally Favoring a Buy Decision

Global Logistics Core activities performed in logistics: 1.Global distribution center management 2.Inventory management 3.Packaging and materials handling 4.Transportation 5.Reverse logistics 20

Global Logistics 1.Global distribution center: a facility that positions and allows customization of products for delivery to worldwide wholesalers or retailers or directly to consumers anywhere in the world These centers are the foundation of a global supply network because they allow either a single location or satellite warehouses to store quantities and assortments of products and allow for value-added customization 2.Global inventory management: the decision-making process regarding the raw materials, work-in-process, and finished goods inventory for an MNC 3.Packaging: the container that holds the product itself Primary packaging holds the product itself Secondary packaging is designed to contain several primary packages Transit packaging is used when primary and secondary packages are assembled for transportation Packaging is intended to perform, protect, and inform 21

Global Logistics 4.Transportation: the movement of raw material, component parts, and finished goods throughout the global supply chain Transportation is the largest percentage of any logistics budget Transport mode influences rates: ocean is the least expensive and air is the most expensive 5.Reverse logistics: the process of moving inventory from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal The ultimate goal is to optimize the after-market activity or make it more efficient 22

Global Purchasing Five strategic levels of purchasing: 1.Level I: domestic purchasing activities only 2.Level II: international purchasing only as needed 3.Level III: international purchasing as part of firm’s overall supply chain management strategy 4.Level IV: global purchasing activities that are integrated across the firm’s locations worldwide 5.Level V: global purchasing activities that are integrated across worldwide locations and functional groups 23

Global Purchasing 24 Outsourcing Terms and Options

Managing a Global Supply Chain Efficient supply chain management can have a substantial impact on a firm’s profitability Four important areas: 1.The role of just-in-time inventory 2.The role of information technology 3.Coordination 4.Interorganizational relationships 25

Role of Just-in-Time Inventory Just-in-time (JIT) economizes on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter the production process, and not before: Can result in major cost savings from reduced warehousing and inventory holding costs Can help firms spot defective parts, take them out of the manufacturing process, and boost product quality But, JIT systems eliminate buffer inventory 26

Role of Information Technology Electronic data interchange (EDI): Facilitates the tracking of inputs Allows the firm to optimize its production schedule Allows the firm and its suppliers to communicate in real time Eliminates the flow of paperwork between a firm and its suppliers 27

Coordination Global supply chain coordination: shared decision-making opportunities and operational collaboration of key global supply chain activities Helps to create a more integrated, coherent, efficient, and effective global supply chain 28

Interorganizational Relationships What is the role of interorganizational relationships in the global supply chain? Trust and commitment between interacting organizations is important to an efficient and effective global supply chain 29

Interorganizational Relationships (continued from Slide 15-41) 30 Upstream/Inbound Relationships Downstream/Outbound Relationships