International Production, Outsourcing and Logistics Chapter 13 International Production, Outsourcing and Logistics Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Lecture/Chapter Topics Strategy, Production and Logistics Where to Produce The Strategic Role of Foreign Factories Outsourcing Production: Make-or-Buy Decisions Managing a Global Supply Chain Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Strategy, Production and Logistics Production refers to activities involved in creating a product. Logistics refers to the procurement and physical transmission of material through the supply chain, from suppliers to customers. Logistics is the activity that controls the transmission of physical materials through the value chain, from procurement through production and into distribution. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Strategy, Production and Logistics 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, for which logistics is responsible. Objectives of production and logistics being conducted internationally are to: lower the costs of value creation add value by better serving customer needs Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Strategy, Production and Logistics The objectives of reducing costs and increasing quality are not independent of each other. Dispersing production activities to various locations around the globe where each activity can be performed most efficiently can lower costs. Product quality can be increased by eliminating defective products from both the supply chain and the manufacturing process. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Strategy, Production and Logistics There are three ways in which improved quality control reduces costs: Productivity increases because time is not wasted manufacturing poor quality products that cannot be sold. Increased product quality means lower re-work and scrap costs. Greater product quality means lower warranty and re-work costs. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Strategy, Production, and Logistics The Relationship between Quality and Cost Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Strategy, Production and Logistics The main management technique that companies are utilising to boost their product quality is the Six Sigma program, which aims to reduce defects, boost productivity, eliminate waste and cut costs throughout a company. Six Sigma, a direct descendant of total quality management (TQM), has the goal of improving product quality. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Strategy, Production and Logistics Some countries have also promoted specific quality guidelines. The European Union requires that the quality of a firm’s manufacturing processes and products be certified under a quality standard known as ISO 9000 before the firm is allowed access to the European marketplace. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Strategy, Production and Logistics Two other objectives are important for international companies: Production and logistics functions must be able to accommodate demands for local responsiveness. Production and logistics must be able to respond quickly to shifts in customer demand. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Where to Produce There are three factors that should be considered when making a location decision: Country factors Technological factors Product factors Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Where to Produce Country Factors Country factors suggest that a firm should locate its various manufacturing activities in those locations 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. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Where to Produce Technological Factors The type of technology a firm uses in its manufacturing can affect location decisions. Three characteristics of a manufacturing technology are of interest: the level of fixed costs its minimum efficient scale its flexibility Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Where to Produce Technological Factors (Cont’d) Fixed Costs In some cases the fixed costs of setting up a manufacturing plant are so high that a firm must serve the world market from a single location or from very few locations. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Where to Produce Technological Factors (Cont’d) Minimum Efficient Scale 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 centralised production in a single location or a limited number of locations will make sense. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Where to Produce A Typical Unit Cost Curve Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Where to Produce Technological Factors (Cont’d) Flexible Manufacturing and Mass Customisation 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 utilisation of individual machines through better scheduling improve quality control at all stages of the manufacturing process Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Where to Produce Technological Factors (Cont’d) Flexible Manufacturing and Mass Customisation (cont’d) Flexible manufacturing technologies allow a company to produce a wide variety of end products at a unit cost that at one time could only be achieved through the mass production of a standardised output. Mass customisation implies that a firm may be able to customise its product range to suit the needs of different customer groups without bearing a cost penalty. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Where to Produce Technological Factors (Cont’d) Flexible Manufacturing and Mass Customisation (cont’d) Flexible machine cells (a grouping of various types of machinery, a common materials handler and a centralised cell controller) are another common flexible manufacturing technology. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Where to Produce Technological Factors (Cont’d) Flexible Manufacturing and Mass Customisation (cont’d) Adopting flexible manufacturing technologies can help improve the competitive position of firms by allowing the firm to customise products to different national markets in accordance with demands for local responsiveness. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Where to Produce Summary of Technological Factors Concentrating production at a few choice locations makes sense when: fixed costs are substantial the minimum efficient scale of production is high flexible manufacturing technologies are available Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Where to Produce Summary of Technological Factors (Cont’d) Concentrating production at a few choice locations is not as compelling when: both fixed costs and the minimum efficient scale of production are relatively low appropriate flexible manufacturing technologies are not available Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Where to Produce Product Factors Two product factors impact on location decisions: 1. The product's value-to-weight ratio If the value-to-weight ratio is high, it is practical to produce the product in a single location and export it to other parts of the world. If the value-to-weight ratio is low, there is greater pressure to manufacture the product in multiple locations across the world. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Where to Produce Two product factors impact on location decisions (cont’d) 2. Whether the product serves universal needs (needs that are the same everywhere) Since there are few national differences in consumer taste and preference for such products, the need for local responsiveness is reduced, increasing the attractiveness of concentrating manufacturing in a central location. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Where to Produce Locating Production Facilities There are two basic strategies for locating manufacturing facilities: Concentrating them in the optimal location and serving the world market from there. Decentralising them in various regional or national locations that are close to major markets. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Strategic Role of Foreign Factories 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. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Strategic Role of Foreign Factories As governmental regulations change and/or countries upgrade their factors of production the strategic advantage of a particular location can change. As the strategic role of a factory is upgraded and a firm develops centres of excellence in different locations worldwide, it supports the development of a transnational strategy. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Strategic Role of Foreign Factories A major aspect of a transnational strategy is a belief in global learning, or the idea that valuable knowledge does not reside just in a firm’s domestic operations, it may also be found in its foreign subsidiaries. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Outsourcing Production: Make-or-Buy Decisions The make-or-buy decision is a decision about whether a firm should make or buy component parts. Make-or-buy decisions are important factors in many firms' manufacturing strategies. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Outsourcing Production: Make-or-Buy Decisions The Advantages of Making Vertical integration (making component parts in house): is associated with lower costs facilitates investments in highly specialised assets protects proprietary technology facilitates the scheduling of adjacent processes Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Outsourcing Production: Make-or-buy Decisions The Advantages of Making (Cont’d) Lowering Costs If the firm is more efficient at that production activity than any other enterprise, it may pay a firm to continue manufacturing a product or component part in house. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Outsourcing Production: Make-or-Buy Decisions The Advantages of Making (Cont’d) Facilitating Specialised Investments Internal production makes sense when substantial investments in specialised assets (assets whose value is contingent upon a particular relationship persisting) are required to manufacture a component. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Outsourcing Production: Make-or-Buy Decisions The Advantages of Making (Cont’d) Protecting Proprietary Product Technology A firm might prefer to make component parts that contain proprietary technology in house in order to maintain control over the technology. Improving Scheduling The weakest argument for vertical integration is that the resulting production cost savings make planning, coordination and scheduling of adjacent processes easier. Management Focus: Outsourcing at the Boeing Company Summary This feature focuses on the process of generating ‘make-or-buy’ decisions at Boeing. The Boeing Company is the world's largest manufacturer of commercial jet aircraft, with a 60 per cent share of the global market. Due to decreasing demand for its aircraft and cost constraints on the part of its buyers, Boeing has been forced to find ways to become more price competitive. One strategy that Boeing has utilised is outsourcing. The feature describes Boeing's outsourcing criteria, which involve making a determination whether it is better for Boeing to ‘make’ or ‘buy’ a particular component part. For Boeing this is serious business. On the one hand, Boeing does not want to take unnecessary strategic risks and become too dependent on outside suppliers for critical component parts. On the other hand, Boeing can outsource certain component parts and realise a substantial cost saving. The feature illustrates the nature of this dilemma at Boeing. Discussion of the feature can begin with the following questions. Suggested Discussion Questions 1. Describe Boeing's criteria for determining whether a component part should be ‘outsourced’ or whether it should be manufactured in house. Are Boeing’s criteria appropriate? Why or why not? 2. What could go wrong with Boeing's strategy of outsourcing? Has Boeing taken the necessary precautions? Are there any hazards in the company's strategy? 3. In the future do you believe that Boeing will be doing more or less outsourcing? Justify your answer. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Outsourcing Production: Make-or-Buy Decisions The Advantages of Buying Buying component parts from independent suppliers: gives the firm greater flexibility helps drive down the firm's cost structure helps the firm to capture orders from international customers Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Outsourcing Production: Make-or-Buy Decisions The Advantages of Buying (Cont’d) Strategic Flexibility The greatest advantage of buying component parts from independent suppliers is that the firm can maintain its flexibility, switching orders between suppliers as circumstances dictate. This is particularly important when changes in exchange rates and trade barriers might alter the attractiveness of various supply sources over time. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Outsourcing Production: Make-or-Buy Decisions The Advantages of Buying (Cont’d) Lower Costs Firms that buy components from independent suppliers can avoid: The challenges involved in coordinating and controlling the additional subunits that are associated with vertical integration The lack of incentive associated with internal suppliers The difficulties with setting appropriate transfer prices Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Outsourcing Production: Make-or-Buy Decisions The Advantages of Buying (Cont’d) Offsets Outsourcing can help firms capture more orders from suppliers’ countries. Offsets are common in the commercial aerospace industry. Government defence contracts often include offset requirements. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Outsourcing Production: Make-or-Buy Decisions Trade-Offs The benefits of manufacturing components in house are greatest when: highly specialised assets are involved vertical integration is necessary for protecting proprietary technology the firm is more efficient than external suppliers at performing a particular activity Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Outsourcing Production: Make-or-Buy Decisions Strategic Alliances with Suppliers Firms have tried to capture some of the benefits of vertical integration, without encountering the associated organisational problems, by entering into long-term strategic alliances with key suppliers. While such alliances can help the firm to capture the benefits associated with vertical integration, firms may find their strategic flexibility limited by commitments to alliance partners. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Managing a Global Supply Chain 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. The logistics function is complicated in an international business by factors such as distance, time, exchange rates and customs barriers. Efficient logistics can have a major impact upon a firm's bottom line. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Managing a Global Supply Chain Typical Supply Chain Operations Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Managing a Global Supply Chain Logistic Activities in an International Supply Chain Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Managing a Global Supply Chain The Power of Just-in-Time (JIT) The basic philosophy is to economise on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter the production process, and not before. JIT systems generate major cost savings from reduced warehousing and inventory holding costs. JIT systems can help the firm to spot defective parts and take them out of the manufacturing process, boosting product quality. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Managing a Global Supply Chain Role of Information Technology and the Internet Web-based information systems play a crucial role in materials management. EDI: Facilitates the tracking of inputs Allows the firm to optimise 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 Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.

Summary of Main Themes This chapter explained how efficient production and logistics functions can improve an international business’s competitive position by lowering the costs of value creation and by performing value-creation activities in such ways that customer service is enhanced and value added is maximised. We looked closely at three issues central to international production and logistics: where to produce, what to make and what to buy, and how to coordinate a globally dispersed manufacturing and supply system. Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Global Business Today 1e by Hill. Slides prepared by Fuming Jiang.