Chapter 15 Global Operations and Supply Chain Management McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Managing Global Supply Chains Supply Chain Management the process of coordinating and integrating the flow of materials, information, finances, and services within and among companies in the value chain from suppliers to the ultimate consumer Supply Chain Management the process of coordinating and integrating the flow of materials, information, finances, and services within and among companies in the value chain from suppliers to the ultimate consumer Integral part of global quality & cost management: –Supply chain costs are 50+% of assets and 80+% of revenues –Inventory carried at each stage of supply chain and ties up $$ –Ultimate goal: reduce inventory –Supply chains must be synchronized to minimize buffer inventories –Management of GSC gives competitive advantage Integral part of global quality & cost management: –Supply chain costs are 50+% of assets and 80+% of revenues –Inventory carried at each stage of supply chain and ties up $$ –Ultimate goal: reduce inventory –Supply chains must be synchronized to minimize buffer inventories –Management of GSC gives competitive advantage LO1 15-2

Design of Products and Services Design is related fundamentally to the type of inputs required Important consideration: extent of standardization or adaptation of products Over-the-Wall approach is a traditional approach using sequential design based on addressing production-related problems Cross-functional participation is the alternative approach addressing design-related sourcing and manufacturing problems Design is related fundamentally to the type of inputs required Important consideration: extent of standardization or adaptation of products Over-the-Wall approach is a traditional approach using sequential design based on addressing production-related problems Cross-functional participation is the alternative approach addressing design-related sourcing and manufacturing problems LO2 15-3

Sourcing Globally Reasons for Sourcing Globally: –Lower prices –No local availability of certain products –Competition using better designed or quality components not available locally Reasons for Sourcing Globally: –Lower prices –No local availability of certain products –Competition using better designed or quality components not available locally Offshoring – relocating some or all of a businesss activities or processes to a foreign location Decision: Set up own facilities or outsource production? Offshoring – relocating some or all of a businesss activities or processes to a foreign location Decision: Set up own facilities or outsource production? LO3 15-4

Global Sourcing Arrangements 1.Wholly owned subsidiary 2.Overseas joint venture 3.In-bond plant contractor 4.Overseas independent contractor 5.Independent overseas manufacturer Importance of Global Sourcing Importance of Global Sourcing Intrafirm trade between parent and foreign affiliates 30-40% of exports and % of imports in U.S. U.S.: % of purchased materials in cost of goods sold is rising: –More complex products –More focus on core business –Outsource activities lacking competitive ability –Globally locate quick response suppliers LO3 15-5

Problems with Global Sourcing Initial lower costs may not really be lower when all costs are connected to the purchase New costing techniques: –Life-cycle costing being used to analyze over life of product –Full-costing –Activity-based costing Tied to firms strategic objectives with explicit supplier objectives Initial lower costs may not really be lower when all costs are connected to the purchase New costing techniques: –Life-cycle costing being used to analyze over life of product –Full-costing –Activity-based costing Tied to firms strategic objectives with explicit supplier objectives Added Costs of Importing: 1.International freight, insurance, and packing (10- 12%) 2.Import duties (0-50%) 3.Customhouse brokers fees (3- 5%) 4.Transit or pipeline inventory (5-15%) 5.Cost of letter of credit (1%) 6.International travel and communication costs (2-8%) 7.Company import specialists (5%) 8.Reworking of products out of specification (0-15%) Added Costs of Importing: 1.International freight, insurance, and packing (10- 12%) 2.Import duties (0-50%) 3.Customhouse brokers fees (3- 5%) 4.Transit or pipeline inventory (5-15%) 5.Cost of letter of credit (1%) 6.International travel and communication costs (2-8%) 7.Company import specialists (5%) 8.Reworking of products out of specification (0-15%) LO5 15-6

Other Disadvantages Price increase due to home currency losing value because of exchange rate fluctuations –Quote in home country currency to avoid exchange risk –If home country is unstable, quote in sellers currency –Use hedging Price increase due to home currency losing value because of exchange rate fluctuations –Quote in home country currency to avoid exchange risk –If home country is unstable, quote in sellers currency –Use hedging E-procurement & E- commerce issues: –Integrated in, not isolated from firms business system –Security –Compatibility with other foreign country E-standards –Potential anticompetitive effects of collaboration E-procurement & E- commerce issues: –Integrated in, not isolated from firms business system –Security –Compatibility with other foreign country E-standards –Potential anticompetitive effects of collaboration LO5 15-7

Manufacturing Systems International firms have manufacturing facilities at various levels of development Different levels affect cost and quality Manufacturing systems can vary based on high to low technology within the same company Manufacturing system in place affect how the global supply chain is set up and managed International firms have manufacturing facilities at various levels of development Different levels affect cost and quality Manufacturing systems can vary based on high to low technology within the same company Manufacturing system in place affect how the global supply chain is set up and managed LO5 15-8

Advanced Production Techniques can Enhance Quality and Lower Costs International competition requires companies to achieve efficiency and effectiveness in international production Systems being implemented to improve competitiveness: –Just-in-time supply chains (JIT) –Highly synchronized manufacturing systems –Computer-integrated manufacturing (CIM) using computers and robots International competition requires companies to achieve efficiency and effectiveness in international production Systems being implemented to improve competitiveness: –Just-in-time supply chains (JIT) –Highly synchronized manufacturing systems –Computer-integrated manufacturing (CIM) using computers and robots LO5 15-9

Logistics – managerial functions associated with movement of materials, work in progress or finished goods Supply chain management effectiveness is based on interface of logistics with sourcing, manufacturing, design, engineering, and marketing Many firms outsource logistics to specialists specifically for international logistics 3 rd party logistics suppliers also offer warehousing, distribution management and customs & brokerage services Logistics – managerial functions associated with movement of materials, work in progress or finished goods Supply chain management effectiveness is based on interface of logistics with sourcing, manufacturing, design, engineering, and marketing Many firms outsource logistics to specialists specifically for international logistics 3 rd party logistics suppliers also offer warehousing, distribution management and customs & brokerage services LO

Standardization and the Management of Global Operations Standards – documented agreements on technical specifications or other precise criteria used consistently as guidelines, rules, or definitions of the characteristics of a product, process, or service Standards – documented agreements on technical specifications or other precise criteria used consistently as guidelines, rules, or definitions of the characteristics of a product, process, or service LO

Benefits of Standardization of Global Operations Ensure that materials, products, processes and services are appropriate for their purpose Standards are developed across product lines and for various functions: –American Society for Testing and Materials (ASTM) –ISO 9000 (International Organization for Standards) most used in Europe for quality –ISO 9001 most comprehensive standard –Other industry-specific standards Ensure that materials, products, processes and services are appropriate for their purpose Standards are developed across product lines and for various functions: –American Society for Testing and Materials (ASTM) –ISO 9000 (International Organization for Standards) most used in Europe for quality –ISO 9001 most comprehensive standard –Other industry-specific standards LO

Organization and Staffing Standardized manufacturing systems impact organization and staffing: –Simpler and Less Costly when Standardized Replication requires smaller staffs –Logistics of Supply Organizing production into 1 logistical supply chain and standardizing processes increase profits Standardized manufacturing systems impact organization and staffing: –Simpler and Less Costly when Standardized Replication requires smaller staffs –Logistics of Supply Organizing production into 1 logistical supply chain and standardizing processes increase profits LO

Control Quality Control –Standardized production equipment makes quality control of foreign affiliates easier –If all plants adhere to same standards, home office can spot and address deviations Production and Maintenance Control –Single standard reduces maintenance & production control, allows for evaluation of local management effectiveness, and transfer of maintenance experience to reduce stoppages and breakdowns Quality Control –Standardized production equipment makes quality control of foreign affiliates easier –If all plants adhere to same standards, home office can spot and address deviations Production and Maintenance Control –Single standard reduces maintenance & production control, allows for evaluation of local management effectiveness, and transfer of maintenance experience to reduce stoppages and breakdowns Planning 1.Design engineers need only copy the drawings and lists of materials that they have in their files. 2.Vendors will be requested to furnish equipment that they have supplied previously. 3.The technical department can send the current manufacturing specifications without alteration. 4.Labor trainers experienced in the operation of the machinery can be sent to the new location without undergoing special training on new equipment. 5.Reasonably accurate forecasts of plant erection time and output can be based on experience with existing facilities. 1.Design engineers need only copy the drawings and lists of materials that they have in their files. 2.Vendors will be requested to furnish equipment that they have supplied previously. 3.The technical department can send the current manufacturing specifications without alteration. 4.Labor trainers experienced in the operation of the machinery can be sent to the new location without undergoing special training on new equipment. 5.Reasonably accurate forecasts of plant erection time and output can be based on experience with existing facilities. LO

Impediments to Standardization of Global Operations LO

Impediments to Standardization of Global Operations LO

Impediments to Standardization of Global Operations LO

Impediments to Standardization of Global Operations LO

Local Manufacturing System Basis for Organization Local manufacturing plant typically scaled-down version of parent Similar organizational structure to parent Smaller scale of foreign operations puts all departments in one location Local manufacturing plant typically scaled-down version of parent Similar organizational structure to parent Smaller scale of foreign operations puts all departments in one location Horizontal and Vertical Local organization rarely integrated Added investment deters vertical integration Some countries dictate % of local content in finished goods Subsidiaries rarely use horizontal integration Overseas affiliates become conglomerate when parent acquires a multinational Local organization rarely integrated Added investment deters vertical integration Some countries dictate % of local content in finished goods Subsidiaries rarely use horizontal integration Overseas affiliates become conglomerate when parent acquires a multinational LO