Global Production, Outsourcing, and Logistics

McGraw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. Introduction In a globalized world, managing supply chains is shockingly difficult -How should a globally dispersed supply chain be managed? -To what extent should we own our factories rather than outsourcing? -Should the firm manage global logistics itself, or should it outsource the management? -Where should production be done? -What strategic role should foreign production sites play?

McGraw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. Strategy, Production, and Logistics Production is the activities involved in creating a product -especially direct physical work -but includes 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 produce depends on timely, high quality inputs

McGraw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. Strategy, Production, and Logistics Technology and location economies are reducing the direct cost of production So supply chain management, logistics and other service work have become more important

McGraw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. The demands on supply chains are amazingly complex In addition to low cost and high quality and reliability, two other objectives have particular importance -Production and logistic functions must accommodate demands for responsiveness -Production and logistics must be able to respond quickly to shifts in customer demand

McGraw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. Make or Buy Decisions Should a firm make or buy component parts? Advantages of making: -Can become most efficient producer (control your destiny) -Can make own specialized long-term investments -Protect proprietary product technology -Improved scheduling But – the more people you employ and the more facilities you operate, the more likely you will become bureaucratic -You wind up doing things you’re not very good at

McGraw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. Advantages of buying components -Flexibility in sourcing – can switch suppliers -Can cut cost structure quickly -Long-term alliances with suppliers give benefits of vertical integration with less of the associated problems

McGraw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. The key challenge: Understand and manage the total cost of sourcing, including: -inventory costs -costs of inspections and defects -effect of a supplier’s work on the final performance of the product -all transportation costs -importing costs including tariffs difficulties of working with customs -time required to process orders -supplier ability to work with your technological system (Drake, pp )

McGraw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. Strategic Role of Foreign Factories Often initially established where labor costs low Later, important centers for design and final assembly Upward migration caused by improvement in local capabilities and by pressures to: -Improve cost structure -Customize product to meet customer demand -An increasing abundance of advanced factors of production

McGraw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. Role of Information Technology and the Internet Firms today 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 -To place orders with suppliers -To register parts leaving a supplier -To track them as they travel toward a manufacturing plant -To register their arrival

McGraw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved.

McGraw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. A Production, Outsourcing, and Logistics Case When introducing the X-Box gaming console, Microsoft had to decide if it should manufacture the console or outsource manufacturing -Microsoft primarily creates software and lacked the manufacturing capabilities to make the X-Box

McGraw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The McGraw-Hill Companies, Inc., All Rights Reserved. Microsoft decided to outsource production to Flextronics for four reasons -Flextronics’ industrial park strategy would allow good control of the supply chain Flextronics takes care of the subcontractors -Flextronics had a global presence -Flextronics’ Web-based information systems would share information well with Microsoft -Microsoft trusted Flextronics