McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter Sixteen Global Production, Outsourcing, and Logistics

McGraw-Hill/Irwin 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 3 rd party -Microsoft primarily creates software and lacked the manufacturing capabilities to make the X- Box 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

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

McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Strategy, Production, and Logistics Production is the activities involved in creating a product -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

McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. 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 poor- quality products that cannot be sold, leading to a direct reduction in unit costs -Lowering rework and scrap costs associated with defective products -Reducing the warranty costs and time associated with fixing defective products

McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Relationship Between Quality and Costs

McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Total Quality Management The total quality management (TQM) philosophy was developed by a number of American consultants such as W. Edwards Deming, Josephy Juran, and A. V. Feigenbaum Deming identified a number of steps that should be 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

McGraw-Hill/Irwin 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 percent accurate -Only 3.4 defects per million units

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

McGraw-Hill/Irwin 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

McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Country Factors Optimum economic, political, and cultural conditions Externalities -Skilled labor pools -Supporting industries Formal and informal trade barriers Exchange rate

McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Technological Factors Fixed costs Minimum efficient scale Flexible manufacturing -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

McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Typical Unit Cost Curve

McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Manufacturing Location Arguments for concentrating production to a few locations include -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

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

McGraw-Hill/Irwin 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

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

McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Location Strategy and Production

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

McGraw-Hill/Irwin 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

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

McGraw-Hill/Irwin 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

McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. 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 -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 © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Role of Information Technology and the Internet EDI systems have resulted in -Suppliers, shippers, and the purchasing firm communicate with each other with no time delay -Increased flexibility and responsiveness of the whole global supply system -Paperwork between suppliers, shippers, and the purchasing firm is eliminated 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

McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Looking Ahead to Chapter 17 Global Marketing and R & D -The Globalization of Markets and Brands -Market Segmentation -Product Attributes -Distribution Strategy -Communication Strategy -Pricing Strategy -Configuring the Marketing Mix -New-Product Development