1. Sprott School of Business BUSI 2701D - Fundamentals of International Business Lecture 11 – Global Production and Logistics Instructor - Wade Rose, PhD Sprott School of Business BUSI 2701D - Fundamentals of International Business Lecture 11 – Global Production and Logistics Instructor - Wade Rose, PhD

2. Lecture 11 Overview Understand why production and logistics decisions are critical to multinational firms Understand why production and logistics decisions are critical to multinational firms Understand the factors that influence the decision of where to locate production Understand the factors that influence the decision of where to locate production Understand the factors that influence ‘Make or Buy’ decisions Understand the factors that influence ‘Make or Buy’ decisions Understand how foreign subsidiaries’ roles in a multinational enterprise can be enhanced over time Understand how foreign subsidiaries’ roles in a multinational enterprise can be enhanced over time ©MH 2011 BUSI 2701 2

3. Typical Business Firm 3 Sprott 2701C Operations and logistics Engineering / design Marketing Accounting & Finance Human Resources Support: IS / IT, Quality, Safety, Infrastructure Executive Leadership

4. ©MH 2011 BUSI 2701 What Are The Main Production Issues For Firms? International firms must answer five interrelated questions 1. Where should production activities be located? 2. What should be the long-term strategic role of foreign production sites? 3. Should the firm own foreign production activities or outsource those activities to independent vendors? 4. How should a globally dispersed supply chain be managed, and what is the role of Internet-based information technology in the management of global logistics? 5. Should the firm manage global logistics itself, or should it outsource the management to enterprises that specialize in this activity? 4

5. ©MH 2011 BUSI 2701 How Are Strategy, Production, And Logistics Related? Strategy - Vision of where you are trying to go or what you are trying to become. Over-arching approach. High level plan of how you are going to get where you want to go Strategy - Vision of where you are trying to go or what you are trying to become. Over-arching approach. High level plan of how you are going to get where you want to go Production - activities involved in creating a product or service Production - activities involved in creating a product or service Logistics - procurement and physical transmission of material through the supply chain, from suppliers to customers Logistics - procurement and physical transmission of material through the supply chain, from suppliers to customers 5

6. ©MH 2011 BUSI 2701 How Are Strategy, Production, And Logistics Related? Questions: How can production and logistics: 1. Lower the costs of value creation? disperse production to the most efficient locationsdisperse production to the most efficient locations manage the global supply chain efficiently to better match supply and demandmanage the global supply chain efficiently to better match supply and demand 2. Add value by better serving customer needs? eliminate defective products from the supply chain and the manufacturing process (i.e. improve quality)eliminate defective products from the supply chain and the manufacturing process (i.e. improve quality) 6

7. ©MH 2011 BUSI 2701 How Can Quality Be Improved? Many firms use the Six Sigma program - a direct descendant of total quality management (TQM) Many firms use the Six Sigma program - a direct descendant of total quality management (TQM) aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout the companyaims to reduce defects, boost productivity, eliminate waste, and cut costs throughout the company In the European Union, firms must meet ISO 9000 standards before gaining access to the European marketplace In the European Union, firms must meet ISO 9000 standards before gaining access to the European marketplace These programs can lead to improved quality and reduced costs These programs can lead to improved quality and reduced costs 7

8. ©MH 2011 BUSI 2701 How Can Quality Be Improved? The Relationship Between Quality and Costs 8

9. ©MH 2011 BUSI 2701 Where Should Production Be Located? Firms should locate production so that production and logistics are cost effectiveproduction and logistics are cost effective production and logistics can be locally responsiveproduction and logistics can be locally responsive production and logistics can respond quickly to shifts in customer demandproduction and logistics can respond quickly to shifts in customer demand Firms should consider 1. Country factors 2. Technological factors 3. Product factors 9

10. Case: Indian Auto The case describes India’s evolution as a small car manufacturing hub for several global automakers. In 2012, India is expected to export half a million vehicles a year. South Korea’s Hyundai is leading the charge, exporting over one third of its Indian production. Suzuki and Nissan have both entered the Indian market more recently. Both companies see the Indian market as an important component in their future production and marketing strategies. ©MH 2011 BUSI 2701 10

11. Case: Indian Auto 1. Why did Hyundai initially commit to the Indian market? What benefits does Hyundai currently enjoy as a result of being first to market? What are the drawbacks of being an early market entrant? 2. What makes India an attractive location for auto production? What disadvantages do you see? How do Indian production capabilities fit into the strategies of companies like Hyundai and Nissan? 3. Nissan is planning to hire Indian engineers to develop a new car to compete with Tata’s “People Car.” Why does Nissan want to involve local engineers in the product development process rather than simply transferring an existing design to India? ©MH 2011 BUSI 2701 11

12. ©MH 2011 BUSI 2701 Why Are Country Factors Important? Manufacturing should be located where economic, legal, political, and cultural conditions are most conducive to the performance of that activity Manufacturing should be located where economic, legal, political, and cultural conditions are most conducive to the performance of that activity Firms should consider Firms should consider the availability of skilled labor and supporting industriesthe availability of skilled labor and supporting industries formal and informal trade barriersformal and informal trade barriers expectations about future exchange rate changesexpectations about future exchange rate changes transportation coststransportation costs regulations affecting FDIregulations affecting FDI 12

13. ©MH 2011 BUSI 2701 Why Are Technological Factors Important? Firms should consider 1. The level of fixed costs if fixed costs are high, produce in a single location or a few locationsif fixed costs are high, produce in a single location or a few locations when fixed costs are low, multiple production plants may be possible – allows firms to respond to local demandswhen fixed costs are low, multiple production plants may be possible – allows firms to respond to local demands 13

14. ©MH 2011 BUSI 2701 Why Are Technological Factors Important? Firms should consider 2. The minimum efficient scale when minimum efficient scale (the level of output at which most plant-level scale economies start) is high, choose centralized production in a single location or a limited number of locationswhen minimum efficient scale (the level of output at which most plant-level scale economies start) is high, choose centralized production in a single location or a limited number of locations when minimum efficient scale is low, respond to local market demands and hedge against currency risk by operating in multiple locationswhen minimum efficient scale is low, respond to local market demands and hedge against currency risk by operating in multiple locations 14

15. ©MH 2011 BUSI 2701 Why Are Technological Factors Important? Firms should consider 3. The flexibility of the technology flexible manufacturing technology / flexible machine cells or lean productionflexible manufacturing technology / flexible machine cells or lean production reduces set up times for complex equipment reduces set up times for complex equipment increases the utilization of individual machines increases the utilization of individual machines improves quality control improves quality control Flexible manufacturing allows firms to produce a wide variety of end products at a relatively low unit costFlexible manufacturing allows firms to produce a wide variety of end products at a relatively low unit cost Mass customization Mass customization 15

16. ©MH 2011 BUSI 2701 What Should a Firm Do? Production should be concentrated in one or a few locations when Production should be concentrated in one or a few locations when fixed costs are substantialfixed costs are substantial the minimum efficient scale of production is highthe minimum efficient scale of production is high flexible manufacturing technologies are availableflexible manufacturing technologies are available Production in multiple locations makes sense when Production in multiple locations makes sense when both fixed costs and the minimum efficient scale of production are relatively lowboth fixed costs and the minimum efficient scale of production are relatively low appropriate flexible manufacturing technologies are not availableappropriate flexible manufacturing technologies are not available 16

17. ©MH 2011 BUSI 2701 Why Are Product Factors Important To Location Decisions? Two product factors 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 to other parts of the worldIf the value-to-weight ratio is high, produce the product in a single location and export 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 worldIf the value-to-weight ratio is low, there is greater pressure to manufacture the product in multiple locations across the world 2. Whether the product serves universal needs When products serve universal needs, the need for local responsiveness falls, and concentrating manufacturing in a central location makes senseWhen products serve universal needs, the need for local responsiveness falls, and concentrating manufacturing in a central location makes sense 17

18. ©MH 2011 BUSI 2701 How Are Location, Strategy, And Production Related? Location, Strategy, and Production 18

19. ©MH 2011 BUSI 2701 What Is The Strategic Role Of Foreign Factories? The strategic role of foreign factories and the strategic advantage of a particular location can change over time factories established to take advantage of low cost labor can evolve into facilities with advanced design capabilitiesfactories established to take advantage of low cost labor can evolve into facilities with advanced design capabilities Improvement in a facility comes from 1.Pressure to lower costs or respond to local markets 2.An increase in the availability of advanced factors of production 19

20. ©MH 2011 BUSI 2701 What Is The Strategic Role Of Foreign Factories? Many companies now see foreign factories as globally dispersed centers of excellence supports the development of a transnational strategysupports the development of a transnational strategy global learning - valuable knowledge can be found in foreign subsidiariesglobal learning - valuable knowledge can be found in foreign subsidiaries implies that firms are less likely to switch production to new locations simply because some underlying variable like wage rates has changed implies that firms are less likely to switch production to new locations simply because some underlying variable like wage rates has changed 20

21. ©MH 2011 BUSI 2701 Should A Firm Outsource Production (i.e. Make or Buy Decisions)? Should a firm make or buy the component parts to go into its final product? Should a firm make or buy the component parts to go into its final product? Make-or-buy decisions are important to firms' manufacturing strategies Make-or-buy decisions are important to firms' manufacturing strategies service firms also face make-or-buy decisionsservice firms also face make-or-buy decisions decisions involving international markets are more complex than those involving domestic marketsdecisions involving international markets are more complex than those involving domestic markets 21

22. ©MH 2011 BUSI 2701 Why Make? Vertical integration - making component parts in- house 1. Lowers costs - if a firm is more efficient at that production activity than any other enterprise, manufacturing in-house makes sense 2. Facilitates investments in highly specialized assets - internal production makes sense when substantial investments in specialized assets are required 22

23. ©MH 2011 BUSI 2701 Why Make? Vertical integration - making component parts in- house 3. Protects proprietary technology – in-house production makes sense when component parts contain proprietary technology 4. Facilitates the scheduling of adjacent processes - planning, coordination, and scheduling of adjacent processes can be easier with in-house production 5. The activity is within a firm’s core competencies 23

24. ©MH 2011 BUSI 2701 Why Buy? Buying component parts from independent suppliers 1. Helps drive down the firm's cost structure avoids challenges of coordination and control of additional subunitsavoids challenges of coordination and control of additional subunits avoids the lack of incentive associated with internal suppliersavoids the lack of incentive associated with internal suppliers avoids the difficulties with setting appropriate transfer pricesavoids the difficulties with setting appropriate transfer prices 24

25. ©MH 2011 BUSI 2701 Why Buy? Buying component parts from independent suppliers 2. Gives the firm greater flexibility important when changes in exchange rates and trade barriers alter the attractiveness of various supply sources over timeimportant when changes in exchange rates and trade barriers alter the attractiveness of various supply sources over time 3. Helps the firm capture orders from international customers can help firms gain orders from suppliers’ countries (i.e. offsets)can help firms gain orders from suppliers’ countries (i.e. offsets) 25

26. ©MH 2011 BUSI 2701 Do Strategic Alliances With Suppliers Make Sense? Sometimes, firms can capture the benefits of vertical integration without the associated organizational problems by forming long-term strategic alliances with key suppliers Sometimes, firms can capture the benefits of vertical integration without the associated organizational problems by forming long-term strategic alliances with key suppliers However, these commitments may actually limit strategic flexibility However, these commitments may actually limit strategic flexibility 26

27. Case: Boeing 787 The case explores Boeing’s strategy for its new 787 aircraft. Boeing made the decision to outsource much of the production of the 787 in the hopes of significantly reducing the time to get the product to market. Boeing also anticipated that its outsourcing strategy would allow it to generate additional sales from the countries that were partners in the process, and reduce its costs and risks. While Boeing’s strategy worked for some components, for other parts, the strategy was a disaster. Suppliers were late and some produced poor quality parts forcing Boeing to commit additional resources to the project. ©MH 2011 BUSI 2701 27

28. Case: Boeing 787 Background Videos: http://www.youtube.com/watch?v=57KGak- B_LA&feature=related http://www.youtube.com/watch?v=9yRmwGMNuDo Boeing Partners: http://www.newairplane.com/787/whos_building/ ©MH 2011 BUSI 2701 28

29. Case: Boeing 787 1. What are the benefits to Boeing of outsourcing so much work on the 787 to foreign suppliers? What are the potential risks? Do the benefits outweigh the risk? 2. In 2007 and 2008 Boeing ran into several publicized issues with regard to its management of globally dispersed supply chain. What are the causes of these problems? What can a company like Boeing do to make sure that such problems do not occur in the future? 3. Some critics have claimed that by outsourcing so much work, Boeing has been exporting American jobs overseas. Is this criticism fair? How should the company respond to such criticism? ©MH 2011 BUSI 2701 29

30. ©MH 2011 BUSI 2701 How Do Firms Manage The 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 all at the right time, in the right amount and in the right sequence 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 all at the right time, in the right amount and in the right sequence The goal is to The goal is to manage a global supply chain at the lowest possible cost and in a way that best serves customer needsmanage a global supply chain at the lowest possible cost and in a way that best serves customer needs establish a competitive advantage through superior customer serviceestablish a competitive advantage through superior customer service 30

31. ©MH 2011 BUSI 2701 What Is The Role Of Just-In-Time Inventory? Just-in-time (JIT) systems economize on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter the production process 31

32. ©MH 2011 BUSI 2701 What Is The Role Of Just-In-Time Inventory? JIT systems JIT systems generate major cost savings from reduced warehousing and inventory holding costsgenerate major cost savings from reduced warehousing and inventory holding costs can help the firm spot defective parts and take them out of the manufacturing process to boost product qualitycan help the firm spot defective parts and take them out of the manufacturing process to boost product quality But, a JIT system leaves the firm with no buffer stock of inventory to meet unexpected demand or supply changes But, a JIT system leaves the firm with no buffer stock of inventory to meet unexpected demand or supply changes 32

33. ©MH 2011 BUSI 2701 What Is The Role Of Information Technology And The Internet? Web-based information systems play a crucial role in materials management Web-based information systems play a crucial role in materials management allow firms to optimize production scheduling according to when components are expected to arriveallow firms to optimize production scheduling according to when components are expected to arrive Electronic Data Interchange (EDI) Electronic Data Interchange (EDI) facilitates the tracking of inputsfacilitates the tracking of inputs allows the firm to optimize its production scheduleallows the firm to optimize its production schedule lets the firm and its suppliers communicate in real timelets the firm and its suppliers communicate in real time eliminates the flow of paperwork between the firm and its supplierseliminates the flow of paperwork between the firm and its suppliers 33

34. Supply Chain Strategies See the Whole Board BUSI 2701 34

35. Supply Chain - Definition All parties involved, directly or indirectly, upstream and downstream Flows of products, services, finances, and/or information from raw materials to final consumer BUSI 2701 35

36. Supply Chain - Definition Can include: Raw materials providers, refiners, manufactures, parts suppliers, assembly providers, systems providers, distributors, wholesalers and retailers But also: Banks, third party logistics providers, consulting companies, marketing companies, research labs, universities and other types of organizations BUSI 2701 36

37. Supply Chain The concept should be thought of as a network, web or system that functions as a whole to provide value from the highest upstream source, through various value- adding or modifying nodes, to the end- customer. Remember: the whole can be greater than the sum of the parts. BUSI 2701 37

38. Supply Web or System??? BUSI 2701 38

39. Supply Chain Strategy Supply chain strategy is the deliberate and/or emergent conceptual framework by which a company involves its supply chain and supply chain members in its efforts to reach its own strategic objectives. How do you make the whole web work for you? Note: No one person is responsible for the whole supply chain BUSI 2701 39

40. Supply Chain Strategies Geographic Geographic Upstream (suppliers)Upstream (suppliers) Downstream (distributors / customers)Downstream (distributors / customers) Philosophies Philosophies Product focusedProduct focused Demand / Customer focusedDemand / Customer focused Lean / Agile / LeagileLean / Agile / Leagile IntegrativeIntegrative Facilitator Facilitator E-Supply ChainE-Supply Chain BUSI 2701 40

41. Supply Chain Strategies: Integrative Possible Strengths of an integrative SC strategy Synergies and complementary systems effects Access to markets, technologies, resources and expertise Visibility of problems Greatest impact when integration covers both the upstream and downstream sides of the supply chain BUSI 2701 41

42. Supply Chain Strategies: Integrative Possible Weaknesses of an integrative SC strategy Very difficult to integrate processes across supply chain partners Efforts to integrate the entire network are extremely complex (numerous P&Ls) Can lead to massive quantities of data coming from numerous sources which can be difficult to interpret in real- time Vulnerable to various disruptions such as natural disasters, terrorist incidents, or disease outbreaks in partner countries Can be divorced from corporate / business strategy BUSI 2701 42

43. Supply Chain Facilitation: E-Supply Chain Possible Strengths Instantaneous sharing of information enhanced ability to deal with demand and supply uncertainty Can facilitate the global search for products, suppliers and distributors Electronic Market Places (EMP) allow flexibility and access to suppliers globally BUSI 2701 43

44. Supply Chain Facilitation: E-Supply Chain Possible Weaknesses Can be mistaken as a strategy (Porter) It is not always possible to predict the changes and new directions brought about by innovations in information technology Porter believes that the internet has lowered profit levels in general due to increased buyer access to information and lower switching costs BUSI 2701 44

45. Supply Chain Facilitation: E-Supply Chain Possible Weaknesses Can necessitate process changes for the various firms in the chain Information sharing can represent a risk to the security of sensitive information Can be divorced from corporate / business strategy Different people in the organization may be in control of the strategies BUSI 2701 45

46. Supply Chain Strategy Selection Drivers Customer-perceived value Dependent upon whether products are functional or innovative Product lifecycle position Macroeconomic factors such as exchange rates and tariffs, and technology availability in a target country Political and cultural factors BUSI 2701 46

47. Supply Chain Strategy Selection Drivers Stable versus volatile demand Waste reduction and environmental protection Configuration and coordination issues Align supply chain strategy with corporate and business strategy BUSI 2701 47

48. Significant advantages when supply chain strategy is aligned with Corporate / Business strategy See the Whole Board BUSI 2701 48

49. The Missing Link????? ????? downstream upstream emergent deliberate Supply Chain Strategy Corporate / Business Strategy vision core competencies black art product based demand based lean agile leagile integrative E-facilitation cost leadership differentiation leverage stretch learning process patterns BUSI 2701 49

50. Supply Chain Conclusions Supply chain can be viewed in a broad sense to include all the actors involved in the value chain (or web) Supply chain strategy has many faces Geographic / philosophies / facilitation There is often a “missing link” between supply chain strategy and corporate / business strategies This lack of coordination can cause significant problems for a firm BUSI 2701 50

51. Lecture 11 Overview Understand why production and logistics decisions are critical to multinational firms Understand why production and logistics decisions are critical to multinational firms Understand the factors that influence the decision of where to locate production Understand the factors that influence the decision of where to locate production Understand the factors that influence ‘Make or Buy’ decisions Understand the factors that influence ‘Make or Buy’ decisions Understand how foreign subsidiaries’ roles in a multinational enterprise can be enhanced over time Understand how foreign subsidiaries’ roles in a multinational enterprise can be enhanced over time ©MH 2011 BUSI 2701 51

52. Questions?? ©MH 2011 BUSI 2701 52