1. Global Business Today 9e
by Charles W.L. Hill
and Tomas Hult

2. Global Production and Supply-Chain Management
Chapter 15
Global Production and Supply-Chain Management

3. Learning Objectives The learning objectives for this chapter are to:
Explain why global production and supply-chain management decisions are of central importance to many global companies.
Explain how country differences, production technology, and production factors all affect the choice of where to locate production activities.
Recognize how the role of foreign subsidiaries in production can be enhanced over time as they accumulate knowledge.
Identify the factors that influence a firm’s decision of whether to source supplies from within the company or from foreign suppliers.
Understand the functions of logistics and purchasing (sourcing) within global supply chains.
Describe what is required to efficiently manage a global supply chain.

4. In today’s global economy, firms must decide:
Introduction
In today’s global economy, firms must decide:
Where to locate productive activities
What the long-term strategic role of foreign production sites should be
Whether to own foreign production activities or outsource those activities
How to manage a globally dispersed supply chain and what the role of Internet-based information technology should be in the management of global logistics
Whether to manage global logistics or outsource

5. Supply Chain Management
Question: How can production and supply chain management be conducted internationally to:
1. Lower the costs of value creation
2. Add value by better serving customer needs
Answer:
Production: activities involved in creating a product
Supply chain management: the procurement and physical transmission of material through the supply chain, from suppliers to customers
Purchasing
Logistics
Purchasing: worldwide buying of raw material, component parts, and products used in manufacturing the product or service.
Logistics: plans, implements, and controls the effective flows and inventory of raw material, component parts, and products used in manufacturing.

6. Supply Chain Management (continued from Slide 15-5)
The strategic objectives of the production and logistics function are:
To lower costs
To increase product quality by eliminating defective products from the upstream and downstream supply chain and manufacturing process
These two objectives are interrelated

7. Supply Chain Management (continued from Slide 15-6)
Better quality control helps firms reduce costs because:
Time is not wasted manufacturing poor quality products that cannot be sold
Re-work and scrap costs are lower
Warranty costs and the time used too fix defective products are lower
The Relationship Between Quality and Costs

8. Supply Chain Management (continued from Slide 15-7)
Question: What management tool is used to increase the reliability of product offerings?
Answer:
The Six Sigma quality improvement program aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout a company
Six Sigma is a direct descendant of total quality management (TQM)
In addition, some countries have also promoted specific quality guidelines like the EU’s ISO 9000

9. Supply Chain Management (continued from Slide 15-8)
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

10. Question: Where should production activities be located? Answer:
Where to Produce
Question: Where should production activities be located?
Answer:
When deciding where to locate production facilities, firms must consider:
Country factors
Technological factors
Production factors
Internet Extra: The World Factbook offers very detailed guides on countries and is a great starting place to explore the relative merits of different countries as investment destinations. Create a fictitious product and market. Then go to the site {
Click on the countries you are interested in exploring. Then identify various relevant factors such as government or transportation. Develop a ranking system to help you identify the best location to produce your product.

11. Country Factors
Firms should locate manufacturing activities 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
Management Focus: Philips in China
Summary
This feature describes Philips NV’s operations in China. Philips, the Dutch consumer electronics, lighting, semiconductor, and medical equipment conglomerate, has been operating factories in China since By the mid 2000s, the company had invested more than $2.5 billion in China and operated 25 factories there. Initially, Philips believed that it would sell a large portion of its output to the local Chinese market. However, the company quickly discovered that the low wages that make China such an attractive production location also meant that the market for its products was smaller than anticipated. Philips’ solution was to export most of its output to the United States and elsewhere. Discussion of the feature can revolve around the following questions:
Suggested Discussion Questions
1. What makes China such an attractive production location for Philips? Are there other locations that share the same characteristics?
Discussion Points: Several factors make China an attractive production location for Phillips. Perhaps the most important factor is the country’s cheap wages. In addition, the Chinese workforce is well educated, the economy is strong, and many of the company’s suppliers are doing business there. Most students will argue that at least at the moment, China is the only country that offers these particular qualities. While other countries like Mexico and India also have low cost workforces, they do not have the industrial base that is present in China.
2. Philips wants to eventually turn China into a global supply base from which its products will be exported around the world. Consider the advantages and disadvantages of this strategy.
Discussion Points: Students should recognize that using China as a global supply base from which to serve the world offers several advantages to Phillips. By having a single production location, the company can capitalize on costs savings that come from economies of scale as well as the low wages in China. However, if economic, political, or other types of problems arise in the country, Phillips could be in serious trouble if it has no alternate locations to fill production gaps.
Teaching Tip: Students can explore the company in more depth by going to {
Lecture Note: To extend the discussion of this feature, consider { { .

12. Technological Factors
Firms should consider:
The level of fixed costs involved: if they are very high, it could make sense for the firm to serve the world market from a single location or from a very few locations
The minimum efficient scale of the technology: 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 centralized production makes sense
The type of technology used in manufacturing can affect location decisions.

13. Technological Factors (continued from Slide 15-12)
The flexibility of the technology
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 utilization of individual machines through better scheduling
Improve quality control at all stages of the manufacturing process

14. Technological Factors (continued from Slide 15-13)
Flexible manufacturing technologies: enable firms to produce a wide variety of end products at a unit cost that traditionally would require mass production of a standardized output
Mass customization: a firm may be able to customize its product range to suit the needs of different customer groups without bearing a cost penalty

15. Technological Factors (continued from Slide 15-14)
Another common flexible manufacturing technology is the flexible machine cells: grouping of various types of machinery, a common materials handler, and a centralized cell controller
Adopting flexible manufacturing technologies can help the firm to customize products to meet the demands of small customer groups in different national markets
So, firms can act like a local firm without bearing the costs of establishing local manufacturing facilities

16. Production Factors
Several production factors influence why production facilities are located and used in certain ways
Consider:
Product features
Locating production facilities
Strategic roles for production facilities

17. Production Factors (continued from Slide 15-16)
Two product features impact location decisions:
The product's value-to-weight ratio
If the value-to-weight ratio is high, produce the product in a single location and export it
If the value-to-weight ratio is low, manufacture the product in multiple locations across the world
Whether the product serves universal needs
The need for local responsiveness is reduced for products that do, which increases the attractiveness of concentrated manufacturing

18. Production Factors (continued from Slide 15-17)
There are two basic strategies for locating manufacturing facilities
Concentrating them in the optimal location and serving the world market from there
Decentralizing them in various regional or national locations that are close to major markets

19. Production Factors (continued from Slide 15-18)
Location Strategy and Production

20. Production Factors (continued from Slide 15-19)
Concentrated production makes sense when:
Fixed costs are substantial
The minimum efficient scale of production is high
Flexible manufacturing technologies are available
Concentrated production does not make sense when:
Both fixed costs and the minimum efficient scale of production are relatively low
Appropriate flexible manufacturing technologies are not available

21. Production Factors (continued from Slide 15-20)
Question: Does the strategic rationale for establishing a foreign production facility change?
Answer:
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
As governmental regulations change and/or countries upgrade their factors of production the strategic advantage of a particular location can change

22. Production Factors (continued from Slide 15-21)
As the strategic role of a factory is upgraded and a firm develops centers of excellence in different locations worldwide, it supports the development of a transnational strategy
A focus of a transnational strategy is global learning: the idea that valuable knowledge does not reside just in a firm’s domestic operations, it may also be found in its foreign subsidiaries
Managers should promote the idea that factories are potential centers of excellence with strategic importance to the firm

23. Production Factors (continued from Slide 15-22)
Foreign factories can have a number of roles or designations:
Offshore factory: a factory that is developed and set up mainly for producing component parts or finished goods at a lower cost than producing them at home or in any other market
Source factory: a factory whose primary purpose is also to drive down costs in the global supply chain

24. Production Factors (continued from Slide 15-23)
Server factory: a factory that is linked into the global supply chain for a global firm to supply specific country or regional markets around the world
Contributor factory: a factory that serves a specific country or world region
Outpost factory: a factory that can be viewed as an intelligence–gathering unit
Lead factory: a factory that is intended to create new processes, products, and technologies that can be used throughout the global firm in all parts of the world

25. Hidden Costs of Foreign Locations
There may be hidden costs associated with foreign production
Common concerns include:
High employee turnover
Shoddy workmanship
Poor product quality
Low productivity
Management Focus: GE Moves Manufacturing from China to the United States
Summary
 This feature explores General Electric’s decision to move manufacturing from China to the United States. After decades of shifting production to China to take advantage of lower wages, the company has recently started to reverse its strategy. Wage rates in China have been rising and at the same time, productivity levels in the United States have been rising. In addition, higher oil prices are affecting transportation costs. General Electric has also found that there may be benefits to having product design and manufacturing located near to each other. Discussion of the feature can revolve around the following questions:
Suggested Discussion Questions
1. Reflect on the decision by General Electric to move production from China to the United States. What does this decision tell you about the importance of wage rates in production location decisions?
 Discussion Points: general Electric initially moves its production to China to take advantage of lower wages in the country. Today, however, wage rates have increased significantly, and are now some five times higher than they were in While the rates are still lower than U.S. labor rates, productivity level in the United States have risen during the same time period making the overall gap between the two countries much smaller. Students will probably recognize that it is important to consider not just actual wage rates when considering production locations, but also variables like productivity levels and transportation costs.
 2. What drawbacks do you see in General Electric’s decision to move its manufacturing back to the United States?
 Discussion Points: At the moment, General Electric’s decision to manufacture its GeoSpring water heater in the United States rather than in China is going well. By locating product design close to manufacturing, General Electric was able easily fix design flaws that had been slowing its assembly. This reduced labor costs and material costs and improved product quality. However, some students may point out that as the company continues to move production to the United States, it could face higher wages especially if unions become involved. Students may also raise concerns about the potential for transportation costs to rise or whether government policy decisions could negatively impact General Electric’s U.S. operations.
 Teaching Tip: To learn more about General Electric’s international operations, go to {

26. Make-or-Buy Decisions
Question: Should an international business make the component parts to go into their final product or outsource them? Answer: Make-or-buy decisions: decisions about whether to perform a certain value creation activity in-house or outsource it to another firm - are important to a firm’s manufacturing strategy

27. Make-or-Buy Decisions (continued from Slide 15-26)
Operationally Favoring a Make Decision

28. Make-or-Buy Decisions (continued from Slide 15-27)
Operationally Favoring a Buy Decision

29. Global Supply Chain Functions
Logistics and purchasing are critical functions in ensuring that:
Materials are ordered and delivered
An appropriate level of inventory is managed

30. Core activities performed in logistics:
Global Logistics
Core activities performed in logistics:
Global distribution center management
Inventory management
Packaging and materials handling
Transportation
Reverse logistics

31. Global Logistics (continued from Slide 15-30)
Global distribution center management
Global distribution center: a facility that positions and allows customization of products for delivery to worldwide wholesalers or retailers or directly to consumers anywhere in the world
These centers are the foundation of a global supply network because they allow either a single location or satellite warehouses to store quantities and assortments of products and allow for value-added customization
Inventory management
Global inventory management: the decision-making process regarding the raw materials, work-in-process, and finished goods inventory for an MNC

32. Global Logistics (continued from Slide 15-31)
Packaging and materials handling
Packaging: the container that holds the product itself
Primary packaging holds the product itself
Secondary packaging is designed to contain several primary packages
Transit packaging is used when primary and secondary packages are assembled for transportation
Packaging is intended to perform, protect, and inform

33. Global Logistics (continued from Slide 15-32)
Transportation
Transportation: the movement of raw material, component parts, and finished goods throughout the global supply chain
Transportation is the largest percentage of any logistics budget
Transport mode influences rates: ocean is the least expensive and air is the most expensive
Reverse logistics
Reverse logistics: the process of moving inventory from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal
The ultimate goal is to optimize the after-market activity or make it more efficient

34. Five strategic levels of purchasing:
Global Purchasing
Five strategic levels of purchasing:
Level I: domestic purchasing activities only
Level II: international purchasing only as needed
Level III: international purchasing as part of firm’s overall supply chain management strategy
Level IV: global purchasing activities that are integrated across the firm’s locations worldwide
Level V: global purchasing activities that are integrated across worldwide locations and functional groups

35. Global Purchasing (continued from Slide 15-34)
Outsourcing Terms and Options

36. Managing a Global Supply Chain
Question: Why is logistics important to firms?
Answer:
Efficient supply chain management can have a substantial impact on a firm’s profitability
Four important areas:
The role of just-in-time inventory
The role of information technology
Coordination
Interorganizational relationships

37. Role of Just-in-Time Inventory
Question: How can a just-in-time inventory process help a firm?
Answer:
Just-in-time (JIT) economizes on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter the production process, and not before:
Can result in major cost savings from reduced warehousing and inventory holding costs
Can help firms spot defective parts, take them out of the manufacturing process, and boost product quality
But, JIT systems eliminate buffer inventory

38. Role of Information Technology
Question: What is the role of information technology in materials management?
Answer:
Electronic data interchange (EDI):
Facilitates the tracking of inputs
Allows the firm to optimize 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

39. Question: What is the role of coordination in global supply chains?
Answer:
Global supply chain coordination: shared decision-making opportunities and operational collaboration of key global supply chain activities
Helps to create a more integrated, coherent, efficient, and effective global supply chain

40. Coordination (continued from Slide 15-39)
To achieve operational integration and collaboration, address:
Responsiveness
Variance reduction
Inventory reduction
Shipment consolidation
Quality
Life-cycle support

41. Interorganizational Relationships
Question: What is the role of interorganizational relationships in the global supply chain?
Answer:
Trust and commitment between interacting organizations is important to an efficient and effective global supply chain

42. Interorganizational Relationships (continued from Slide 15-41)
Upstream/Inbound
Relationships
Downstream/Outbound
Relationships

43. Summary In this chapter we have:
Explained why global production and supply-chain management decisions are of central importance to many global companies.
Explained how country differences, production technology, and production factors all affect the choice of where to locate production activities.
Recognized how the role of foreign subsidiaries in production can be enhanced over time as they accumulate knowledge.
Identified the factors that influence a firm’s decision of whether to source supplies from within the company or from foreign suppliers.
Understood the functions of logistics and purchasing (sourcing) within global supply chains.
Described what is required to efficiently manage a global supply chain.