1. International Business 11e
By Charles W.L. Hill
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. Global Production and Supply Chain Management
Chapter 17
Global Production and Supply Chain Management

3. What Are the Main Production Issues for Firms?
International firms must answer five interrelated questions
Where 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 outsource those activities to independent vendors?
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?
Should the firm manage global logistics itself, or should it outsource the management to enterprises that specialize in this activity?
The Opening Case: Apple: The Best Supply Chains in the World? describes the successful use of supply chain management by technology giant Apple. Apple’s hands-on approach and strong relationships with its suppliers have earned it recognition for having the world’s most efficient supply chains.

4. How Are Strategy, Production, and Supply Chain Management Related?
Production - activities involved in creating a product
Supply Chain Management - the integration and coordination of logistics, purchasing, operations, and market channel activities from raw material to the end-customer
LO 17-1: Explain why production and logistics decisions are of central importance to many multinational businesses.

5. How Are Strategy, Production, and Supply Chain Management Related?
Questions: How can production and supply chain management
Lower the costs of value creation?
disperse production to the most efficient locations
manage the global supply chain efficiently to better match supply and demand
Add value by better serving customer needs?
eliminate defective products from the supply chain and the manufacturing process
Production and supply chain management are closely linked since a firm’s ability to perform its production activities efficiently depends on a timely supply of high quality material inputs for which purchasing and logistics are critical functions.
Purchasing represents the part of the supply chain that involves worldwide buying of raw material, component parts, and products used in manufacturing of the company’s products and services. Logistics is the part of the supply chain that plans, implements, and controls the effective flows and inventory of raw material, component parts, and products used in manufacturing.
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

6. How Can Quality Be Improved?
Most 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 company
in the EU, firms must meet ISO 9000 standards before gaining access to the EU marketplace
Improved quality reduces costs
The total quality management (TQM) philosophy was developed by a number of American consultants such as W. Edwards Deming, Joseph 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
Production process operating at Six Sigma are percent accurate.
Only 3.4 defects per million units

7. How Can Quality Be Improved?
The Relationship Between Quality and Costs

8. Where Should Production Be Located?
Firms should locate production so that
production and logistics can be locally responsive
production and logistics can respond quickly to shifts in customer demand
Firms should consider
Country factors
Technological factors
Production factors
LO 17-2: Explain how country differences, production technology, and product features all affect the choice of where to locate production facilities.
Demands for local responsiveness arise from national differences in consumer tastes and preferences, infrastructure, distribution channels, and host-government demands.
Demands for local responsiveness create pressures to decentralize production activities to the major national or regional markets in which the firm does business or to implement flexible manufacturing processes that enable the firm to customize the product coming out of a factory according to the market in which it is to be sold.
In recent years, time-based competition has grown more important. When consumer demand is prone to large and unpredictable shifts, the firm that can adapt most quickly to these shifts will gain an advantage.

9. Why Are Country Factors Important?
Manufacturing should be located where economic, political, and cultural conditions are most conducive to the performance of that activity
create a global web of activities
global concentrations of activities at certain locations
LO 17-2: Explain how country differences, production technology, and product features all affect the choice of where to locate production facilities.

10. Why Are Country Factors Important?
Firms should consider
the availability of skilled labor and supporting industries
formal and informal trade barriers
expectations about future exchange rate changes
transportation costs
regulations affecting FDI
LO 17-2: Explain how country differences, production technology, and product features all affect the choice of where to locate production facilities.

11. Think Like a Manager
Koninklijke Philips NV has faced criticism for relocating much of its product design and manufacturing to China, with some observers warning that political upheaval or an economic downturn in China would result in a very costly slowdown in Philips’ core business activities. Imagine you are the head of a successful US-based information technology company that has offshored your customer service department to India. Many of your Indian support engineers are also capable web developers who could significantly reduce your labor costs by taking over certain product development responsibilities. Would you consider moving product development to India? What are some potential costs and benefits?
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

12. Why Are Technological Factors Important?
Firms should consider
The level of fixed costs
if 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 demands
LO 17-2: Explain how country differences, production technology, and product features all affect the choice of where to locate production facilities.

13. Why Are Technological Factors Important?
The minimum efficient scale
the level of output at which most plant-level scale economies are exhausted
when minimum efficient scale 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 locations

14. Why Are Technological Factors Important?
The flexibility of the technology
flexible manufacturing technology or lean production
reduces set-up times for complex equipment
increases the utilization of individual machines
improves quality control
allows firms to produce a wide variety of end products at a relatively low unit cost
mass customization
flexible machine cells

15. What Should a Firm Do?
Production should be concentrated in a few locations when
fixed costs are substantial
the minimum efficient scale of production is high
flexible manufacturing technologies are available
Production in multiple locations makes sense when
both fixed costs and the minimum efficient scale of production are relatively low
appropriate flexible manufacturing technologies are not available

16. Why Are Production Factors Important to Location Decisions?
Two product factors 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 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 world
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 sense

17. How Are Location, Strategy, and Production Related?

18. What Are the Strategic Roles for Foreign Factories?
Many companies now see foreign factories as globally dispersed centers of excellence
supports the development of a transnational strategy
global learning - valuable knowledge can be found in foreign subsidiaries
implies that firms are less likely to switch production to new locations when an underlying variable, such as wage rates, changes

19. What Are the Strategic Roles for Foreign Factories?
Foreign factories can have one of a number of strategic roles or designations, including:
offshore factory
source factory
server factory
contributor
outpost factory
lead factory
An offshore factory is one 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.
The primary purpose of a source factory is also to drive down costs in the global supply chain. Managers of a source factory have more of a say in certain decisions, such as purchasing raw materials and component parts used in the production at the source factory. They also have strategic input into production planning, process changes, logistics issues, product customization, and implementation of newer designs when needed.
A server factory is linked into the global supply chain for a global firm to supply specific country or regional markets around the globe. This type of factory—often with the same standards as the top factories in the global firm’s system—is set up to overcome intangible and tangible barriers in the global marketplace. For example, a server factory may be intended to overcome tariff barriers, reduce taxes, and reinvest money made in the region.
A contributor factory also serves a specific country or world region. The main difference between a contributor factory and a server factory is that a contributor factory has responsibilities for product and process engineering and development. This type of factory also has much more of a choice in terms of which suppliers to use for raw materials and component parts.
An outpost factory can be viewed as an intelligence-gathering unit. This means that an outpost factory is often placed near a competitor’s headquarters or main operations, near the most demanding customers, or near key suppliers of unique and critically important parts. An outpost factory also has a function to fill in production; it often operates as a server and/or offshore factory as well.
A lead factory is intended to create new processes, products, and technologies that can be used throughout the global firm in all parts of the world.

20. What Are the Hidden Costs of Foreign Production Locations?
There may be hidden costs associated with foreign production
Before making the decision to locate production in a foreign location, firms must consider the potential for
high employee turnover
poor workmanship
poor product quality
low productivity

21. Should a Firm Outsource Production?
Question: 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
service firms also face make-or-buy decisions
decisions involving international markets are more complex than those involving domestic markets
LO 17-4: Identify the factors that influence a firm’s decision of whether to source supplies from within the company, or from foreign suppliers.

22. Why Make? Vertical integration - making component parts in-house
Lowers costs
if a firm is more efficient at that production activity than any other enterprise, manufacturing in-house makes sense
Facilitates investments in highly specialized assets
internal production makes sense when substantial investments in specialized assets are required
Management Focus: Philips in China explores the strategic decision making involved in establishing Koninklijke Philips NV’s Chinese plants. The company initially used the plants as low cost locations to manufacture electronic components. Later, entire products were produced in China. Later still, Chinese plants were involved not only in production but also product design. Today, Philips’ Chinese plants are an important part of the company’s global network responsible for manufacturing, product development and design. Some observers worry that Philips has become over-reliant on its Chinese plants and faces potential disruptions should political or economic conditions in China change.

23. Why Make? Protects proprietary technology
in-house production makes sense when component parts contain proprietary technology
Facilitates the scheduling of adjacent processes
planning, coordination, and scheduling of adjacent processes can be easier with in-house production

24. Why Buy? Buying component parts from independent suppliers
Gives the firm greater flexibility
important when changes in exchange rates and trade barriers alter the attractiveness of various supply sources over time

25. Why Buy? Helps drive down the firm's cost structure
avoids challenges of coordination and control of additional subunits
avoids the lack of incentive associated with internal suppliers
avoids the difficulties with setting appropriate transfer prices
Helps the firm capture orders from international customers
can help firms gain orders from suppliers’ countries

26. Make-or-Buy Decisions
Operationally Favoring a Make Decision Operationally Favoring a Buy Decision

27. Functions of the Global Supply Chain
Logistics is the part of the supply chain that plans, implements, and controls the effective flows and inventory of raw material, component parts, and products used in manufacturing.
The core activities performed in logistics are:
Global distribution center management
Inventory management
Packaging and materials handling
Transportation
Reverse logistics
LO 14-5: Understand the functions of logistics and purchasing (sourcing) within global supply chains.
A global distribution center (or warehouse) is a facility that positions and allows customization of products for delivery to worldwide wholesalers or retailers or directly to consumers anywhere in the world.
Global inventory management can be viewed as the decision-making process regarding the raw materials, work-in-process (component parts), and finished goods inventory for a multinational corporation. The decisions include how much inventory to hold, in what form to hold it, and where to locate it in the supply chain.
Packaging comes in all shapes, sizes, forms, and uses. It can be divided into three different types: primary, secondary, and transit. Primary packaging holds the product itself. Secondary packaging (sometimes called case-lot packaging) is designed to contain several primary packages. Transit packaging comes into use when a number of primary and secondary packages are assembled on a pallet or unit load for transportation. Regardless of where the product is in the global supply chain, packaging is intended to achieve a set of multilayered functions. These can be grouped into (1) perform, (2) protect, and (3) inform.
Transportation refers to the movement of raw material, component parts, and finished goods throughout the global supply chain.
Reverse logistics is the process of planning, implementing, and controlling the efficient, cost-effective flow of raw materials, in-process inventory, finished goods, and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal.

28. Functions of the Global Supply Chain
Purchasing is the part of the supply chain that involves worldwide buying of raw material, component parts, and products used in manufacturing of the company’s products and services.
The core activities performed in purchasing include development of an appropriate strategy for global purchasing and selecting the type of purchasing strategy best suited for the company.
LO 17-5: Understand the functions of logistics and purchasing (sourcing) within global supply chains.
There are five strategic levels—from domestic to international to global—that can be undertaken by a global company.
Level I is simply companies engaging in domestic purchasing activities only.
Companies that are at level II engage in international purchasing activities only as needed.
Companies at level III engage in international purchasing activities as part of the firm’s overall supply chain management strategy.
Level IV refers to global purchasing activities that are integrated across worldwide locations. This involves integration and coordination of purchasing strategies across the firm’s buying locations worldwide.
Level V involves engaging in global purchasing activities that are integrated across worldwide locations and functional groups. Broadly, this means that the firm integrates and coordinates the purchasing of common items, purchasing processes, and supplier selection efforts globally, for example.

29. Functions of the Global Supply Chain
Outsourcing Terms and Options

30. 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
JIT systems
generate 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
But, a JIT system leaves the firm with no buffer stock of inventory to meet unexpected demand or supply changes

31. What Is the Role of Information Technology?
Web-based information systems play a crucial role in materials management
allow firms to optimize production scheduling according to when components are expected to arrive
Options for global supply chains:
Electronic data interchange (EDI)
Enterprise resource planning (ERP)
Collaborative planning, forecasting, and replenishment (CPFR)
Vendor management of inventory (VMI)
warehouse management system (WMS)
LO 17-6: Describe what is required to efficiently coordinate a globally dispersed production system.
Electronic data interchange (EDI) refers to the electronic interchange of data between two or more companies.
Enterprise resource planning (ERP) is a wide-ranging business planning and control system that includes supply chain-related subsystems (e.g., materials requirements planning, or MRP).
Collaborative planning, forecasting, and replenishment (CPFR) is a system that was developed to fill the interorganizational connections that ERP cannot fill.
Vendor management of inventory (VMI) allows for a holistic overview of the supply chain with a single point of control for all inventory management.
A warehouse management system (WMS) often operates in concert with ERP systems; for example, an ERP system can define material requirements that are then transmitted to a distribution center for a WMS.

32. Coordinating Global Supply Chains
Global supply chain coordination refers to shared decision-making opportunities and operational collaboration of key global supply chain activities.
To achieve operational integration and collaboration, six operational objectives should be addressed:
Responsiveness
Variance reduction
Inventory reduction
Shipment consolidation
Quality
Life-cycle support
LO 17-6: Describe what is required to efficiently coordinate a globally dispersed production system.
Responsiveness refers to a global firm’s ability to satisfy customers’ requirements across global supply chain functions in a timely manner.
Variance reduction refers to integrating a control system across global supply chain functions to eliminate global supply chain disruptions.
Inventory reduction refers to integrating an inventory system, controlling asset commitment, and turning velocity across global supply chain functions.
Shipment consolidation refers to using various programs to combine small shipments and provide timely, consolidated movement. This includes multiunit coordination across global supply chain functions.
Quality refers to integrating a system so that it achieves zero defects throughout global supply chains.
Life-cycle support refers to integrating the activities of reverse logistics, recycling, after-market service, product recall, and product disposal across global supply chain functions.

33. Interorganizational Relationships
Upstream/Inbound Relationships

34. Interorganizational Relationships
Downstream/Outbound Relationships

35. Interorganizational Relationships: Vendors and Buyers
Benefits of relationships with vendors (upstream) and buyers (downstream) include those typical of a transactional exchange: costs equal to quality for the goods bought, but not necessarily for the best goods in the marketplace

36. Interorganizational Relationships: Suppliers and Customers
Benefits of relationships with suppliers (upstream) and customers (downstream) is that the firm will receive all the favorable characteristics that the raw materials, component parts, and/or products have relative to the next best alternative in the global marketplace.

37. Interorganizational Relationships: Partners and Clients
Benefits of relationships with partners (upstream) and clients (downstream) include the one or two points of higher quality for the raw materials, component parts, and/or products whose improvement will yield the greatest value to the customer for the foreseeable future (quality greater than cost).