1. Global Production, Outsourcing, and Logistics14
chapter
Global Production, Outsourcing, and Logistics
McGraw-Hill/Irwin
Global Business Today, 5e
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

2. Quality and Costs TQM Quality … Increases Productivity
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Quality and Costs
Quality …
Improves Performance Reliability
Increases Productivity
Lowers Rework and Scrap Costs
Lowers Warranty Costs
Lowers Manufacturing Costs
Lowers Service Costs
Increases Profits
C) The objectives of manufacturing and materials management value by better serving customer needs. This can be accomplished by lowering costs and increase product quality. These two aspects are related. are to lower the costs of value creation and add
D) There are three ways in which improved quality control reduces costs. First, *- because time is not wasted manufacturing poor quality products that cannot be sold. This saving leads to a direct reduction in unit costs. Second, increased product quality means lower re-work and scrap costs. Third, greater product quality means lower warranty and re-work costs. The net effect is to lower the costs of value creation by reducing both manufacturing and service costs.
E) The main management technique that companies are utilizing to boost their product quality is total quality management (TQM). TQM is a management philosophy that takes as its central focus the need to improve the quality of a company’s products and services.
TQM

3. ISO 9000 European Unions standards for quality Set by code
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ISO 9000
European Unions standards for quality
Set by code
Firm must be certified “ISO 9000” before it is allowed access to the EU marketplace
F) Apart from the rise of TQM, the growth of international standards in some cases focused greater attention on the importance of product quality. In Europe, for example, the European Union requires that the quality of a firm’s manufacturing processes and products be certified under a quality standard known as ISO 9000 before the firm is allowed access to the European marketplace.
G) Added to the objectives of lowering costs and improving quality are two further objectives of manufacturing and materials management that take on particular importance for international businesses. First, manufacturing and materials management must be able to accommodate demands for local responsiveness. Second, manufacturing and materials management must be able to respond quickly to shifts in customer demand.
Lecture Note: Each year CIO magazine publishes a list of the "Top 100" companies in terms of Supply Chain/Logistics Management. This list may be helpful in locating companies that are heavily involved in this issue. The current list, which includes global corporations such as Caterpillar, FedEx, Texas Instruments, Toyota, UPS, and Xerox, can be accessed at { Chain/Logistics Management

4. Manufacturing Location Decision
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Country Factors
Favorable economic, political, cultural conditions
CIA.gov,
Technological Factors: a few choice location (concentrate)
Fixed costs relatively high
High minimum efficient scale
Flexible manufacturing-lean production-mass customization
Product features
Value-to-weight ratio (influence shipping cost): hisingle location
Universal needssingle location
High minimum efficient scale
Scale of output a plant needs to realize scale-economies
Market demand must be sufficient to reach this scale
WHERE TO MANUFACTURE
A) For the firm that considers international production to a feasible option, three broadly defined factors need to be considered when making a location decision: country factors, technological factors, and product factors
Country Factors
B) As discussed earlier in the book, country factors suggest that a firm should locate it various manufacturing activities in those locations where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity. However, regulations affecting FDI and trade can significantly affect the appropriateness of specific countries, as can expectations about future exchange rate changes
Teaching Tip: The United States Central Intelligence Agency has compiled a “country profile” on each country in the world. The country profiles are very informative, and may provide useful information to a company that is contemplating doing business in a particular country. The country profiles are available to the public and can be downloaded at {
Teaching Tip: For additional information about a particular country, Yahoo provides an easy-to-search bank of linked sources that provide information about almost every country in the world. The site is available at {
Technological Factors
C) The type of technology a firm uses in its manufacturing can be pivotal in location decisions. Three characteristics of a manufacturing technology are of interest here: the level of its fixed costs; its minimum efficient scale; and its flexibility.
Fixed Costs
D) In some cases the fixed costs of setting up a manufacturing plant are so high that a firm must serve the world market from a single location or from a very few locations.
Minimum Efficient Scale
E) The larger the minimum efficient scale of a plant, the greater the argument for centralizing production in a single location or a limited number of locations.
Flexible Manufacturing and Mass Customization
F) The term flexible manufacturing technology or lean production as it is often called – covers a range of manufacturing technologies that are designed to (i) reduce set up times for complex equipment (ii) increase the utilization of individual machines through better scheduling, and (iii) improve quality control at all stages of the manufacturing process.
G) Flexible manufacturing technologies allow a company to produce a wider variety of end products at a unit cost that at one time could only be achieved through the mass production of a standardized output. The term mass customization has been coined to describe this ability. Mass customization implies that a firm may be able to customize its product range to suit the needs of different customer groups without bearing a cost penalty.
H) Flexible machine cells are another common flexible manufacturing technology. A flexible machine cell is a grouping of various types of machinery, a common materials handler, and a centralized cell controller (computer).
I) The adoption of flexible manufacturing technologies can help improve the competitive position of firms. Most importantly, from the perspective of an international business, flexible manufacturing technologies can assist in the process of customizing products to different national markets in accordance with demands for local responsiveness.
Summary
J) When fixed costs are substantial, the minimum efficient scale of production is high, and/or flexible manufacturing technologies are available, the arguments for concentrating production at a few choice locations are strong. Alternatively, when both fixed costs and the minimum efficient scale of production are relatively low, and when appropriate flexible manufacturing technologies are not available, the arguments for concentrating production at a few choice locations are not as compelling.
Product Factors
K) Two product factors impact location decisions. The first is the product's value-to-weight ratio because of its influence on transportation costs. If the value-to-weight ratio is high, it is practical to produce the product in a single location and export it 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.
L) The other product feature that can influence location decisions is whether the product serves universal needs, needs that are the same all over the world. Since there are few national differences in consumer taste and preference for such products, the need for local responsiveness is reduced. This increases the attractiveness of concentrating manufacturing in a central location.

5. Where to Locate? Concentrate manufacturing if:
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Where to Locate?
Concentrate manufacturing if:
Costs of manufacturing =responsive to country environment (one location best)
Trade barriers are low
Exchange rates among currencies with impact on your business are stable
Production technology
Has high fixed costs
Has high minimum efficient scale
Exists in flexible manufacturing format
Product value-to-weight ratio is high
Product serves universal needs – minor difference in customer needs, consumer preferences
Locating Manufacturing Facilities
M) There are two basic strategies for locating manufacturing facilities: concentrating them in the optimal location and serving the world market from there, and decentralizing them in various regional or national locations that are close to major markets. The appropriate strategic choice is determined by the various country, technological, and product factors discussed in this section. A summary of this material is provided in Table 14.1 in the text.

6. Where to Locate? Decentralize manufacturing if:
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Where to Locate?
Decentralize manufacturing if:
Country environment does not affect costs much
Trade barriers are high
Production technology
Has low fixed costs
Has low minimum efficient scale
Does not exists in flexible manufacturing format
Product value-to-weight ratio is low
Product does not serve universal needs – significant difference in customer needs, consumer preferences

7. Make-or-Buy? “Make” advantage (vertical integration) “Buy” advantage
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Make-or-Buy?
“Make” advantage (vertical integration)
Lower costs in-house?
Are specialized assets needed?
Investment issue
Is proprietary technology needed?
Know-how protection issue (Dunning)
Is planning, coordination, scheduling of adjacent processes needed?
“Buy” advantage
Strategic flexibility needed?
Lower costs by buying?
Offsets a possibility by?
In either case “improved scheduling” just as important
THE STRATEGIC ROLE OF FOREIGN FACTORIES
A) The strategic role of foreign factories can change over time. A factory originally set up 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.
B) Similarly, the strategic advantage of a particular location can change as well, as governmental regulations change and/or countries upgrade their factors of production.
C) 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.
MAKE-OR-BUY DECISIONS v
A) International businesses face sourcing decisions, decisions about whether they should make or buy the component parts to go into their final product. Make-or-buy decisions are important factors in many firms' manufacturing strategies.
Teaching Tip: An article entitled "Is the Make-Buy Decision Process a Core Competence"? by Charles H. Fine and Daniel E. Whitney of MIT Center for Technology, Policy, and Industrial Development is available at {
The Advantages of Make
B) The arguments that support making component parts in-house - vertical integration - are fourfold. Specifically, vertical integration may be associated with lower costs, facilitate investments in highly specialized assets, protect proprietary technology, and facilitate the scheduling of adjacent processes.
Lower Costs
C) It may pay a firm to continue manufacturing a product or component part in-house, as opposed to outsourcing it to an independent manufacturer, if the firm is more efficient at that production activity than any other enterprise.
Facilitating Specialized Investments
D) When substantial investments in specialized assets are required to manufacture a component, the firm will prefer to make the component internally rather than contract it out to a supplier.
Proprietary Product Technology Protection
E) In order to maintain control over its technology, a firm might prefer to make component parts that contain proprietary technology in-house, rather than have them made by independent suppliers.
Improved Scheduling
F) The weakest argument for vertical integration is that production cost savings result from it because it makes planning, coordination, and scheduling of adjacent processes easier.
The Advantages of Buy
G) The advantages of buying component parts from independent suppliers are that it gives the firm greater flexibility, it can help drive down the firm's cost structure, and it may help the firm to capture orders from international customers. .
Strategic Flexibility
H) The greatest advantage of buying component parts from independent suppliers is that the firm can maintain its flexibility, switching orders between suppliers as circumstances dictate. This is particularly important in the international context where changes in exchange rates and trade barriers might alter the attractiveness of various supply sources over time.
I) Vertical integration into the manufacture of component parts involves an increase in the scope of the organization. The resulting increase in organizational complexity can be costly. There are three reasons for this. First, the greater the number of sub-units within an organization, the greater the problems of coordinating and controlling those units. Second, the firm that vertically integrates into component part manufacture may find that because its internal suppliers have a captive customer in the firm, internal suppliers lack an incentive to reduce costs. Third, leading directly on from the previous point, vertically integrated firms have to determine the appropriate price for goods transferred between sub-units within the firm. Setting appropriate transfer prices is a problem in any firm. The firm that buys its components from independent suppliers can avoid all of these problems.
Offsets
J) Another reason for outsourcing some manufacturing to independent suppliers based in other countries is that it may help the firm capture more orders from that country.
Trade-Offs
K) It is clear that trade offs are involved in make-or-buy decisions. The benefits of manufacturing components in-house seem to be greatest when highly specialized assets are involved, when vertical integration is necessary for protecting proprietary technology, or when the firm is simply more efficient than external suppliers at performing a particular activity.
L) Several firms have tried to capture some of the benefits of vertical integration, without encountering the associated organizational problems, by entering into long-term strategic alliances with key suppliers. Although alliances with suppliers can help the firm to capture the benefits associated with vertical integration without dispensing entirely with the benefits of a market relationship, alliances do have their drawbacks. The firm that enters into a strategic alliance may find its strategic flexibility limited by commitments to alliance partners

8. Other Issues Strategic alliances with suppliers
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Other Issues
Strategic alliances with suppliers
Reap benefits of vertical integration and avoid organization integration problems
Build trust between firm and suppliers
Integrate suppliers in design process
Facilitate Just-in-Time process management
Just-in-time inventory system management
Minimize inventory holding costs
Challenge: minimal inventory buffer may lead to disruption if there is a cross-border supply problem
The role of information technology and the internet
lower transaction costs internationally
Strategic Alliances with Suppliers
M) Several international businesses have tried to reap some of the benefits of vertical integration without the associated organizational problems by entering into strategic alliances with key suppliers.
COORDINATING A GLOBAL MANUFACTURING SYSTEM
A) Materials management 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. The materials management function is complicated in an international business by distance, time, exchange rates, customs barriers, and the like. Efficient materials management can have a major impact upon a firm's bottom line.
Teaching Tip: Stanford University maintains a web site that is a forum for the dissemination of research and practical advice in the area of global supply chain management. The site supplies current information that can help embellish a lecture on global materials management. The site is available at {
The Power of Just-in-Time (JIT)
B) The basic philosophy behind JIT systems is to economize on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter the production process, and not before.
C) Just-in-time systems generate major cost savings from reduced warehousing and inventory holding costs. In addition, JIT systems help the firm to spot defective parts and take them out of the manufacturing process - thereby boosting product quality
The Role of Information Technology
D) Information technology and particularly electronic data interchange, play a major role in materials management. 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, and eliminates the flow of paperwork between a firm and its suppliers.
L) Several firms have tried to capture some of the benefits of vertical integration, without encountering the associated organizational problems, by entering into long-term strategic alliances with key suppliers. Although alliances with suppliers can help the firm to capture the benefits associated with vertical integration without dispensing entirely with the benefits of a market relationship, alliances do have their drawbacks. The firm that enters into a strategic alliance may find its strategic flexibility limited by commitments to alliance partners

9. Chapter 14: Global Production, Outsourcing, and Logistics
CRITICAL THINKING AND DISCUSSION QUESTIONS
1. An electronics firm is considering how best to supply the world market for microprocessors used in consumer and industrial electronic products. A manufacturing plant cost approximately $500 million to construct and requires a highly skilled work force. The total value of the world market for this product over the next 10 years is estimated to be between $10 and $15 billion. The tariffs prevailing in this industry are currently low. What kind of manufacturing strategy do you think the firm should adopt - concentrated or decentralized? What kind of location(s) should the firm favor for its plant(s)?
Answer: The firm should pursue a concentrated manufacturing because (1) the tariffs prevailing in the industry are low, (2) the cost of building a plant to produce the microprocessors is high, and (3) the product's value-to-weight ratio is high. All of these factors favor a concentrated vs. a decentralized manufacturing strategy. In terms of location, the company should consider three factors: country factors, technology factors, and product factors. First, in terms of country factors, the firm should locate its plant in a country that has a highly skilled pool of workers available. That criterion probably limits the firm to developed nations. Second, in terms of technology factors, the firm is compelled to limit the number of its manufacturing facilities because of the high cost of constructing a plant. Third, in terms of product factors, the firm can manufacturer its product in a central location due to the relatively high value-weight ratio and the universal appeal of the product.

10. Chapter 14: Global Production, Outsourcing, and Logistics
CRITICAL THINKING AND DISCUSSION QUESTIONS
2. A firm must decide whether to make a component part in-house or to contract it out to an independent supplier. Manufacturing the part requires a nonrecoverable investment in specialized assets. The most efficient suppliers are located in countries with currencies that many foreign exchange analysts expect to appreciate substantially over the next decade. What are the pros and cons of (a) manufacturing the component in-house and (b) outsourcing manufacture to an independent supplier? Which option would you recommend? Why?
Answer: Manufacturing in-house would reduce the risk of currency appreciation and rising costs from independent suppliers. Specialized asset investment would make firm dependent on specific suppliers, however, technological know-how would be protected, and improved scheduling would be available. Out-sourcing would be beneficial if the product using the component fails in the market because the supplier will bear the cost of the non-recoverable investment, and flexibility in case a better component can be designed or bought would be preserved. Outsourcing would also lower organizational and coordination costs. Based on what we know, manufacturing in house may be slightly preferred, but other information could tip the decision the other way.