1. Strategy, Production and Logistics

2. In today’s global economy, firms must decide on:
where to locate productive activities
the long-term strategic role of foreign production sites
whether to own foreign production activities or outsource
how to manage a globally dispersed supply chain
determine Internet-based information technology’s role in the management of global logistics
whether to manage global logistics or outsource

3. Strategy, Production, and Logistics
Question: How can production and logistics be conducted internationally to lower the costs of value creation and
add value by better serving customer needs?
Production refers to activities involved in creating a product
Logistics - procurement and physical transmission of material through the supply chain, from suppliers to customers

4. Strategic Objectives of Production and Logistics
The strategic objectives of the production and logistics function are
to lower costs
to increase product quality by eliminating defective products from the supply chain and the manufacturing process

5. Strategy, Production, and Logistics
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

6. :What management tool is used to increase the reliability (quality) of product offerings?
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 European Union’s ISO 9000 standards

7. 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

8. Where should production activities be located?
When deciding where to locate production facilities, firms must consider
country factors
technological factors
product factors
WHICH OF THE ABOVE IS THE MOST IMPORTANT?
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.

9. 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 {
Video Note: In recent years, many companies have turned to China as a location for low cost production. However, in the light news of various tainted products produced being in China, some managers are questioning that strategy. The iGlobe Probe Sheds Light on Working Conditions in China explores working conditions in China and the potential for production problems.

10. Some Facts and Figures on Outsourcing
Probably the question most people want to know is how many U.S. jobs have been lost to outsourcing? According to Techsunite.org, over 500,000 jobs have been outsourced since the year There have also been over 250,000 additional jobs lost due to outsourcing. The biggest culprits of outsourcing are IT companies.

11. Number of U.S. Jobs Moving Offshore
Job Category
2000
2005
2010
2015
Management
37,477
117,835
288,281
Business
10,787
61,252
161,722
348,028
Computer
27,171
108,991
276,954
472,632
Architecture
3,498
32,302
83,237
184,347
Life Sciences
3,677
14,478
36,770
Legal
1,793
14,220
34,673
74,642
Art, design
818
5,576
13,846
29,639
Sales
4,619
29,064
97,321
226,564
Office
53,987
295,034
791,034
1,659,310
Total
102,674
587,592
1,591,101
3,320,213

12. Biggest Outsourcing Companies
According to Techsunite.org, the top 10 companies that have outsourced the most jobs and the number outsourced are:
IBM 63,700
EDS 22,400
Dell 17,450
Cognizant 15,000
Siemens AG 15,000
General Electric 14,250
Convergys 14,000
Accenture 13,000
Computer Sciences Corp 10,800
Intel 10,426

13. The type of technology a firm uses in its manufacturing can affect location decisions so firms should consider:
The level of fixed costs involved - if fixed costs of setting up a manufacturing plant are high, it makes sense for the firm to serve the world market from a single location or from a few locations
2. The minimum efficient scale of the technology - The larger the level of output at which most plant-level scale economies are exhausted of a plant, the more likely centralized production makes sense
3. The flexibility of the manufacturing technology or lean production covers a range of manufacturing technologies that are designed to:
reduce set up times for complex equipment
Increase utilization of machines through better scheduling
improve quality control at all manufacturing process stages

14. When does it make sense to concentrate production at a few choice locations?
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

15. Two product factors impact location decisions
1. The product's value-to-weight ratio
If the value-to-weight ratio is high, it is practical to produce the product in a single location and export it
If 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
The need for local responsiveness is reduced for products that do, which increases the attractiveness of concentrated manufacturing

16. Locating Production Facilities
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

17. Locating Production Facilities

18. Classroom Performance System
Decentralized production will be favored when
There are substantial differences in political economy
Fixed costs are high
The product’s value-to-weight ratio is high
Exchange rates are volatile
Classroom Performance System Answer: d

19. Classroom Performance System
Firms will prefer concentrated production when
Minimum efficient scale is high
Location externalities are not important
The product does not serve universal needs
There are few trade barriers
Classroom Performance System Answer: a

20. Outsourcing Production: Make-or-Buy Decisions
Question: Should an international business make the component parts to go into their final product or outsource them?
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
Management Focus: Hewlett Packard in Singapore
Summary
This feature explores the strategic decision making involved in establishing Hewlett Packard’s Singapore plant. The company initially used the plant as a low cost location to manufacture electronic components. Later, entire products were produced in Singapore. Still later, the Singapore plant was involved not only in production but also product design. Today, the plant is an important part of Hewlett Packard’s global network and is responsible for manufacturing and also product development and design. The following questions can provide the basis for the discussion of this feature:
Suggested Discussion Questions
1) What factors were important in Hewlett Packard’s initial decision to open a plant in Singapore? How did these factors contribute to the decision to increase responsibilities at the Singapore plant?
Discussion Points: Hewlett-Packard initially selected Singapore as a production location because the country offered a lower cost, well-educated workforce that spoke English. In addition, the country was economically stable, and had a good infrastructure. The lower cost, well-educated workforce enabled Hewlett-Packard to reduce its manufacturing and product development costs when the company decided to assign the responsibility for redesigning its handheld calculator to its Singapore facility. The success of this assignment was such that the company has continued to ask the facility to redesign other products.
2) Today, the Singapore plant is considered to be a “lead plant” for Hewlett Packard. How can the company help the plant continue to be a key component in Hewlett Packard’s global network?
Discussion Points: Many students will suggest that communication will be central to ensuring that the Singapore facility remains a lead plant for Hewlett-Packard. Already, the company has made the commitment to ensuring the Singapore facility is on the same page as the headquarters location by transferring engineers from Singapore to the United States, and back. Students will probably suggest that continuing to establish cross-border relationships and teams will be important as the company goes forward.
Teaching Tip: To further explore Hewlett-Packard’s international operations, go to {
Lecture Note: To extend the discussion of this feature, consider { }.

21. The Advantages of Make
1. Lowering Costs - A firm should consider manufacturing a part in-house if the firm is more efficient at that production activity than any other enterprise
2. Facilitating Specialized Investments -In-house production makes sense when substantial investments in specialized assets (assets whose value is contingent upon a particular relationship persisting) are required to manufacture a component
3. Protecting Proprietary Technology -When proprietary technology is involved, in-house production can make sense to maintain control over the technology
4. Improving Scheduling - In some cases, in-house production can make planning, coordination, and scheduling of adjacent processes easier

22. Classroom Performance System
Which of the following is not one of the key factors that influence the decision of where to produce?
Country factors
Competitors factors
Technological factors
Product factors
Classroom Performance System Answer: b

23. The Advantages of Buy
Strategic Flexibility - Outsourcing provides the firm with flexibility to switch orders between suppliers if necessary. Important when there are changes in exchange rates and trade barriers
Lower Costs - Firms that outsource can avoid
challenges involved with coordinating and controlling additional subunits
the lack of incentive associated with internal suppliers
the difficulties with setting appropriate transfer prices
Offsets - Outsourcing can help firms capture more orders from suppliers’ countries

24. Trade-Offs
The benefits of manufacturing components in-house are greatest when
highly specialized assets are involved
when vertical integration is necessary for protecting proprietary technology
when the firm is more efficient than external suppliers at performing a particular activity

25. Strategic Alliances with Suppliers
Question: Can strategic alliances with suppliers give firms the benefits of vertical integration?
Some firms have tried to use strategic alliances to capture some of the benefits of vertical integration, without having the associated organizational problems
However, in some cases, this backfires as firms find their strategic flexibility limited by commitments to alliance partners

26. Classroom Performance System
Buying from independent suppliers offers all of the following advantages except
It gives the firm greater flexibility
It helps drive down the firm's cost structure
It protects proprietary property
It helps the firm to capture orders from international customers
Classroom Performance System Answer: c

27. Why is logistics important to the international firm?
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
In international business, this is complicated by distance, time, exchange rates, and customs barriers, etc.
Efficient logistics can have a major impact upon a firm's bottom line

28. The Role of Just-in-Time Inventory
Question: How can a just-in-time inventory process help a firm?
A 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
It can result in major cost savings from reduced warehousing and inventory holding costs
It can help firms spot defective parts, take them out of the manufacturing process, and boost product quality

29. What is the role of information technology in materials management?
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

30. Critical Discussion Question
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 costs 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. Should the firm adopt a concentrated or decentralized manufacturing strategy? 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 versus 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 could limit 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.

31. Critical Discussion Question
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 non-recoverable 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. Outsourcing 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.