1. Global Business Management (MGT380) Lecture #26

2. Global Production, Outsourcing and Logistics

3. Learning Objectives  Understand how country differences, manufacturing technology and product features all affect the choice of where to locate production operations.  Appreciate the factors that influence a firm’s decision of whether to source component parts from within the company or purchase them  Understand what is required to efficiently coordinate a globally dispersed manufacturing system

4. Quick Recap of the last lecture  Strategic pricing has three aspects 1. Predatory pricing - use profit gained in one market to support aggressive pricing designed to drive competitors out in another market 2. Multi-point pricing - a firm’s pricing strategy in one market may have an impact on a rival’s pricing strategy in another market 3. Experience curve pricing - price low worldwide in an attempt to build global sales volume as rapidly as possible, even if this means taking large losses initially  A firm’s ability to set prices may be limited by Antidumping regulations –  Dumping and Competition policy  Why Is New Product Development Important? Product innovation should be a strategic priority today, competition is as much about technological innovation as anything else; The pace of technological change is faster than ever and product life cycles are often very short; new innovations can make existing products obsolete, but at the same time, open the door to a host of new opportunities; Firms need close links between R&D, marketing, and manufacturing

5.  The rate of new product development is greater in countries where  more money is spent on basic and applied research and development  demand is strong; consumers are affluent; competition is intense  Why Cross-functional team is important? Team integration is facilitated by cross-functional product development teams. Effective cross functional teams should (i) Be led by a heavyweight project manager with status in the organization ii) include members from all the critical functional areas iii)have members located together (iv) establish clear goals (v)develop an effective conflict resolution process  Building global capabilities: To adequately commercialize new technologies, firms need to integrate R&D and marketing. To successfully commercialize new technologies, firms may need to develop different versions for different countries

6. Strategy, Production, And Logistics: Firms need to identify how production and logistics can be conducted internationally to: lower the costs of value creation (ii) add value by better serving customer needs  Production refers to activities involved in creating a product  Logistics refers to the procurement and physical transmission of material through the supply chain, from suppliers to customers To lower costs, firms can: disperse production to those locations where activities can be performed most efficiently(ii) manage the global supply chain efficiently to better match supply and demand To improve quality, firms can: (i) eliminate defective products from the supply chain and the manufacturing process (ii) Improved quality will also reduce costs  To increase product quality, most firms today use the Six Sigma program which aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout a company- a part of total quality management (TQM). In the European Union, firms must meet the standards set forth by ISO 9000.

7. Where To Produce Three factors are important when making location decisions: 1. country factors 2. technological factors 3. product factors

8. Technological Factors  The type of technology a firm uses in its manufacturing can affect location decisions Three characteristics of a manufacturing technology are of interest: 1. the level of fixed costs 2. the minimum efficient scale 3. the flexibility of the technology

9. Technological Factors 1. The level of fixed costs:  If the fixed costs of setting up a manufacturing plant are high, it might make sense to serve the world market from a single location or from a few locations  When fixed costs are relatively low, multiple production plants may be possible  Producing in multiple locations allows firms to respond to local markets and reduces dependency on a single location

10. Technological Factors 2. The minimum efficient scale:  The larger the minimum efficient scale (the minimum efficient scale is defined as the lowest production point at which long-run total average costs are minimized) of a plant, the more likely centralized production in a single location or a limited number of locations makes sense  A low minimum efficient scale allows the firm to respond to local market demands and hedge against currency risk by operating in multiple locations

11. Technological Factors 3. The flexibility of the technology:  flexible manufacturing technology or lean production lean production, often simply "lean", is a systematic method for the elimination of waste within a manufacturing process. Lean also takes into account waste created through overburden and waste created through unevenness in work loads. Essentially, lean is centered on making obvious what adds value by reducing everything else. Lean manufacturing is a management philosophy derived mostly from the Toyota Production System (TPS). It 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

12. Technological Factors  Firms using flexible manufacturing technologies can produce a wide variety of end products at a unit cost that at one time could only be achieved through the mass production of a standardized output  Mass customization (Production of personalized or custom-tailored goods or services to meet consumers' diverse and changing needs at near mass production prices. Enabled by technologies such as computerization, internet, product modularization, and lean production, it portends the ultimate stage in market segmentation where every customer can have exactly what he or she wants) implies that a firm may be able to customize its product range to meet the demands of local markets yet still control costs  Flexible machine cells allow firms to increase efficiency by improving capacity utilization. It is is a manufacturing system in which there is some amount of flexibility that allows the system to react in case of changes, whether predicted or unpredicted. This flexibility is generally considered to fall into two categories, which both contain numerous subcategories.

13. Technological Factors Concentrating production at a few choice locations makes sense 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

14. Review question Firms should produce in multiple locations when a) fixed costs are low b) fixed costs are substantial c) the minimum efficient scale of production is high d) flexible manufacturing technologies are available

15. Product Factors Two product factors impact location decisions: 1. the product's value-to-weight ratio:  The value to weight ratio of a product is a measure of the monetary value a product has per kilogram or pound. This is an important measure used in supply chain design and strategy. It is one of the most important factors that determine how a product will be shipped to its market and consumers.  An example of different value to weight ratios is between diamonds and coal. Both are forms of carbon, but have very different value to weight ratios. A kilogram of coal is only worth a few cents, but one full kilogram of Diamonds can be worth tens of millions of dollars depending on the diamond grade.  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

16. 2. whether the product serves universal needs:  When products serve universal needs, the need for local responsiveness falls, increasing the attractiveness of concentrating manufacturing in a central location

17. Classroom Performance System All of the following are key factors that influence the decision of where to produce except a) country factors b) competitors factors c) technological factors d) product factors

18. Locating Production Facilities There are two basic strategies for locating manufacturing facilities: 1. concentrating them in the optimal location and serving the world market from there 2. decentralizing them in various regional or national locations that are close to major markets

19. Locating Production Facilities Table 16.1

20. Review question When _______, firms will favor decentralized production. a) there are substantial differences in political economy b) fixed costs are high c) the product’s value-to-weight ratio is high d) exchange rates are volatile

21. Review question Concentrated production makes sense when a) minimum efficient scale is high b) location externalities are not important c) the product does not serve universal needs d) there are few trade barriers

22. 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 initially established to take advantage of low cost labor can evolve into facilities with advanced design capabilities  Improvement in a facility comes from two sources: 1. pressure to lower costs or respond to local markets 2. an increase in the availability of advanced factors of production

23. The Strategic Role Of Foreign Factories  Many companies now see foreign factories as globally dispersed centers of excellence  This philosophy supports the development of a transnational strategy  A major aspect of a transnational strategy is a belief in global learning, or the idea that valuable knowledge does not reside just in a firm’s domestic operations, it may also be found in its foreign subsidiaries  This implies that firms are less likely to switch production to new locations simply because some underlying variable like wage rates has changed

24. Outsourcing Production: Make-or-Buy Decisions  Should an international business make or buy the component parts to go into their final product?  Make-or-buy decisions are important factors in many firms' manufacturing strategies  Today, service firms also face make-or-buy decisions as they choose which activities to outsource and which to keep in-house  Make-or-buy decisions involving international markets are more complex than those involving domestic markets

26.  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?

27. The Advantages Of Make Vertical integration (making component parts in-house) can: 1. lower costs - if a firm is more efficient at that production activity than any other enterprise, it may pay the firm to continue manufacturing a product or component part in-house 2. facilitate investments in highly specialized assets - internal 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

28. The Advantages Of Make 3. protect proprietary technology - a firm might prefer to make component parts that contain proprietary technology in-house in order to maintain control over the technology 4. facilitate the scheduling of adjacent processes - the weakest argument for vertical integration is that the resulting production cost savings make planning, coordination, and scheduling of adjacent processes easier

29. The Advantages Of Buy Buying component parts from independent suppliers: 1. gives the firm greater flexibility  By buying component parts from independent suppliers, the firm can maintain its flexibility, switching orders between suppliers as circumstances dictate  This is particularly important when changes in exchange rates and trade barriers alter the attractiveness of various supply sources over time

30. The Advantages Of Buy 2. helps drive down the firm's cost structure Firms that buy components from independent suppliers avoid:  the challenges involved with coordinating and controlling the additional subunits that are associated with vertical integration  the lack of incentive associated with internal suppliers  the difficulties with setting appropriate transfer prices 3. helps the firm capture orders from international customers  Outsourcing can help firms capture more orders from suppliers’ countries

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

32. Strategic Alliances With 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

33. Review question Which of the following is not an advantage of buying from independent suppliers? a) it gives the firm greater flexibility b) it helps drive down the firm's cost structure c) it protects proprietary property d) it helps the firm to capture orders from international customers

34. Managing A 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 The objectives of logistics are:  To manage a global supply chain at the lowest possible cost and in a way that best serves customer needs  To help the firm establish a competitive advantage through superior customer service

35. The Role Of Just-in-Time Inventory  The basic philosophy behind just-in-time (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  JIT systems generate major cost savings from reduced warehousing and inventory holding costs  JIT systems can help the firm spot defective parts and take them out of the manufacturing process to boost product quality  However, a JIT system leaves the firm with no buffer stock of inventory to meet unexpected demand or supply changes

36. The Role Of Information Technology And The Internet  Web-based information systems play a crucial role in materials management  They allow firms to optimize production scheduling according to when components are expected to arrive Electronic Data Interchange (EDI):  facilitates the tracking of inputs  allows the firm to optimize its production schedule  lets the firm and its suppliers communicate in real time  eliminates the flow of paperwork between the firm and its suppliers

37. Summary of the lecture Three factors are important when making location decisions: 1. country factors 2. technological factors 3. product factors Three characteristics of a manufacturing technology are of interest: 1. the level of fixed costs 2. the minimum efficient scale[(the minimum efficient scale is defined as the lowest production point at which long-run total average costs are minimized) of a plant, the more likely centralized production in a single location or a limited number of locations makes sense] 3. the flexibility of the technology [ is a systematic method for the elimination of waste within a manufacturing process. Lean also takes into account waste created through overburden and waste created through unevenness in work loads. Essentially, lean is centered on making obvious what adds value by reducing everything else. Lean manufacturing is a management philosophy derived mostly from the Toyota Production System]

38.  Firms using flexible manufacturing technologies can produce a wide variety of end products at a unit cost that at one time could only be achieved through the mass production of a standardized output  Mass customization (Production of personalized or custom-tailored goods or services to meet consumers' diverse and changing needs at near mass production prices. Enabled by technologies such as computerization, internet, product modularization, and lean production, it portends the ultimate stage in market segmentation where every customer can have exactly what he or she wants) implies that a firm may be able to customize its product range to meet the demands of local markets yet still control costs Technological factors: Concentrating production at a few choice locations makes sense when: i) fixed costs are substantial ii) the minimum efficient scale of production is high iii) flexible manufacturing technologies are available Two product factors impact location decisions:1. the product's value-to-weight ratio. 2. Does product serves universal needs: When products serve universal needs, the need for local responsiveness falls, central location preferred

39. There are two basic strategies for locating manufacturing facilities: 1. concentrating them in the optimal location and serving the world market from there 2. decentralizing them in various regional or national locations that are close to major markets  Improvement in a facility comes from two sources: 1. pressure to lower costs or respond to local markets 2. an increase in the availability of advanced factors of production  A major aspect of a transnational strategy is a belief in global learning, or the idea that valuable knowledge does not reside just in a firm’s domestic operations, it may also be found in its foreign subsidiaries  Make-or-buy decisions are important factors in many firms' manufacturing strategies  Advantages of make: lower costs; facilitate investments in highly specialized assets ; protect proprietary technology; facilitate the scheduling of adjacent processes