1

Chapter 9

Global Operations

2

R & D

Procurement

Manufacturing

Marketing

Sales

Stage model of international development

EXPORT LOCALISATION GLOBAL

AgentLocaldistributor

Localdistributor

Marketingsubsidiaries

Marketingsubsidiaries Subsidiaries

WOSJVs

Assembly

BuyingOffice

Assembly

Components

SourcingLocalPlant

Local+Regional+GlobalPlants

Subsidiaries SubsidiariesSubsidiaries

Adaptation

Development

ISD 2

MULTINATIONAL

TimeNumberof countries

BuyingOffice

BuyingOffice

BuyingOffice

3

Global configuration of the value chain

R & D Procurement Manufacturing Marketing GeneralManagement

GLOBALCENTRES

REGIONALCENTRES

LOCALUNITS

4

ResearchDevelopment

SourcingProduction Marketing

Customer Services

Global

Regional

Local

- Central R & D- Technology Strategy- Core technology- Core products- Technology conferences- Technological intelligence

- Regional product development- Regional intelligence - Regional seminars

- Local laboratories

- Global factories- Global materials flow- Process engineering- Central sourcing

- Regional factories- Regional sourcing

- Local production- Local sourcing

- Global marketing strategy- Global communication - Global product management

Finances H.R.M

- Policies- Procedures- Information system

- Regional customers support- Logistics- Maintenance

- After sales services

- Corporate Finance- Global Treasury- Control

- Regional Debt financing- Regional Control

- Local borrowing

- International H.R.M

- Regional careers- Training

- Local careers- Local

Components of a global value chain

- Regional accounts- Regional bidding

- Distribution- Promotion- Sales

5

Local for Local production

Production of goods or services internal to the company in internationally dispersed

sites for serving local markets

Local for Local outsourcing

Sourcing of goods or services with external local domestic suppliers

serving local operations

Local for Global production

Production of goods or services internal to the company in internationally dispersed

sites for serving local markets

Local for Global outsourcing

Sourcing of goods or services with external international suppliers

serving global operations

OffshoringObjectives

Offshoring ModesOffshore

ProductionOffshore

Outsourcing

For market

For globalcompetitiveness

6

1995 2005 1995 2005

Hungary 27% 36% Luxembourg 47% 59%Estonia 29% 32% Ireland 33% 44%Slovenia - 31% Denmark 8% 23%Slovak Republic 15% 29% Netherlands 11% 16%Czech Republic 17% 26% Estonia 15% 16%OECD 21% 26% Belgium 12% 15%Mexico - 25% Norway 13% 14%Belgium 21% 20% Hungary 12% 14%Austria 19% 20% Sweden 9% 14%Ireland 32% 18% Slovak Republic 14% 13%Portugal 16% 17% Austria 9% 13%Sweden 18% 17% Greece 3% 12%Finland 13% 17% Indonesia 10% 11%Canada 18% 16% Finland 10% 10%Poland 9% 16% Chile 7% 10%Denmark 16% 16% Slovenia - 9%Greece 16% 15% Korea 6% 8%Netherlands 19% 14% Germany 5% 8%Germany 11% 14% Czech Republic 10% 8%Korea 14% 13% Canada 10% 7%Indonesia 14% 13% Israel 10% -Norway 15% 13% Spain 5% 7%France 12% 12% Russian Federation 6% -Spain 12% 12% Italy 6% 7%Israel 11% - United Kingdom 6% 6%Turkey 11% 11% France 4% 5%Chile 14% 11% South Africa 3% 5%United Kingdom 13% 11% Portugal 6% 5%Italy 11% 11% New Zealand 5% -Russian Federation 11% - OECD 4% 4%New Zealand 11% - Brazil 3% 5%China 8% 10% China 1% 5%South Africa 7% 10% Poland 4% 4%Australia 9% 9% Turkey 4% 4%Luxembourg 15% 8% Mexico - 3%United States 5% 7% Australia 4% 2%India 6% 6% Japan 2% 2%Brazil 5% 6% India 4% 1%Japan 3% 6% United States 0% 1%

Offshoring of manufacturing by country Offshoring of Services by country

Source: OECD Economic Globalisation Indicators 2010 - OECD © 2010

7

Setting-up global operations(The 3 Ls)

Localisation Why?

Location Where?

Linkage How?

Why do we set upan operationalfacility outside existing locations?

What is the preferredgeographical site forsetting up the operation?

What is the role of this operation in the global network and how does it link with other operations and what is its degree of autonomy?

8

Localisation

Competitive Forces

Growth Opportunities

Physical resources

Intellectual and support resources

Costs

Physical proximity to markets( time and responsiveness dimensions)

Customers intimacy

Learning

Legislation ( local content)

Why set up an operationalfacility outside

existing locations?

9

Intellectuel and support resources

LocationWhere?

Physical Resources Costs

Physical proximity to market

Customers’ intimacy

Learning Legislation

Criteria

KeyCapabilities

Costs/benefit

What is the preferredgeographical site forsetting up the operation?

Accessto

resource

Qualityand

costs ofresources

• Human capital• Legal and

technical cluster

EfficiencyVolumeQuality

• Labor• Prooducti

vity• Infrastruct

ure•

Overheads

SpeedResponsiveness

• Geographical distance

• Telecom• Communicatio

ns• Transport

Customizationrelationships

Customer baseMarket culture

Innovation

Competitors &related

industriesinformation

Localcontent

Economies of scale

Importanceof

market

10

Source : UNCTAD, 2005

11

Made in ?????Idea for product generated in Singapore

Concept design in Singapore

Concept approved in Houston

Engineering design in Taiwan

Final assembly in Australia, China, India and Singapore

HP ProLiant ML150 server

12

13

AT Kearney – Offshore Location AttractivenessHigh Quality

Low Quality

People skillsAnd

Business environment

CostsLowHigh

Australia

Turkey Vietnam

Thailand Philippines

India

Czech Rep.

Singapore

Malaysia

ChinaBrazil

Canada

Ireland

14

100

-20

-10

-10

-5

-5

10

5

5

70

USA & European Costs

Labour saving

Capital saving (Depreciation)

Materials saving

Increased scale

Incentives

Additional logistics costs

Additional managment costs

Duties

Landed Costs

Costs advantages of offshore sourcing and manufacturing

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LinkageHow?

What is the role of a particular operation in the global network and how does it link with other operations and which degree of autonomy?

Source

Offshore

Lead

Outpost

Contributor

Server

Access to Low cost production

Access to skillsand knowledge

Proximity tomarket

Site Competence

• Global hub

• Supply global markets

• Product development

• Multi products improvement

• Process development`

• Process improvement

• Procurement and local

logistics

• Maintain process

• Production only

Different Roles for International Factories( Source : Ferdows)

High

Low

Source: Ferdows

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Evolution of Production Centres

• Global Hub• Supply Global Markets• Product Development• Multi Products Improvement• Process Development• Process Improvement• Procurement and LocalLogistics

• Maintain Process• Production only

Plant Competencies

Primary Strategic Reason

Access to lowProduction costs-

Access to Skills and knowledge

Proximity tomarket

OUTPOST

OFFSHORE

SERVER

SOURCE

LEAD

CONTRIBUTOR

Source: Ferdows

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18

Service Provider

Service User

Service User

Service User

Service User

Service Provider

Service User Foreign Affiliate

Service Provider

Model 1Direct acquisition of services: ie, On-line education,

Model 3:Detachment: the provider detach personnel to perform the service:Medical, legal, consulting, education…

Service Provider

Service User

Service User

Service Provider

DetachTravel

Model 2Consumption of Service abroad: ie, Medical Service, education

Model 4:Inward FDI: the provider set up an affiliate to provide service aboad:Banking, Consulting, Hotel, etc..

Model 5:Outsourcing: the user outsource a service to a foreign provider:Buying, BPO, ICT…

Model 6:Offshoring: the user sets-up an affiliate that provides the service abroad: R and D, BPO, ICT, Call centres…

COUNTRY A COUNTRY B

Internationalization of Services

Detach

Service Provider Foreign Affiliate

Service Provider Foreign Affiliate

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Degree of centralisation of procurement decisions

Degree of vertical integrationof the procurement function

OutsourcedProcurement

InternalProcurement

CentralisedProcurement

DecentralisedProcurement

Outsourced centralprocurement

Outsourced dispersedprocurement

Central internalprocurement

Dispersed internalprocurement

One global purchasingagent takes care ofsourcing needs

Ex:Li & Fung

Local purchasing agents take care of sourcing needs according to global specifications

Central purchasing department sources globally

Ex :major airlines

Local subsidiariessource locally according to

Global specifications

Ex :Mc Donald, Carrefour

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ProductDesign

Supplieridentification

Contractnegotiation

QualityControl

ConsolidationLogistics

• Solution selling

• Helps customer to manage its

risk

• Manages the whole supply

chain

CUSTOMERS

Retail chains forTextile, Toys

FASHION Products:• Cyclical• Volatile difficult to predict• Speed is important• Reliability of delivery• Quality and costs• Minimize risks (overstock,..)GLOBAL NETWORK of 3000 suppliers

Product Specialists (account managers)

OFFICE ACROSS THE WORLD

21

International Project ManagementPre Feasibility

Feasibility

Basic Engineering

DetailedEngineering

Tendering

Start-up

1

2

3

4

5

6

• Project definition• Basic economics• Basic market

forecast• Basic technology

definition• Geophysical

survey

• Business plan• Cash flows• Risk analysis

• Definition of technicalspecifications

• Drafting of specific specifications used for tendering

• Contract negotiations with suppliers

• Expetition• Reception

Construction

• Civil engineering

• Works on site

• Training• Tests• Production• Training

7

22

Construction Risk Cost overruns or construction

delays • Technology• Security• Penalties for Delays Supporting IndustriesQualified contractors and supporting services Logistics and Red tapeCustoms clearance and transport

Operating Risk Supply of inputs Market Throughput

(efficiency of operations)

Operating costs Disruption (e.g. strikes)

Force majeure: Environmental disasters,

Wars, Terrorism

Sovereign Risk

Expropriation

Direct and Creeping

Legal Lack of law enforcement

Convertibility and

transferability Foreign exchange

Price control Inflation

Risks in Projects

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Internet and Global Operations

Population Internet Users Internet Users Penetration Growth Users %

( 2011 Est.) Dec. 31, 2000 Latest Data (% Population) 2000-2011 of TableAfrica 1,037,524,058 4,514,400 118,609,620 11,40% 2,527.4 % 5,70%Asia 3,879,740,877 114,304,000 922,329,554 23,80% 706,90% 44,00%Europe 816,426,346 105,096,093 476,213,935 58,30% 353,10% 22,70%Middle East 216,258,843 3,284,800 68,553,666 31,70% 1,987.0 % 3,30%North America 347,394,870 108,096,800 272,066,000 78,30% 151,70% 13,00%Latin America / Carib. 597,283,165 18,068,919 215,939,400 36,20% 1,037.4 % 10,30%Oceania / Australia 35,426,995 7,620,480 21,293,830 60,10% 179,40% 1,00%

WORLD TOTAL 6,930,055,154 360,985,492 2,095,006,005 30,20% 480,40% 100,00%

World Regions

Source: www.internetworldstats.com

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Source:http://www.realiteq.com

25

Effects of the Internet on globalisation

Market globalisation

• Increases global commonality in customer needs and tastes (facilitates customized standardization and strengthens appeal of global brands• Enables global customers and global channels (facilitates global sourcing) • Supports global marketing (enhances global brands and standardises search)• Makes global products more rapidly visible

Cost reduction • Exploits differences in country costs and

facilitates competition from low-cost small-scale companies from emerging markets

• Enhances global sourcing • Speeds up global logistics • Reduces product development costs

Foster global competition • Makes competitive comparisons easier• Increases the number of potential global suppliers by reverse auctions• Puts new rivals in the global competitive arena

Weakens government barriers to open trade

• Makes it easier for customers to by-pass customs and tax levies • Puts pressure on government to harmonise standards and policies • Gives customers more incentives to lobby their governments to

align with more customers friendly regulations Source: Yip (2000).