Chapter Sixteen

Global Production, Outsourcing, and Logistics

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Introduction

• As trade barriers fall and global markets develop, firms must confront a set of interrelated issues

- Where in the world 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 is it

better to outsource to vendors?- How should a globally dispersed supply chain be

managed?- Should the firm manage global logistics itself, or should it

outsource the management to enterprises that specialize in this activity?

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Strategy, Production, and Logistics

• Production is the activities involved in creating a product

- Can be both service and manufacturing activities

• Logistics is the activity that controls the transmission of physical materials through the value chain

• Production and logistics are closely linked since a firm’s ability to perform its production activities efficiently depends on a timely supply of high quality material inputs

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Strategy, Production, and Logistics

• Production and logistics functions have a number of important strategic objectives

- Lower costs- Increase product quality by eliminating defective products from both the

supply chain and the manufacturing process

• 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

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Relationship Between Quality and Costs

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Total Quality Management

• The total quality management (TQM) philosophy was developed by a number of American consultants such as W. Edwards Deming, Josephy 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

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Six Sigma

• Six Sigma is the modern successor to TQM- It is a statistically based philosophy that aims to reduce

defects, boost productivity, eliminate waste, and cut costs throughout a company

• Production process operating at Six Sigma are 99.99966 percent accurate

- Only 3.4 defects per million units

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Strategy, Production, and Logistics

• In addition to lowering costs and improving quality, two other objectives have particular importance

- Production and logistic functions must be able to accommodate demands for local responsiveness

- Production and logistics must be able to respond quickly to shifts in customer demand

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Where to Produce

• For the firm contemplating international production a number of factors must be considered

- Country factors- Technological factors- Product factors

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Country Factors

• Optimum economic, political, and cultural conditions• Externalities

- Skilled labor pools- Supporting industries

• Formal and informal trade barriers• Exchange rate

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Technological Factors

• Fixed costs• Minimum efficient scale• Flexible manufacturing

- Reduce setup times for complex equipment- Increase machine utilization - Improve quality control

• Flexible machine cells to perform a variety of operations

Mass customization

Low costProduct

customization

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Typical Unit Cost Curve

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Manufacturing Location

• Arguments for concentrating production to a few locations include

- Fixed costs are substantial- Minimum efficient scale is high- Flexible manufacturing technologies available

• Arguments to manufacture in all major markets the firm operates in include

- Fixed costs are low- Minimum efficient scale is low- Flexible manufacturing technologies unavailable- Trade barriers and transportation costs remain major impediments

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Product Factors and Location Strategies

• Two product features affect location decisions:- Value to weight ratio- Product serves universal needs

• Two basic strategies- Concentrating in a centralized location and serving the world

market - Decentralizing them in various regional or national locations

close to major markets when opposite conditions exist

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Centralized Location

• Factor costs have substantial impact• Low trade barriers• Externalities favor certain location• Stable exchange rates• High fixed costs, high minimum efficient scale

relative to global demand or flexible manufacturing technology

• Product’s value-to-weight ratio is high• Product serves universal needs

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Decentralized Location

• Factor costs do not have substantial impact• High trade barriers• Location externalities not important• Exchange rates volatile• Low fixed costs, low minimum efficient scale• Flexible manufacturing technology unavailable• Product’s value-to-weight ratio is low• Significant differences in consumer tastes and

preferences exist between nations

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Strategic Role of Foreign Factories

• Initially, established where labor costs low• Later, important centers for design and final assembly• Upward migration caused by pressures to:

- Improve cost structure- Customize product to meet customer demand- An increasing abundance of advanced factors of

production

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Make or Buy Decisions

• Should a firm make or buy the component parts that go into their final product?

• Advantages of making own components:- Lower costs if most efficient producer- Facilitating specialized investments- Proprietary product technology protection- Improved scheduling

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Advantages of Buy Versus Make

• Strategic flexibility in sourcing components• Lower firm’s cost structure• Offsets• Strategic alliances with suppliers give benefits of

vertical integration without the associated organizational problems

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Managing a Global Supply Chain

• Objective of materials management in managing a firm’s global supply chain

- Maintain lowest possible cost - In a way that best serves the customer’s needs

• Role of just-in time inventory- Economize on inventory holding costs- Speeds inventory turnover- Drawback: no buffer stock

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Role of Information Technology and the Internet

• Firms increasingly use electronic data interchange (EDI) to coordinate the flow of materials into manufacturing, through manufacturing, and out to customers

• EDI systems require computer links between a firm, its suppliers, and its shippers; these electronic links are then used

- To place orders with suppliers- To register parts leaving a supplier- To track them as they travel toward a manufacturing

plant- To register their arrival

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Role of Information Technology and the Internet

• EDI systems have resulted in- Suppliers, shippers, and the purchasing firm communicate with each

other with no time delay- Increased flexibility and responsiveness of the whole global supply

system- Paperwork between suppliers, shippers, and the purchasing firm is

eliminated

• Web-based systems are rapidly transforming the management of globally dispersed supply chains, allowing even small firms to achieve a much better balance between supply and demand

• Because the number of firms adopting these systems has increased, those that don’t may find themselves at a significant competitive disadvantage