28/09/2022 Lecture 5

Topics: Global Production and Supply Chain Management (Chapter 16 – 17)

Exporting:

Chosen by 90% of firms at first due to low commitment and to get to know the market

 Often first step towards establishing foreign production and not an end in itself

Advantages:

- International market bigger than domestic market

 Increase in revenue
- Lower unit cost due to higher volume

Reasons why (Small / Medium sized) firms are not exporting:

- Rather wait for opportunities to come to them instead of taking proactive steps due
to the risk involved with it
 Could miss on big opportunities or even go out of business if domestic market
goes down
 Larger firms usually scan foreign markets to see where opportunities are

- Unfamiliar with foreign market opportunities

- Ignorance of potential opportunities

 Intimidated by complexity and mechanics
 Differences in practices, language, culture, legal systems, currency

Failures of exporting that can lead to no future exporting:

- Poor market analysis

- Poor understanding of competitive conditions
- Failure to customize products to needs of foreign customers
- Lack of effective distribution program
- Poorly executed marketing
- Problems with securing financing
Solution for successful exporting:

COLLECTING INFORMATION through

- Trade associations

- Government agencies (providing businesses with intelligence & assistance for

attacking foreign markets)

- Commercial bank (f.e. helps inform small/medium sized businesses about global
opportunities)

USAGE OF EXPORT SERVICE PROVIDERS

- Freight forwarders (orchestrates transportation: smaller shipments into one big one)

- Export management company (services for firms that haven’t exported yet)

- Export trading companies (exports products for companies that contract with them)

- Export packaging companies (advises on appropriate design and materials for pack.)

- Customs brokers (Helps companies avoid pitfalls involved in customs regulations)

- Confirming houses (Represents foreign companies that want to buy your product)

- Export agents (Buying products directly from manufacturer)

- Piggyback marketing (One firm distributes another firm’s products)

HIRING EXPERIENCED EXPORT CONSULTANT

- Can identify opportunities & navigate the paperwork, regulations

CONCENTRATE ON ONE OR A HANDFUL OF MARKET (SMALLER SCALE)

- Consider time and managerial commitment

 Needs to build strong and enduring relationships with local distributors and
customers

HIRE LOCAL PERSONNEL

- Helps establishing firm in foreign market

PROACTIVE STEPS ABOUT SEEKING EXPORT OPPORTUNITIES

RETAIN THE OPTION OF LOCAL PRODUCTION

Export and Import Financing

Lack of trust is a result of distance between the two parties due to space, language, and
culture

 Using a third party trusted by both

Options of using a third party to execute exporting:

1. Letter of credit:

Bank will pay a specified sum of money to a beneficiary, normally the exporter, on
presentation of particular, specified documents

Draft / Bill of exchange:

Instrument to effect payment:
Order written by exporter instructing an importer to pay a specified amount of
money at a specified time

o Slight draft: Payable on presentation to drawee

o Time draft: Allows for delay in payment (usually 30, 60, 90 or 120 days)

Bill of Lading:
Issued to the exporter by the common carrier transporting the product

 3 purposes: a receipt, a contract and a document of title

2. Export Insurance

Exporters prefer letter of credit from importer as it is more beneficial but:

Might lose business due to other company not requiring a letter of credit

 When importer has strong bargaining power: Export credit insurance

Insurance pays major portion of loss in case customer defaults to pay

 More expensive for exporter as they have to pay insurance a fee

 Less beneficial because in case importer doesn’t pay, only get portion of loss and
not the whole money
Alternative option: Countertrade

Trade goods and services for other goods and services when they can’t be traded for money

Attractive option when conventional means of payment are difficult, costly or non-existent
 20 – 25% of world trade

- Nonconvertibility -> Countertrade

Types of Countertrade:

1. Barter

Direct exchange of goods/services between 2 parties without a cash transaction

 Most restrictive
 Usually used for one-time-only deals

2. Counterpurchase

Reciprocal buying agreement:

Firm agrees to purchase a certain amount of materials back from a country to which
a sale is made

3. Offset

Similar to counterpurchase: One party agrees to purchase goods/services with a

specified percentage of the proceeds from the original sale

Different to counterpurchase: can purchase goods from any firm in the country

 Greater flexibility

4. Switch Trading

Use of specialized third-party trading house

 Buys the firm’s counterpurchase credits & sells them to another firm that can
better use them

5. Compensation or Buybacks

Firm builds a plant in a country

Certain percentage of the factory’s output as partial payment for the contract
Advantages of Countertrade:

- Great for developing countries that have issue with raising the foreign exchange
- Many countries prefer countertrade to cash deals
- Willingness to enter into countertrade = marketing weapon to win new orders when
high competition

Disadvantages of Countertrade:

- Firms would prefer to be paid in hard currency

- Exchange of unusable or poor-quality products that firm can’t make use of
 Expensive and time-consuming

 Countertrade more attractive to large firms with worldwide network

 Avoid if smaller/medium size firms due to lack of worldwide network

Supply Chain Management

International firms must answer 5 interrelated questions:

1. Which location?
2. Which long-term strategy?
3. Own or outsource production?
4. How should supply chain be managed?
5. Manage global supply chain internally or outsourcing it?

Concepts:

Production

Activities involved in creating a product / service

Supply Chain Management

The integration and coordination of logistics, purchasing, operations, and market channel
activities from raw material to end-customer

Production & Supply Chain Management functions

- Lower the costs of value creation

- Add value by increasing quality / improving reliability
(through process-based quality standards, eliminating defective raw material,
component parts and products from manufacturing process and the supply chain)
  Use Six Sigma quality improvement methodology to increase reliability of
product offering
o Reduces defects, boosts productivity, eliminates waste and cuts costs
throughout the company

 Growth of international Standards -> Importance of product quality

 Need to quickly adapt to shifts in customer demand – gain advantage

 Improved quality control

Where to produce?

Firms should locate production so that production and other supply chain functions can be
locally responsive and respond quickly to shifts in customer demand.

Firms should consider:

1. Country factors

Political and economic systems, culture, and relative factor costs differ from country
to country

- Location economies
- Formal and informal trade barriers
- Transportation costs
- Rules and regulations
- Exchange rate movements
2. Technological factors

Type of technology a firm uses to perform specific manufacturing activities

- The level of fixed Costs

o If high -> produce in single / few location/s
o If low -> multiple production locations (accommodates demands for local
responsiveness better)

- The minimum efficient scale of the firm

o If large relative to demand -> Choose centralized production in single location
o If low relative to demand -> Respond to local market demands in multiple
locations

- The flexibility of the manufacturing technology

o Unit costs vs. product variety
o Mass customization through flexible manufacturing technology (lean
production)
 Produce wider variety of end products at lower unit cost

3. Product Factors

2 factors impact location decisions

- Product’s value-to-weight ratio (Influence on transportation costs)

o High value-to-weight ratio -> Produce the product in single location & export
to other parts of the world as transportation costs haven’t got big influence
o Low value-to-weight ratio -> Produce product in multiple locations across the
world
 High ratio means high value of product but low in weight in comparison to
price (f.e. phone or other electronics, pharmaceuticals)

- Whether product serves universal needs

When product serves universal needs, less need for local responsiveness
 Production at an optimal location
What should a firm do?

 Technological and product factors could point towards centralized production

whereas formal and informal trade barriers could point towards a decentralized
production

Strategic Roles for Production Facilities:

1. Offshore factory:

Producing component parts or finished goods at lower cost than producing them at
home or any other market

2. Source factory:

Driving down costs in the global supply chain – Managers play bigger role than in
offshore factory

3. Server factory

Linked into the global supply chain to supply specific country or regional markets
around the globe – to overcome barriers (f.e. tariff barriers, reduce taxes)
 4. Contributor factory

Serving a specific country but it has responsibilities for product & process
engineering and development unlike server factory
 Stand alone

5. Outpost factory

Intelligence-gathering unit: usually placed near a competitor’s headquarter or near

most demanding customers
 Choosing countries based on countries’ strategic importance

6. Lead factory

Creating new processes, products and technologies that can be used throughout the
global firm
 Highly skilled employees needed

Hidden costs of foreign locations:

- High employee turnover

- Shoddy workmanship
- Poor product quality
- Low productivity

 If foreign country has different values than home-country firms, the employee
turnover can be higher which makes development projects and the general
increase in productivity very difficult
Make-or-Buy Decisions:

Operationally favouring a Make Decision - Insourcing Operationally favouring a Buy-Decision - Outsourcing

2 main factors:

1. Cost
2. Production Capacity

 Other factors also contribute to making the decision

Global Supply Chain Functions

Logistics and purchasing are critical functions in ensuring that materials are ordered and
delivered and that an appropriate level of inventory is managed.

Global Logistics

Logistics is the part of the supply chain that plans, implements, and controls the effective
flows and inventory of raw material, component parts, and products used in manufacturing

Core competencies performed in logistics:

1. Global distribution center management

o Allow delivery to worldwide wholesalers or retailers or directly to customers
o Store product & provide location for customization - Adding value to product
 Foundation of global supply network

2. Inventory management
o Decision-making process regarding raw materials, component parts and
finished goods

3. Packaging and materials handling

o Primary packaging (Holds product itself)
o Secondary packaging (Containing several primary packages)
o Transit packaging
 Perform, Protect, Inform (in regards to packaging and product inside)

4. Transportation (90% via large ships…)

o Movement of raw materials, component parts and finished goods
o Largest percentage of budget considering distance, transport mode, size of
load, load characteristics and oil prices

5. Reverse logistics
o Logistics to the point of consumption to origin
 Get value back through f.e. recycling the product – also increases brand
reputation
 Recapturing value or proper disposal
 Global Purchasing

Purchasing is the part of the supply chain that involves worldwide buying of raw materials,
component parts, and products used in manufacturing of the company’s products and
services. E.g. outsourcing

Level 1:
Domestic activities only
Level 2:
International
purchasing as needed
Level 3:
International

Prodductsnkdnld
purchasing as strategy
Level 4:
Global purchasing
that’s integrated across
worldwide locations
Level 5:
Global purchasing
that’s integrated across
worldwide locations
and functional groups
Managing a Global Supply Chain

Lowering costs instead of increasing sales -> Big impact on profitability

- Role of Just-In-Time Inventory

o Materials arrive just in time for production – Low inventory costs – no buffer
 Can’t react quickly to demand shifts
o Improve product quality as you can spot defects straight away and fix them
before more faulty products are being produced
o Good to have multiple suppliers to not just rely on one due to no buffer

- Role of Information technology

o Web and cloud-based information systems – coordination of flow of
materials into manufacturing, through manufacturing and out to customers

- Coordination
o Decision making involving joint consideration
 Responsiveness, variance reduction, inventory reduction, shipment
consolidation, quality, and life-cycle support

- Interorganizational relationships (trust/commitment)

o Relationship classification in upstream and downstream supply chain
Definitions:

Upstream Global Supply Chain Includes all of organization and

resources that are involved from raw
materials to production facility

Downstream Global Supply Chain Includes all of organization that are

Involved from production facility to
End-customer

Plant Consists of physical capital like building

And equipment at location where it is
Used to produce goods
= Factory