Global Production, Outsourcing and Logistics Chapter 6

Introduction
Production:

The activities involved in creating a

product (Both goods & service).

Logistics:

The activity that controls the transmission of physical materials through the value chain, from procurement, into production and into distribution.

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INTRODUCTION

Introduction
Objective of production & logistics: Achieve lowest possible cost Increase quality by eliminating defect Establish competitive advantage through excellent customer service. Materials costs normally account for 50 70% of revenue. Small reduction have substantial effect on profitability.

The Relationship Between Quality and Costs

Increases Productivity Improves Performance Reliability Lowers Rework and Scrap Costs Lowers Warranty and Rework Costs

Lowers Manufacturing Costs

Increases Profits

Lowers Service Costs

Figure 16.1

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Production & Logistics: Strategic Objectives

2 objectives : Lower costs Dispersion & efficient global SC Increase product quality - Eliminate defects Tools: TQM- Management technique used to improve product quality. Mistakes, defects & poor quality materials are not acceptable & should be eliminated. Six Sigma Statistically based philosophy. Production process would be 99.99966 % 16-2 accurate. 3.4% defects per million unit only.

Just-in-Time
Pioneered by Japanese firms . JIT : To economize inventory holding costs by having materials arrive at mnfg. Plant just in time to enter production process (not before)

Power of Just-in-Time: No inventory holding costs. Improve quality Drawback: No buffer inventory. If not arrived in time, caused disruption to operation.

OTHER QUALITY MGMT TECHNICS

Issues In Global Manufacturing

3 questions: Where to manufacture? Make or Buy Decisions? How too coordinate globally dispersed supply chain?

Country Factors

Technological Factors

Where to Manufacture?

Product Factors

Manufacturing Location Strategies

Two strategies for locating manufacturing facilities:

Concentration. Decentralization.

Country Factors
Political economy. Culture. Relative factor costs. Global concentrations of activity. Skilled labor pools. Supporting industries. Formal and informal trade barriers. Transportation costs. Rules regarding FDI. Exchange rate movements.

Technological factors

Type of manufacturing technology used in production effect locations decisions.

1. Level of fixed costs, high @ low. High High set up cost. So, produce in one/few locations.

Low Economical to perform in several locations. More local responsiveness & 16-5 avoid risk of depending on one location.

Technological factors
2. Minimum efficient scale Centralize if high

3. Flexible manufacturing (Lean Production)

Manufacturing
Reduce

technologies that are design to:

setup times for equipment. Increase machine utilization through better scheduling. FM available one or few locations only

Product Factors
2 product features affect location decisions: Value to weight ratio. Effect transportation cost. Expensive product but not weight very much transport cost is low. Ex: Semiconductor. Pressure to produce in optimal location.
Product serves universal needs.

Less differences - low pressure for local responsiveness. Concentrating manufacturing at optimal locations.

Location Strategy and Manufacturing

Favored Manufactured Strategy Country Factors Concentrated Decentralized

Differences in political economy Substantial Differences in culture Substantial Differences in factor costs Substantial Trade barriers Few Exchange rates Stable
Technological Factors Fixed costs High Minimum efficient scale High Flexible manufacturing technology Available

Few Few Few Many Volatile

Low Low Not Available

Product Factors Value-to-weight ratio Serves universal needs

High Yes

Low No 16-9

Outsourcing production: Make-or-Buy Decisions Sourcing decisions : Whether firm should buy or make component parts that go into final product. Vertical Integration or outsourcing. International outsourcing is complicated, due to political volatility, exchange rate movements, costs factors etc.

Make-or-Buy Decisions
Advantages of Make :

Lower costs - Continue producing parts if they can do it efficiently. Facilitating specialized investments.

Proprietary product production technology protection Improve scheduling - Especially firm using JIT inventory systems.
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Make-or-Buy Decisions
Advantages of Buy :

Strategic flexibility Switch suppliers if circumstances dictate. Lower costs No costs of establishing parts production facilities. Concentrate on what firm can do best.

Offsets- Help capture more orders from country where parts are made.

Role of Information Technology

IT Important role in logistics.

Track component parts to assembly plant: Optimize production scheduling. Accelerate production, when necessary.
Creating linkages between a firm and its suppliers and shippers. Communicate without time delay. Minimizes paperwork.
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