Chapter 16

Global Production, Outsourcing &logistics

International Business
 Strategy, Production, and Logistics
Production is the activities involved in creating a

product
o 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
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
Relationship Between
Quality and Costs
 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
o Management should embrace the philosophy that mistakes,
defects, and poor quality materials are not acceptable
o Supervisors should work more with employees and provide them
with the tools they need to do the job
o Management should create an environment in which employees
will not fear reporting problems
o Work standards should not only be defined as numbers or quotas,
but should include some notion of quality
 Six Sigma
 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

 Where to Produce

For the firm contemplating international production a

number of factors must be considered

Country factors

Technological factors

Product factors
 Country Factors
Optimum economic, political, and cultural conditions

Externalities
o Skilled labor pools
o Supporting industries

Formal and informal trade barriers

Exchange rate
Technological Factors

Fixed costs
Minimum efficient scale
Flexible manufacturing
o Reduce setup times for complex equipment
o Increase machine utilization
o Improve quality control
Flexible machine cells to perform a variety of
operations
 Manufacturing Location
 It includes
 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
 Product Factors and
Location Strategies
 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
 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
 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
 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
 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

 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
 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
 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
Questions…