International

Business

What are we going

xin chào to explore today?

11/04/2021 1
 Don’t be an iSlave

11/04/2021 2
11/04/2021
 Thinking
is free.

Do more
of it.
11/04/2021 4
 66% of adult smartphone owners in
a study reported 
suffering from ‘nomophobia’, the
fear of losing or being without their
phones at any given time.

A study found that 

just seeing the Facebook logo can
spark cravings
 that are difficult to ignore

11/04/2021 5
 According to research from
RescueTime, people generally
spend an average of 3 hours and
15 minutes on
their phones every day, with
the top 20% of smartphone users
spending upwards of 4 hours &
30 minutes. Aug 21, 2019

11/04/2021 6
 I fear the day that technology
will surpass our human
interaction. The world will
have a generation of …...
addicts

11/04/2021 7
11/04/2021 8
  
1: Introduction to International Business—Globalization
 
2: Communication, culture, ethics, CSR and sustainability
 
3: National (Historical) Political, Economic and Legal Systems, trade
theories and patterns of international trade
 
4: International trade and government Policies – assessing markets,
performance and trade instruments
 
5: Industrial types, analysis of business and risk, organizational structures &
business planning
 
6: Evaluation of countries and business opportunities – what, why and how –
Risk & Reward factors and resources
 
7: Market entry, feasibility and business strategies: value and reaction, value
chains configuration and coordination
 
8: Foreign Exchange, debt and equity, inflation, trade practices, international
monetary systems, accounts, tax and financial management
 
9: Global Supply Chain Management (strategic objectives,
logistics & sourcing) and …
Global Production (location, technology & production)
10: Global marketing: Product, price, promotion and configurations of the
mix, distribution and branding.
 
11: Management, leadership, HRM and diversity

 
11/04/2021 9
11/04/2021 10
From Yahoo – Finance 25 May 2021
California-based Innova, the world’s biggest rapid
COVID-19 test maker, is setting up a factory in Wales
(UK) that will produce millions of tests a day.
Innova CEO said that the UK was a key market for the
company in which it is making large investments.

Innova, owned by private equity firm Pasaca Capital,

has supplied the UK with more than 1 billion tests
produced in China, as part of contracts worth more
than £3bn ($4bn).

The UK, Innova’s biggest market for lateral flow devices

(LFD), has spent more than £100m (x30 000 VD)
transporting these and other tests from China. 
11/04/2021 11
 Supply Chain Management &
Global Production Factors

• Improving performance

• Global logistics

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Supply chain management is the integration and
coordination of logistics, purchasing, operations and
marketing activities from raw (base) materials to
final customers.
Which company (MNE) has the best supply
chain?

• What does this mean?

• What characteristics and functions are

required to be top?
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 According to Gartner Global Supply Chain Top 25, Apple
has the best worldwide supply chains, its supply chains.

‘ best leadership in applying demand-driven principles to

drive business results … it consistently brings both
operational and innovation excellence … in some of the
most competitive markets in the world.’

• What does this mean?

• What characteristics and functions are

required to be top?
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 Where should production be, local or global?

What are the long- short-term goals?

Should the company own or out-source production?

Should the supply chain be decentralised / centralised

(global integration Vs local responsiveness)?

How do we balance lowering cost of value creation and

adding value by serving customers requirements?

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 Basic facts and definitions of terminology
• Production
Both manufacturing (including assembly) and services

• Purchasing and logistics are crucial functions

Purchasing is part of the supply chain that involves purchasing

global raw materials, components, parts used in production and
services.

Logistics is the planning, implementation and control of effective

flows and inventory of raw material, components and products
used in production.

• Supply chain management is ……………….

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Basic facts and definitions of terminology

Supply chain management is the

integration and coordination of
logistics, purchasing, operations and
marketing activities from raw (base)
materials to final customers

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 Why is it important? Fill in the
What are the strategic objectives? missing words

• Ensure total cost of production from raw material to end user is

• Use production sites where costs are

• Maximise purchasing operations (enhance order fulfillment, delivery, supplier
selection)

• Efficient operations (best location for production focused on production priorities

and high quality outcomes of the supply chain)

• Increase product/service

• of defective parts and products

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 Why is it important?
What are the strategic objectives?
• Ensure total cost of production from raw material to end user is LOW
LO
• Use production sites where costs are W
• Maximise purchasing operations (enhance order fulfillment, delivery, supplier
selection)

• Efficient operations (best location for production focused on production priorities

and high quality outcomes of the supply chain)

• Increase product/service QUALITY

•
ELIMINAT
E of defective parts and products

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 Why is it important?
What are the strategic objectives?
• Ensure total cost of production from raw material to end user is as
low as possible

• Use production sites where costs are lowest, incl. coordination and
integration of supply chains (both inside the company and via suppliers
• Maximise purchasing operations (enhance order fulfillment, delivery, supplier
selection)

• Efficient operations (best location for production focused on production priorities

and high quality outcomes of the supply chain)

• Increase product/service quality (via process-based quality standards)

• Eliminate (lowest amount) defective parts and products – quality means
reliability. This has to be in upstream (suppliers) and downstream (organisations –
wholesale & retail )
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 To improve performance need to focus on:

Quality
Change
Employees

TQM & Kaizen

PDCA

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 Quality & TQM

Change

Employees &
Kaizen

PDCA

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 Quality
What is so important about quality?
Good quality reduces costs of the value chain.
How?
• Time wasted producing good quality means productivity is better
and unit cost is lower

• Lower rework and scrap costs (defective items)

• Warranty / guarantee costs and time fixing defect are reduced

• Total production and after-sales service costs are reduced

TQM Six Sigma (Reduce defects , Boost

productivity, Eliminate waste, Cut costs)
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 TQM
Total Quality Management:
Is the continual process of detecting and reducing
or eliminating errors in manufacturing,
streamlining supply chain management, improving
the customer experience, and ensuring that
employees are up to speed with training.

Six Sigma (Reduce defects ,

Boost productivity, Eliminate
waste, Cut costs)

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 Quality & TQM

Change

Employees &
Kaizen

PDCA

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 Change

• Production & supply chains must be

responsive to local demands

• Response time is fast to deal with the

demands

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 Improve performance reliability
Increase
productivity

Increase in profits
Production
costs lower
Lower scrap &
rework costs
Service costs
lower
Reduce
guarantee costs

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 Quality & TQM

Change

Employees &
Kaizen

PDCA

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 Employees - Kaizen
Being defect free, increased productivity is not just about machines
and processes but people.

What is Kaizen?
Kaizen (Continuous Improvement) is a strategy where employees
at all levels of a company work together proactively to achieve
regular, incremental improvements to the manufacturing process.

All factors (incl. talent) are combined within a company to create

a dynamic for improvement.

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 Quality & TQM

Change

Employees &
Kaizen

PDCA

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PDCA cycle (Plan, Do, Check, Act)

Set goals and provide any necessary background information.

• Review the current state and develop a plan for improvements.
• Implement improvements.
• Review and fix what doesn’t work.
• Report results and determine any follow-up items.

PDCA critical analysis helps make improvements:

• Plan (develop a hypothesis)

• Do (run test)

• Check (evaluate results)

• Act (refine your test; then start a new cycle)

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 TQM and ISO

The focus on Total Quality Management (Toyota) is

▪ Customer satisfaction
▪ Continuous improvement
▪ Employee involvement

Company specific standards

Industry specific standards

Internationalistaion of standards
ISO 9000 (quality control standard)
ISO 14000 (standard on environment)
ISO 26000

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 Supply chain management
and logistics

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 Global Supply
Integrating Management

Customer
Supply Operations
relations
management management
management
Innovating &
impacting
Designing and Downstream
Upstream
implementing the process
process
core

Logistics & Quality

Improving
11/04/2021
Management
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Supply chain functions

1. Global logistics
2. Global Sourcing, Purchasing and procurement
3. Global distribution (i.e. marketing EBBA 10)

Global Logistics
1) Distribution centre management (warehousing)
2) Inventory management
3) Packaging and materials handling
4) Transportation
5) Reverse logistics

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To improve Global logistics we need to focus on:

1. Warehousing

2. Inventory management

3. Packaging

4. Transportation

5. Reverse logistics

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 Warehousing

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 Warehousing

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 Warehousing

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Global distribution centre (warehouse)

• A facility that was just for storage, but now allows for
customisation of products for delivery worldwide to wholesalers,
retailers or to customers.

• It adds value especially when one considers the order-processing

part of order-fulfilment.

• Can be single location or matrix /satellite warehousing (varied

products + added value customisation).

• Located strategically (considering total labour and transport

costs).

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 Taobao Villages
The term refers to village-
based online business clusters
withannual e-commerce
transactions over U$1.55
million.

There are now 780 so-called

"Taobao villages" in China, a
268 percent increase over the
past year, according to the
latest research.

780 sites played host to more

than 200,000 active online
stores. It indicates how fast
the Internet is transforming
the rural economy

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Where to have
interconnected
warehousing?

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 Inventory Management

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Inventory management
Includes: raw materials, work-in-progress and finished goods

• Decisions to make:
• How much inventory to hold
• Where to locate it in supply chain

Assets in inventory - statistics

Global companies have a total of 14-15% of their assets in
inventory (32% in raw material, 18 % in Work-in-progress & 50% in
finished products)

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 Parts for cars in a warehouse

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 Packaging

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Packaging
3 kinds: 1. Primary
2. Secondary
3. Transit

• Primary – contain the product itself (what the end-consumer

receives
• Secondary – (case lot packaging) contains several similar items
• 11/04/2021
TransitProvox– Training
collection of cases of on a pallet or container
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 Functions of packaging A. Primary , B. Protect, C. Inform

• A. Ability of product to handle being transported, stored between

points (nodes, incl. transhipment points in a supply chain)

• B. Ability of product to contain right product, be preserved as

new/fresh and provide, security and safety for it)for a particular
time

• C. Provide information about product how to use it, guarantee,

satisfy regulations)

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Functions of packaging A. Primary , B. Protect, C. Inform

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Functions of packaging C. Inform

Way bill

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 Transportation and Logistics
(forward and reverse)

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Transportation
The movement of raw materials, components or finished goods through the
supply chain. How a company (in)directly gets raw materials to production
centres and finally delivers to customers. Representing largest % of supply chain
budget.

Primary drivers of transportation rates and costs are:

▪ Distance
▪ Mode of transport (air, sea, land (train, vehicle))
▪ Size of load
▪ Fuel costs

+ Economies of scale

+ Characteristics of shipment influence transportation type

(thus rates). Factors include: density/volume, value,
perishability, potential for damage
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Functions of packaging A. Primary , B. Protect, C. Inform

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 Forward Logistics

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 Forward Logistics

Modules
Produce Subassembly Manufacture
Part Part
Assembly
Customer

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 C
C

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 Reverse Logistics

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 Forward Logistics

Produce Part
Part Modules Assembly Manufacture/
Subassembly Remake
Customer

Raw
Material

Produce Part Remake Repair Reuse

Reverse Logistics
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 Returns

The challenge for retailers and vendors is to

process returns at a proficiency level that allows
quick, efficient and cost-effective collection and
return of merchandise.

Customer requirements facilitate demand for a

high standard of service that includes accuracy
and timeliness.

It’s the logistic company's responsibility to shorten

the link from return origination to the time of
resell.
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 Reverse Logistics
When a manufacturer's product normally moves
through the supply chain network, it is to reach
the distributor or customer.

Any process or management after the delivery of

the product involves reverse logistics. If the
product is defective, the customer would return
the product

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Reverse Logistics

This is the process of planning, implementing and controlling

efficient, cost-effective flow of raw material, in-process inventory,
finished goods and all connected information from consumption to
origin with the purpose of recapturing value, incl. remanufacturing
and refurbishing activities, or proper disposal.

Optimise after-market activity or make it as efficient as possible ftom

an environmental resource perspective or saving money – adding
value or reducing costs

It is vital when considering the cost or product returns (3.8% in lost

profit in USA 2013)

On average, manufacturers spend 9-14% of their sales revenue on

returns.
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So, the best solution to all this , when you think about
costs??

Don’t make mistakes and have

good quality products or services,
so the customer does not return
the purchased item/service

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 https://finance.yahoo.com/news/reverselogix-raises-20-
million-cambridge-130800000.html

February 18, 2021·4 min read

BURLINGAME, Calif., Feb. 18, 2021 /PRNewswire/ -- ReverseLogix Corp., the
leading cloud-based platform to automate reverse logistics for e-commerce
brands, third-party logistics providers and manufacturers, today announced $20
million in its first round of external funding. The new capital will enhance the
company's capabilities and resources to deliver a turn-key, modular SaaS
platform to manage, plan and execute the complex end-to-end reverse logistics
process for the world's largest e-commerce-focused companies

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 Forward Logistics

Produce Part
Part Assembly Manufacture/
Modules
Remake Customer
Subassembly

Raw
Material

Produce Part Remake Repair Reuse

Reverse Logistics
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Supply chain functions

1. Global logistics

2. Global Sourcing, Purchasing and procurement

3. Global distribution (i.e. marketing EBBA 10)

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 Let’s now look at:

▪ Global Sourcing

▪ Purchasing and Procurement

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 Sourcing
The term ‘sourcing’ is used in a variety of ways as we know from a
previous lecture.
Terminology:

Off-shoring Relocation (primary value) to another country – either within

the company or to another company (e.g. Clarks)

Re-shoring Opposite of off-shoring (bringing back to the original site, e.g.

Clarks)

Home-shoring Rely on home-based employees to handle value that had previously

been handled by overseas centres (e.g. tele-centres)

On-shoring Staying at home, but in a less costly location compared with above.

Near-shoring Like off-shoring, but the transfer of value is to a closer (neighbour)

country not so far away.
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Why source globally?
1. To reduce costs through cheaper labour, more relaxed laws/rules,
lower land and facilities costs

2. Improve quality

3. Increase exposure to worldwide technology

4. Improve the delivery of supplies or strengthen reliability by having

more than one supplier (i.e. do not just rely on home producers)

5. Gain access to materials that are abroad (i.e. technical specification

or product capability)

6. Establish presence in overseas market

7. React to competitors practices

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Outsourcing Examples & Challenges

Toyota
Buying parts from local suppliers and Denso

Apple – Foxconn
Off-shoring can mean outsourcing parts, components and even
manufacturing to another company in another country

Challenges
Quality, Safety , exploitation of child labour and poor labour
practice
▪ Union Carbide - Bhopal (1984) – 3878 deaths
▪ Bangladesh factory collapse (2013) – >100- deaths (affect on GAP, ZARA & Mango)

▪ Amazon- Foxconn - Schoolchildren in China work overnight to produce Amazon

Alexa devices (8 Aug, 2019) - Children as young as 16 recruited by Amazon supplier
Foxconn work gruelling and illegal hours.

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 Purchasing (procurement)

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 Purchasing agent and integrated buying
The purchasing agent is the link between a company’s outsourcing decision and its
supplier relationships. The scope of responsibilities evolve and purchasing goes
through four phases before becoming “global”:

1. Domestic purchasing only

2. Foreign buying based on need

3. Foreign buying as part of procurement strategy

4. Integration of global procurement strategy

Example of integrated buying

Benefits from integrated purchasing, e.g. Vattenfall Shared Service Centre
from 46000 suppliers to 3200 and standardized products/software
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 Power Company

Sales, District heat by Country

make country Z
ting,
Production Distribution
Country X Country X
etc .

Z Y Country
X X
Y

Shared Service Centre

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Consulting for NEU - EBBA 78
Service organisation in a 75 000 employee company
Head of Vattenfall
Services
Jan Bardell

Human Resources
Finance

Magnus Hasselgren Ingrid Ruppert

Market &
Support Systems
Communication
Magnus Hasselgren Berndt Larsson

Generation Distribution Heat & Industry

Services Services Services
Ulrika Wiberg Fredrik Holmgren Per Thorin

Employees 374 1176 357

Turnover (MSEK 518 2000 793
External business: 10 % 25 % 45%

79 | Vattenfall Services Nordic | Jan Bardell | 11/04/2021

Decentralized and Centralized Purchasing – decision making

Should a MNE allow each subsidiary to make every purchasing

decision, or should they centralize all or some of them?

Benefits of decentralized purchasing:

1. Increased production-facility control over purchases

2. Better and faster responsiveness to facility needs (at local

level)

3. More effective use of local suppliers.

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80
 Benefits of centralization:

1. Increased leverage with suppliers

2. Better prices

3. Eliminate administrative duplication

4. Allow purchasers to develop specialized knowledge in

purchasing techniques

5. Reduce the number of orders processed

6. Enable purchasing agents to build solid supplier

relationships
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 Managing global supply chains

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 Managing global supply chains
The potential for reduced costs through better supply chain management is huge.
Material costs account for about 50-70% of revenue in a typical manufacturer.
There are four main areas we need to look at re; management of global supply
chains

1. Role of JIT inventory

2. Role of ICT i l
eta
s e
3. Coordination and control in Global Supply
is d
t ho
Chains (GSC) at k
o
e a lo
a
4. Cross-organisational
h vrelationships
t ’s
Le
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 JIT

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84
Role of JIT (Just-in-time) Inventory
Basically, reduce inventory (holding) costs by getting materials (items) just-in-time to
enter the manufacturing process, not before (so there is no waiting).

• Costs are saved as there is little inventory and it moves quickly (fast
turnover) e.g. reduced warehouse space

• Working capital is reduced (because it is not financing inventory)

• Capital can be used elsewhere

• Company has less unsold inventory (that is written off against earnings)

• Company reduces need to not lower price to sell items left in stock
(inventory)

• Product quality improves (items not coming from warehouse) as

defective input are spotted quickly (problem traced and fixed before
more defective parts are used) 85
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Risks of JIT

• There is no room for error – Buffer stock, as a result of increase

demand, disruption in suppliers (late truck, blockage at docks, etc.)

Risk reduction
• Have more suppliers in different locations

Difference between
service and maintenance
and break down

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 Role of ICT

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87
Role of ICT
ICT (information communication technology – webs and clouds play a
crucial role in modern materials management. With a comprehensive
supply-chain strategy and strong ICT support, a company can be
quicker and more efficient in production, proficient in inventory
management, effective with supplier communication and customer
satisfaction.
Accurately locating parts and tracking helps optimize production.

• Software programmes (SAP, Oracle, PeopleSoft …)

• Electronic data interchange (EDI) is a way to link suppliers, manufacturers, customers
and intermediaries.
• Enterprise resource planning (ERP) – links and integrates everything in the back office
• Material requirements planning (MRP)
• Radio frequency ID (RFID) - labels a product electronically and stores and transmits
information on the product’s origin, destination, and quantity.
• Blockchain technology that records transactions to a digital ledger where they cannot
be changed or altered.

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Software programmes (SAP, Oracle, PeopleSoft …)

• Collaborative planning, forecasting and replenishing (CPRF)

• Vendor management of inventory (VMI)

• Warehouse management system (WMS)

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 Coordination and control in
global supply chains

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Coordination and control in global supplies chains

To have integrated and operational coordination and gain critical

advantage, in GSCs, it is vital to gauge where the leverage points are.
Control is essential as it ensures that configured and collaborated
coordination is carried out.

Strategy and operations must be aligned.

6 factors need to be considered:

1. Inventory reduction and efficiency/cost—controlling asset

commitment and reduction of operational costs

2. Dependability—degree of trust in a company’s products, its

delivery, and its price promises

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Coordination and control in global supplies chains

4. Quality—performance reliability, good service, speed of delivery

and dependable product service/maintenance with zero defects

5. Innovation —ability to develop new products and ideas

6. Flexibility—ability of the production process to make a variety of

products and be able to adjust the volume of output

7. Responsiveness – satisfy customers’ requirements across the GSC

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Some observations – coordination in action

Off-shoring is a way to provide efficiency/cost. But, Dependability needs has

led some companies to locate plants closer to customers rather than only in low-
wage areas, e.g. Dell.

Quality is a major challenge when setting up off-shore and requires significant

work.

Flexibility strategies may mean, due to a need for responsiveness or flexibility,

national market differences, regional manufacturing is best serving local markets.

As a company’s competitive strategies change, so do its manufacturing strategies,

and what was best before, i.e. vertically integrated (a company owns the entire
supplier network or most of it) is no longer the right thing.

Industrial clusters can be an alternative way to reduce transportation and

transaction costs. Japanese keiretsus are groups of independent companies that
work together to manage the flow of goods and services along the entire value
chain. 93
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 Relationships between
vendors & suppliers

Global Supply Chains

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 Shared decision making in Global Supply Chains (GSCs)

Critical joint considerations by GSC members helps resolve conflicts

among GSC members and fosters a culture of coordination and
integration.

Operational objectives need to analysed and addressed in connection

with the ones already mentioned:

• Variance reduction – integrated control systems to eliminate

disruptions

• Shipment consolidation – using programmes to combine small

shipments, while providing timely and consolidated movement

• Life cycle support – integrating reverse logistics activities, incl.

recycling, product recall and disposal of products as required
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How can we analyse the relationships and tasks
involved in the GSC?

Value is, as we know, is a function of cost (money and

non-money resources) given in return for quality
(products, services, information) received!

Greater value is achieved if the quality is greater while the cost

remains the same or is reduced, OR, when the cost is reduced and the
quality remains the same.

So how much effort needs to be put in to

Upstream: suppliers, vendors (middle suppliers), partners?
Downstream: buyers, customers and clients?
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Inter-organisation relationships and connections in GSC
(global supply chain)

2 crucial elements: 1) Trust

2) Commitment
1 crucial fact: Not all relationships in the GSC are equal
To get
raw
material, A B C
parts C C Case 1
C
Supplier V Vendor V Partner V Upstream
V V V case
(inbound
relationship)

Degree of coordination,
Low coordination High coordination integration, relationship
Low integration High integration Vs. Transaction focus a
firm should adopt in
Task (Transactional (Relationship partnering with other
entities in the GSC
Focused)
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Focused) 97
 Inter-organisation relationships and
connections in GSC (global supply
chain)

The producer’s perspective

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Case 1
Producer’s perspective
Situation (from the producer’s perspective)

Supplier
Company A uses suppliers to get items : raw material , parts, etc.
through transactional relationships (which can easily change).

Vendor
Company B uses vendors to get items : raw material , parts, etc. ,
based on experience and performance.

Partner
Company C uses partners to get items : raw material , parts, etc.,
based on trust and commitment.
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 To get Case 2
raw Downstream
material,
case
parts
Outbound
X Buyer Y Client X Customer relationship)

Degree of
coordination,
integration,
Low coordination High coordination relationship Vs.
Low integration High integration Transaction focus a
firm should adopt in
Task (Transactional Focused) Relationship Focused partnering with
other entities in the
GSC

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 Case 2
Seller’s perspective
– Situation (from the seller’s perspective)

Company X sells products and parts to buyer and maintains a

relationship based on transactional relationships (which can
easily change).

Company Y sells products and parts to customers and

maintains a relationship based on experience and
performance.

Company Z sells products and parts to clients and maintains a

relationship based on trust and commitment.

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Emphasising relationships in GSC

What benefits can be expected and what ate the points of distinction?

Value is, as we know, is a function of cost (money and non-money

resources) given in return for quality (products, services, information)
received!

How much effort should a global company allocate to the different

interactions (categories)?

Upstream: 20% effort to supplier, 30% to vendor, 50% to partner

Downstream : 20% effort to buyer, 30% to client, 50% to customer

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 Manufacturing considerations

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 Manufacturing considerations – Where to produce
Where should a company locate its production facilities, i.e. where
is the best place to minimize costs and improve product quality?

Factors to take into consideration

1. Location (country factors)

2. Technology factors

3. Production factors

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105
 Location (country factors)

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106
Location
The essential question is where to locate production facilities?

5 main choices are:

Centralized Manufacturing— Selling standardised, lower-

priced products from home-country facilities (production –
export strategy). Can also work with more expensive items
where economies of scale are important and there is little
need for localisation / customisation.

Regional Manufacturing —These facilities serve customers

within a specific region, e.g. Dell computers in S America,
manufactured in Brazil.

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Location
The essential question is where to locate production facilities?

Multi-domestic Manufacturing — Market expansion in individual

countries where demand makes it worthwhile to manufacture close to
the customers’ (local) needs with country-specific plants/facilities
and/or avoidance trade barriers.

Off-shore manufacturing – when a company decides to manufacture

outside its home market.

Off-shore locations may be attractive because of low labour costs, the

availability of cheap materials and components, and proximity to
markets.

Rationalisation………………..

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Rationalisation

Example 1, when a company specializes in

production of components and assembly of end
items.
Germany
Manufacturing specific products in certain plants can UK
make it more viable to send all production to a Italy
centralised warehouse. In Europe one can find these India
‘hub’ warehouses dotted around the continent. Dubai
USA
Vietnam
It makes it more feasible to distribute to all retailers /
users form these central hubs (Maico).

Example 2, Rationalisation is also when

centralised hubs are used by mailing/distribution
companies for ease of distribution, e.g. DHL.

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Location Factors

What are the main factors that need to be considered for deciding location:

Country factors – PES EL analysis T

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 Technology factors

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111
Technology

Do constraints in technology mean we can or cannot manufacture in

different locations?

Factors influencing the decision:

1. Level of fixed costs

2. Minimum efficient scale

3. Flexibility of manufacturing & customisation

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 1. Level of fixed costs

Establishing different plants in different locations is

expensive, e.g. semiconductors. But may be cheap enough
to create advantages:

a) Closer to local market and respond quickly

b) Company not dependent on one plant

c) Hedge against currency fluctuations

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2. Minimum efficient scale (MES)
When economies of scale lose their advantage.

When further increases in output realise little reduction

in unit costs., i.e. economy of scale is exhausted
(minimum efficient scale).

It depends on the level of global demand.

When MES is relatively low compared with global

demand it may be best to manufacture in different
locations, e.g. global demand for laptops is 35m. /
annum and an efficient plant is 250 000 (when it
reaches MES), then it is best to have alternative
manufacturing sites.

Advantages: local responsiveness and

currency hedging
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3. Flexibility of manufacturing & customisation – lean manufacturing
Standardisation and mass production is included in the concept of economies of
scale. If there is more product variety then the production runs are smaller. But
with flexible manufacturing technologies (lean manufacturing) the disadvantages
can be reduced.

How?
1. Reduce set-up times for complex equipment
2. Increase the utilization of individual machines (schedule
production times well)
3. Improve quality control

Mass customisation
Company can produce a wider variety of product (mass customisation) at
unit costs similar to mass production standardisation)

1990s Toyota Production System developed by

Taiichi Ohno (e.g. paint shop colour change,
Reduced large inventory - warehousing )
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Flexible machine cells

Made up of: ▪ various machines (arranged in ‘cells’)

▪ common materials handler
▪ centralised controller (e.g. computer)

A ‘machine cell’ can contain six or so machines that are dedicated to

producing a family of parts or products.

Advantages:
▪ Reduce set-up times
• Better coordination
• Reduce waste
• In use for 80% of the time rather than 50% of the time
for freestanding machines.
• Reduce bottle necks (that slow productivity)
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 Manufacturing considerations – Where to produce
Where should a company locate its production facilities, i.e. where
is the best place to minimize costs and improve product quality?

Factors to take into consideration

1. Location (country factors)

2. Technology factors

3. Production factors

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117
 Production factors

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Production factors – product features

Why do production facilities need to be located and used in a certain

way globally?

Influential factors:

1. Product features

2. Locating production facilities

3. Strategic role for production facilities

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Product features: 2 product features affect location

A) value-to-weight influences transport costs: pharmaceuticals and

electronic components can be manufactured in one place and
shipped easily, compared with sugar, refined chemicals, paint and
petroleum products (manufacture in multiple locations)

B) Does the product serve universal needs that are the same
globally? For example, Covid 19 vaccinations, iPhone, iPad, Xbox,
cameras. Quite universal products with little variation locally and
therefore can concentrate production in one place.

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 Centralised or
Decentralised production?

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Locating production facilities

Should production facilities be …

a) centralized in one place with global reach
b) decentralised into regional locations close to major markets?
Strategic choices are determined by country specific, technology and product features.

Centralized production makes sense when:

a) Factor costs, socio-cultural and political economy factors have
impact on costs
b) Trade barriers are low
c) Enterprise hubs and industry clusters favour localities
d) Exchange rates are beneficial (i.e. stable)
e) Production technology has high fixed costs and high MES relative
to global demand or flexible manufacturing technology is available
f) Value to weight ratio is high
g) Product has universal appeal
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Decentralized production makes sense when:

a) Factor costs, socio-cultural and political economy factors have little

impact on costs
b) Trade barriers are high
c) Exchange rates are unstable and there is volatility
d) Production technology has low fixed costs and low MES relative to
global demand or flexible manufacturing technology is not
available
e) Value to weight ratio is low
f) Product has no or little universal appeal (consumers have different
tastes and preferences in different locations)

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Strategic role for production facilities
Since 1990s MNEs have been trying to gain from dispersed global production
systems and set up abroad 10:1 compared with home country.

Decisions to do this must be based on: Global learning

Where valuable knowledge is shared and does not just stay in domestic operations.

Foreign factories can upgrade their capabilities and, in the end, share benefits and
synergy with all the company (incl. subsidiaries).

Overseas factories have one or another strategic role:

1. Offshore factory
2. Source factory
3. Server factory
4. Contributor factory
5. Outpost factory
6. Lead factory
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Offshore factory
• Set up to make component parts or lower cost of finished goods
• Investment in technology and managerial resources at a minimum

Source factory
• Strategic role more important than Offshore factory
• Managers have more say in e.g. purchasing than Offshore factory
• Strategic input; production planning, process changes, logistics, product
customization
• Located where production costs are low, infrastructure good and easy to access
skilled and knowledgeable workforce

Server factory
• Set up to supply specific country or regional markets and to overcome tangible
and intangible barriers, e.g. trade barriers, reduce taxes, reinvest money in region
• Eliminate or reduce costly supply chain operations
• Managers can make minor decisions to customizations that please their
customers, but similar in empowerment to the Offshore factory managers
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Contributor factory
• Serves a specific country or region, but compared with Sever factories it has
responsibilities for product and process engineering and development (has own
infrastructure when looking at development, engineering and production)
• Better choice re: suppliers for raw materials and components
• Often compete with home factories for testing new ideas and products (it is more
standalone than others)

Outpost factory
• An intelligence gathering unit, so often located near competitor’s HQ or main
operations, near demanding customers or key suppliers of key or critically
important parts.
• May be selected for operations based on countries strategic importance to
enhance the company’s position on the market, rather than production logic

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 Lead factory (Cutting edge)
• Set up to create new processes, products and technologies that can be
used by the company globally.
• Cutting edge technology or implementation of processes in other parts
of the company are developed at Lead factories.
• Located where there is high calibre of workers
• Managers focus of suppliers, design and other things of critical
importance for the global corporation.

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11/04/2021 128
 Offshore factory?
Lead factory? Lead factory
Contributor factory?
Offshore Germany
factory China
Brazil
Russia
Japan
India
Italy
Poland contributory
UK factory
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 ory
Lead
fact
Germany

China (outpost factory)

Brazil (source factory)
Russia (server factory)
Japan (contributor factory)
India (server factory)
Italy (offshore factory)
Poland (offshore factory)
UK (contributor factory)
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 Hidden costs in locations
abroad!!

There may be hidden costs in locations abroad, e.g. high

employee turnover, lack of long-term commitment, late
deliveries, poor workmanship & quality and low productivity.

Some companies that have outsourced to some locations

abroad have returned home, e.g. Call centres, Microsoft,
e.g. Labour price variations are reduced as cheap labour in
developing countries gets more expensive, e.g. China, Vietnam
…

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Make or buy decision OU Purchase
T from
Ssupplier?
Produce in- OUR
house? CE

Factors that help decide:

Strategic level – long-term gain
What are the supply-chain implications, re: raw materials,
component parts?

Operational level – short-term gain

What are the implications, re: quality control, competitive
priorities, etc.?
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What helps make the decision?

Broad level General level

What is the cost and
Product success – is the
production capacity?
part vital Specific level
……………. Etc. Etc.
Strategic fit – is it critical Cost of raw materials,
component parts,
finishing the product, etc.
Specialist knowledge - design,
production skills, equipment, Can it be produced at no
reliable alternatives less than buying it in?

Is there production
capacity?

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 Operationally favouring a make decision

Continual
Maintain supply
COST assurance /
Control
guarantee

Quality
Control Excess
Industry
better than capacity in
drivers
outsourcing company Due to trust or
commitment reasons in a
specific industry or
market

Proprietary
technology
that should Limited PRODUCTION
not be suppliers CAPACITY
Due to not wanting to
shared work in some countries,
or there are international
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 Operationally favouring a buy decision

Inventory Brand
planning to preference,
COST strategically e.g. Intel
manage chips
inventory

Multisource Small Non-essential

policy – can volumes , item, which have
little effect on your
choose cost core competence, or
efficiency what USP

Supplier
Lack of Competencies
expertise to , e.g. if closer PRODUCTION
make to you if you CAPACITY
produced

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 WHAT ARE YOUR
CONCLUSIONS?

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Case
Coordination and control in a GSC

Using examples from, the lecture, your own experience and knowledge,
discuss with colleagues how Coordination and Control can work
effectively in a Global supply Chain.

Factors that you may consider are:

Warehousing Quality
Inventory management Flexibility strategies
Industrial clusters
Packaging
Relationships across organisations
Transportation
Reverse logistics
Role of ICT, JIT and technology
Off-shoring
Dependability

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137